UK leadership European growth

Transcription

1 Annual Report 2010/11 UK leadership European growth UK s No. 1 domestic airline 27% domestic market share and largest carrier at 12 UK airports Europe s largest regional airline Supported by one of Europe s leading regional MRO operations Expansion under way Secured aircraft for future growth plans and developed new and existing relationships with European flag carriers

2 Introduction Overview Flybe retained its position as Europe s largest regional airline and the UK s largest domestic airline brand, increasing its market share to 27.0%, flew 7.2m passengers and significantly increased its underlying profitability. Flybe is now the largest operator at 12 of the UK s airports and the largest domestic carrier at London Gatwick. We were delighted to complete the successful flotation of Flybe Group plc in December 2010, raising 60.3m of new capital, net of expenses. This was a major strategic goal for the business in order to assist in the export of the business model into Continental Europe and in funding our fleet expansion programme. Flybe also reached agreement for the purchase of seat E175 regional jets, with options and purchase rights for a further 105 aircraft, ensuring very flexible and cost-effective aircraft expansion capability through to With regard to our European expansion, our new partnership with Air France also announced in July 2010 signalled the beginnings of a new stage in the development of Flybe by aligning with one of the leading aviation groups in Europe. We continue to assess, on a selective basis, other European opportunities with both flag carriers and regional airlines. Jim French CBE Chairman and Chief Executive Officer +4.4% 22.3m Increase in Group revenue Underlying profit before tax

3 Flybe Annual Report and Accounts 2010/11 01 Building revenue in a challenging market Revenue growth of 4.4% to 595.5m (2009/10: 570.5m) Passenger numbers level at 7.2 million at a load factor of 61.7% Passenger revenue per seat up to (2009/10: 46.06) New capital raised to fund our next phase of development Flotation on London Stock Exchange completed on 15 December 2010 with new capital of 60.3m raised, after expenses Cash, including restricted funds, of 105.6m at year end (2010: 62.1m) Leading the UK domestic market Leading airline brand in the UK domestic with 27.0% market share (2009/10: 26.0%) Operating out of 14 UK bases and serving 73 airports in total over UK and 12 other European countries* Fleet of 69 aircraft with an average age at year end of 4.3 years (2010: 3.3 years) Business travellers represent 45.3% of our customers (2009/10: 43.2%) Growth and expansion into Europe Announced codeshare with Air France in 2010, covering 62 routes Order for 35 Embraer E-Series regional jets, with options and purchase rights for a further m Training Academy building opened in February 2011 Overview Where we fly At a glance 02 Business highlights Flybe milestones 04 Delivering UK leadership 06 European business city market place 08 Preparing for European growth 09 Flybe s other opportunities 10 Business review Chairman and Chief Executive Officer s Statement 12 Strategy and KPIs 18 Financial review 19 Risks and uncertainties 27 Corporate responsibility 30 Governance Board of Directors 36 Corporate governance 38 Shareholder information 44 Directors remuneration 46 Statement of Directors responsibilities 52 Overview Business review 2011 m 2010 m Revenue Underlying profit before tax** Reported (loss)/profit before tax (4.3) 24.6 * Includes our franchise partner, Loganair. ** Underlying profit before tax is calculated before the estimated impact of volcanic ash and weather disruptions (2010/11: 18.1m; 2009/10: nil), IPO expenses (2010/11: 1.7m; 2009/10: 1.1m) and movements in fair value of financial instruments (2010/11: 6.8m loss; 2009/10: 18.3m gain). The Directors present the Annual report and accounts for the year ended 31 March References to Flybe, the Group, the Company, we or our are to Flybe Group plc (registered number ) and its subsidiary companies where appropriate. Pages 01 to 52, inclusive, of this Annual Report comprise the Directors report that has been drawn up and presented in accordance with English company law and the liabilities of the Directors in connection with that Report shall be subject to the limitations and restriction provided by such law. Financial statements Independent auditor s report to the members of Flybe Group plc 53 Consolidated income statement 54 Consolidated statement of comprehensive income 55 Consolidated statement of changes in equity 55 Consolidated balance sheet 56 Consolidated cash flow statement 57 Notes to the consolidated financial statements 58 Company balance sheet 92 Company statement of changes in equity 93 Company cash flow statement 93 Notes to the Company financial statements 94 Five-year summary 96 Glossary 97 Governance Financial statements

4 Overview 02 Where we fly Where we fly At a glance x4 Flying four times more domestic routes than any other airline 140 Aircraft order for up to 140 Embraer E-series regional jets 11.6m seats flown 4.4% Increase in revenue to 595.5m

5 Flybe Annual Report and Accounts 2010/ m Passengers (2009/10: 7.2 million) 45.3% 45.3% of Flybe passengers are travelling on business Overview 25% of capacity in summer 2010 was flown on routes with a frequency of six or more services a day Total fleet of 69 aircraft, comprising 55 Bombardier Q seat turboprops and 14 Embraer seat regional jets. Operational information Flybe passengers travel on average 5.5 times a year with the airline Bases operated in 2010/11 14 in the UK 73 airports served during 2010/11 40 in the UK and 33 in Europe* Countries 13** 2010 CAA Punctuality Statistics put Flybe ahead of all other major airlines operating in the UK Other highlights Best Short Haul Airline and Best Environmental Contribution Business Travel Awards Top UK Airline in Which? Holiday poll National Training Award 2010 South West Regional in recognition of Flybe s outstanding contribution and commitment to training, learning and development in the workplace Recognition of Flybe s achievements through awards for Jim French Aviation Week s Commercial Air Transport Laureate, British Travel Industry Hall of Fame * 11 of which are served exclusively by Loganair, Flybe s franchise partner. ** one of which is served exclusively by Loganair, Flybe s franchise partner. 61.7% load factor

6 04 Business highlights Overview Business highlights Flybe milestones July A new beginning for the airline as British European dramatically changes its business model to survive in such a highly competitive and aggressive new low cost travel era. Flybe was born and, along with it, a bright, modern brand and changes to commercial, fleet and operational policies that transformed the airline. March 2007 Flybe completes the acquisition of BA Connect, British Airways UK regional airline. In a transformational agreement, Flybe becomes Europe s largest regional airline overnight and integrates the new business within three weeks of acquisition. As part of the deal, BA takes a 15% holding in Flybe. January 2008 Flybe announces its landmark franchise agreement with Loganair, the Scottish regional airline, that sees it take to the skies in Flybe colours in October The deal replaces Loganair s previous agreement with British Airways. April 2006 Lord Digby Jones, then Chief Executive of the CBI, opens Flybe s brand new 12m hangar facility at Exeter airport. Within two years, Flybe s maintenance, renewal and overhaul business becomes one of Europe s biggest with two thirds of its work completed for third party clients like Lufthansa and SAS. June 2007 Flybe launches the world s first ecolabelling scheme for the airline industry. The ecolabel shows passengers in a transparent way the environmental impact of their journey and goes on to win a number of awards for innovation and commitment to the environment. January 2009 Flybe wins the prestigious Air Transport World Regional Airline of the Year award in Washington DC only the second occasion a UK airline has won the trophy in its 35 year history.

7 Flybe Annual Report and Accounts 2010/ m Cash raised in December 2010 LSE listing 13.0m Training Academy building completed Overview April 2010 Flybe overtakes Easyjet to become the UK s number one domestic airline, with a 26% market share. In an incredible turnaround, Flybe moves from fifth position with an 11% market share to top spot in six and a half years. Business highlights in 2010/11 Initial Public Offering on the London Stock Exchange raising 60.3m, net of expenses Leadership in core UK domestic market 27.0% share* New 13.0m Flybe Training Academy building completed and fitted out** Contract signed for up to 140 Embraer E-series regional jets with 35 firm orders placed Commencement of codeshare with Air France covering 62 routes Successful completion of wet lease of four aircraft to Olympic Air * including our franchise partner, Loganair. ** grant funding of 7.1m was received to assist in funding this development. July 2010 Flybe signs a multi-billion dollar deal with Embraer for up to 140 Embraer 175 and E-family aircraft to support its planned European growth. Later in that month, Flybe and Air France sign an extensive codeshare agreement covering some 62 routes. 2011

8 06 Business highlights Overview Business highlights Delivering UK leadership Flybe understands the UK regions better than any other airline for the simple reason that it operates over four times more UK domestic routes than any other operator. Flybe is maintaining and expanding the domestic air network to connect Britain s regions and give choice to millions of UK passengers in accessing flights to European links. It is therefore no surprise to learn that it is the largest scheduled airline, measured by air traffic movements, at 12 airports including Belfast City, Birmingham, Cardiff, Exeter, Inverness, Manchester and Southampton (CAA statistics 2010/11). I m proud to be part of the team that ensured Flybe s punctuality was better than all other major carriers in the UK in Gaeron Kayley Captain, Exeter Flybe is also the largest domestic airline at London Gatwick airport, carrying 1.2 million passengers in 2010/11, linking the capital city with eight airports around the UK and providing crucial lifeline services to London. Flybe understands that for journey times of under two and a half hours, the train can offer a more convenient option. There are fast rail links to the likes of Manchester, Birmingham and Exeter from London terminals; however, it is a very London-centric view to suggest that rail travel is a realistic option for all passengers. The rail network remains based around the terminals in the capital city as indeed will the High-Speed Rail network planned for circa Regional air travel offers the flexibility and convenience of non-london-centric journeys that airlines like Flybe are committed to providing for passengers. For example, a trip from Southampton to Newcastle by train takes up to six hours, including a tube journey through London. By contrast this would take 80-minutes on a Flybe flight. Exeter to Manchester by train is around 4 hours 30 minutes compared to a 50-minute flight time. Norwich to Edinburgh using the rail network is over 6 hours (via Grantham and Darlington) while flying takes 80-minutes. Regional economies rely on fast, reliable air links and any policy shift to limit such services runs the risk of damaging regional businesses.

9 Flybe Annual Report and Accounts 2010/ % UK domestic market share (including our franchise partner, Loganair) Overview Markets Our Airline business targets three distinct passenger groups: Passenger groups 45.3% of Flybe s passengers in 2010/11 travelled for purposes of business (2009/10: 43.2%) 28.0% were visiting friends and relatives (2009/10: 28.2%) Hannah Ringland, Northern Ireland Newcastle Passenger groups: Business Friends and relatives Leisure or hobby activities Other 20.8% were travelling in connection with leisure or hobby activities (2009/10: 23.5%) 5.9% were travelling for other reasons (2009/10: 5.2%) Flybe s route network is focused on the three main passenger groups. It is also aimed at passengers in airline-dependent locations (such as Northern Ireland, the Channel Islands and the Isle of Man) and other locations where surface transportation may be a less attractive option. In regional communities within the UK mainland where there are limited or no direct rail services, such as the areas in and around Inverness and Aberdeen, the competitive impact of surface modes of transport can be significantly less. Flybe s position as the UK s number one domestic airline is underpinned by a punctuality record that is second to none among major carriers in the UK. Taking those airlines that operated more than 25,000 flights during 2010 from the ten CAA reporting airports, the figures showed that Flybe outperformed all the major industry suppliers for its on-time performance, with an 81% on-time ranking for its reported sample of 112,042 flights. Four other airlines achieved a punctuality rating of over 70%, while a further five were in the 60% to 70% range. Across the network, our performance was even better, reaching an 83% punctuality level. Hannah Ringland, 20, is studying to be a primary school teacher at Northumbria University and travels with Flybe every term from her home city of Belfast. Without Flybe s direct service to Newcastle airport, her journey would be expensive and involve a time-consuming combination of trains and ferries. The knowledge that I could book my flights months ahead with Flybe was incredibly reassuring and meant I was able to select the university of my choice knowing that a good value flight would get me to and from Belfast City airport whenever I needed to travel. I love Newcastle and because the flights are so regular, my Mum and Dad have been able to visit as well. Hannah Ringland

10 08 Business highlights Overview Business highlights European business city market place Flybe offered the second largest number of flights to European business cities from the UK regions in 2010/11 based on flights operated. The Flybe route between Southampton and Amsterdam is a perfect example of how the application of the Group s business model has been of major benefit to a UK regional economy, in this case southern England. The Air France codeshare agreement has radically altered how Flybe is viewed and I am looking forward to the next few years being very exciting for Flybe in France. Evelyne Faure Market Manager, France When Flybe entered the market in 2006, there were 101,000 seats on sale on that route. By 2010, thanks to Flybe s vigorous marketing of the route, competitive pricing, strong corporate ticket sales and an educated passenger base who understand the benefits of quick transit through Southampton rather than London Heathrow, there were more than 159,000 seats on sale. Air France codeshare Flybe s first expansion into Europe took place in July 2010 when it signed a landmark codeshare agreement with Air France. The deal gave Flybe passengers access to five additional routes between the UK and France as well as seven new domestic French routes and 11 international routes. Air France codeshare customers are provided with access to 45 new routes from France to the UK, as well as seamless connections through Birmingham, Manchester and Southampton on a further 17 UK domestic routes. Ticket sales for the codeshare commenced in September 2010, with the flights being fully operational from October The deal clearly supports Flybe s strategy of exporting the business model to Europe, provides a solution to Air France s operations from UK regions to Paris and is an excellent opportunity for further partnership within the Air France/KLM Group. Commenting on the agreement soon after its launch, Bruno Matheu, Air France s Executive Vice President Network Revenue Management, and Marketing said: This partnership is dealing with all the routes between the UK and France. The idea is to combine the commercial strengths of both airlines, but also to improve the feeding of the Charles de Gaulle hub.

11 Flybe Annual Report and Accounts 2010/11 09 Preparing for European growth Overview Flybe is Europe s largest regional airline. When the Company announced its intention to float on the London Stock Exchange in December 2010, the Board was very clear that the airline s strategy is focused on becoming Europe s largest and most profitable regional aviation group. Teignmouth Maritime Services The Company s senior management carefully examined a number of different ways to expand the business into Europe, including new strategic arrangements with legacy carriers to provide economic feed from the regions into primary hubs by means of codeshares and capacity shares, contract flying or joint ventures. The contract to purchase up to 140 Embraer E-Series regional jets announced in July 2010 allows Flybe to introduce further improvements in its offering to passengers on a cost basis comparable with the turboprop aircraft they will be replacing. The structuring of the relationship with Embraer allows Flybe to factor in potential organic expansion of the business in the period to 2020 as well, via the options and purchase rights it has in place for a further 105 aircraft over and above the committed order for seat E175s. We are developing relationships with carriers across Europe to provide new opportunities for our regional airline model. During the period, we entered into an important codeshare agreement with Air France, covering 62 routes. These and other investment opportunities for Flybe presented at the time of the IPO are still very much intact and underpin our strategy for growth. We are already Europe s largest regional airline and we have been approached by a number of overseas airlines to use our recognised expertise in the regional aviation sector to make acquisitions, participate in joint ventures or manage the introduction of regional aircraft operations. Teignmouth Maritime Services Ltd ( TMS ) is a South Devon-based marine civil engineering company with a 3m a year turnover that employs 45 people. In a highly competitive industry, it provides specialist marine-based services such as piling, dredging, diving and all kinds of river-fronted construction like landing stages, pontoons and jetties. As well as winning contracts around the UK, TMS has recently expanded to undertake projects in mainland Europe and even North Africa, so the ability to travel quickly to meet potential clients is hugely important, as Paul Hunt, TMS s Contracts Manager, highlights: To consistently win tenders for the business, I need to price-up jobs on the ground it s not really possible to provide an accurate estimate for what might be a quarter of a million pound contract over the phone or by video link! It s crucial that I make the most of my time out of the office and the fact that Flybe offers as many routes as it does from Exeter airport, just a 30 minute drive away, means I can be anywhere in the UK, or further afield, in a matter of hours. We recently won a significant contract in North Africa and were able take the first leg of the journey with Flybe via Paris, rather than having to slog all the way up the M4 to Heathrow, wasting valuable fuel and spending a fortune on car-parking in the process. Regional links to European airports are a big bonus for a company like ours and means we can compete for bigger and bigger jobs and grow the company while remaining based in the South West.

12 10 Business highlights Overview Business highlights Flybe s other opportunities Aviation Services Despite challenging conditions in global aviation in 2010/11, Flybe s Maintenance Repair and Overhaul ( MRO ) business maintained more than 200 aircraft, 63% of which were for third party customers. Our engineering facilities are second to none and it s no surprise that Flybe is maintaining more and more aircraft belonging to other airlines. Rachel Stevens Aircraft Maintenance Fitter, Exeter As part of a strategy to remove risk and widen the base of approved aircraft types, 2010/11 saw additional business jets, such as the Challenger, supported by the MRO a significant achievement which helped the business develop. The customer base widened also in terms of geography, with new work coming from European operators in Austria, Finland, Poland and Greece. The MRO also provided engineers in support of customers as far away as the Ukraine, Kazakhstan, the UAE and Mozambique, extending the reach of the business into new markets. 2010/11 saw the business launch a review of its capabilities to ensure it maximised bay capacity for the use of advanced materials as well as the fabrication of aircraft parts. This strategic shift involved a successful restructuring of the workforce to not only allow for greater flexibility as work streams changed but also allowed for the workforce to expand their skill sets. The MRO business now offers the regional aviation sector one of the most comprehensive records and maintenance monitoring systems in the market place, the Electronic Task Management System. The internal system links many of the MRO processes in order to generate accurate information on the progress of a contract as well as an even clearer understanding of the job cost.

13 Flybe Annual Report and Accounts 2010/ Flybe apprentices trained in the first 3 years Overview Training Academy 2010/11 was a landmark year for staff development at Flybe with the construction and official opening of its brand new Training Academy at Exeter International Airport. Training Academy The state-of-the-art building cost 13.0m to construct and is designed to BREEAM* Excellent specifications. It features 26 classrooms and incorporates a flight simulator complex, an integrated apprentice workshop and cabin door trainer, all of which contribute to increasing the wide range of training opportunities available to third party customers. The construction programme was completed in February 2011 and officially opened by the Rt. Hon. George Osborne MP, the Chancellor of the Exchequer, on 20 April On unveiling the commemorative plaque, the Chancellor said: It s a great honour to come here today and to see this fantastic facility. I know what a success story Flybe is and it s great to see a big company investing in the future and working with local education establishments. Think about what Britain needs Britain needs more people to study engineering. Congratulations for what you have achieved here. The new Q400 simulator in the Training Academy building completed February Moving forward, the Training Academy, like Flybe s MRO business, will market its world-class facilities to customers not only in Europe but also further afield. * BREEAM the Building Research Establishment Environmental Assessment Method is the world s most widely used environmental assessment method for buildings. BREEAM assesses buildings against set criteria and provides an overall score which falls within a band providing either a Pass, Good, Very Good or Excellent rating. Chancellor of the Exchequer George Osborne at the controls with Dave McMullon, Fleet Training Manager Q400.

14 12 Chairman and Chief Executive Officer s statement Business review Chairman and Chief Executive Officer s statement As the leading UK domestic airline, with a well-recognised brand, Flybe is seen as a strong potential partner by other European operators, as demonstrated by the interest they show in pursuing opportunities with us. Jim French CBE Chairman and Chief Executive Officer Key financial headlines Change m m % Revenue EBITDAR underlying* EBITDAR unadjusted Profit before tax underlying** (Loss)/profit before tax unadjusted (4.3) 24.6 n/a Profit after tax unadjusted (82.9) Operating cash inflow Net cash/(debt)*** 21.9 (21.4) n/a * EBITDAR defined as operating profit or loss after adding back unrealised gains and losses on fuel and foreign exchange hedges, IPO expenses, depreciation, amortisation and aircraft rental charges. Underlying EBITDAR is EBITDAR after adding back the estimated impact of the disruption caused by volcanic ash and winter weather. ** Underlying profit before tax defined as profit before tax before the estimated impact of the disruption from volcanic ash and weather, unrealised gains and losses on fuel and foreign exchange hedges and IPO expenses. *** Net cash/(debt) includes restricted cash. Overview Looking at the past year, I am pleased to report on a robust performance by Flybe during what has been a transformational and eventful period for the Group. The start of the reporting period saw the eruption of the Eyjafjallajökull volcano in Iceland and the well-publicised disruptions to air travel throughout Europe that ensued. Towards the end of the period, in November and December 2010, extreme weather conditions across the UK also had a negative impact on all airlines, as flights were grounded or cancelled. All airlines also had to contend with an extremely challenging macro-economic environment, as consumer confidence remained fragile. It was also a year of achievement for Flybe. Our successful flotation on the London Stock Exchange in December 2010 raised 60.3m of new capital, net of expenses. This will enable us to pursue our strategy of expanding our operations on mainland Europe and provides us with a platform for future growth by acquisition, purchase of new aircraft and by developing relationships with carriers across Europe. During the period Flybe reached an important codeshare agreement with Air France by which we became a feeder airline from the UK regions for Air France s transcontinental flights. We also continued our planned fleet expansion with an order placed for up to 140 Embraer E series regional jets.

15 Flybe Annual Report and Accounts 2010/ m Underlying profit before tax up from 7.4m in 2009/ m Operating cash inflow, up 21.5% from 2009/10 Against the backdrop of an extremely eventful and sometimes disruptive environment, we are pleased to have increased our share of the UK domestic market to 27.0% and with the year s results, which demonstrate the robustness of our business model and the strength of our position to capitalise on future growth opportunities, both in the UK and Europe. Results Underlying profit before tax for the year was 22.3m compared to an underlying profit before tax of 7.4m in 2009/10. Group revenue was up 4.4% to 595.5m and underlying EBITDAR improved 30.9% to 119.0m. After IPO costs and losses on fuel and foreign exchange hedges (unwinding gains recognised in the previous year), we reported a loss of 4.3m compared to a profit of 24.6m last year. This result is in line with the Board s expectations for the year and represents a strong performance in view of the challenging conditions faced by all airlines in the period. Strategy Flybe remains focused on our strategy of becoming Europe s largest and most profitable regional aviation group. The key elements underpinning this strategy are: retaining market leadership in the UK domestic market and optimising profits from this core market continuing to develop our operations from the UK regions to European business cities exporting our regional airline business model into other European geographies, through a combination of acquisitions and organic development growing the turnover and profitability of our complementary MRO and Training Academy businesses Business review Strategic opportunities m Revenue 595.5m Steady growth achieved against a background of challenging economic and operational conditions m Underlying EBITDAR 119.0m Growth in EBITDAR outstrips growth in revenue Given the considerable restructuring and consolidation currently being undertaken within the aviation industry in Europe, it is the Board s belief that there will be further European regional opportunities for Flybe as this process of consolidation matures and stabilises. The Board has therefore been very active in ensuring that Flybe is well positioned across Europe to capitalise on any future opportunities which may arise. As a result of Flybe being Europe s largest regional airline, we have been approached by various overseas airlines to use our recognised expertise in the regional aviation sector to: participate in new regional airline joint ventures support or acquire existing regional operations manage the introduction of regional aircraft operations for others Such approaches vary from project to project but incorporate the various key regional aviation skills which we have developed flight operations, engineering, training and commercial.

16 14 Chairman and Chief Executive Officer s statement Business review Chairman and Chief Executive Officer s statement Continued Flybe ended the year in its strongest ever financial position. During 2010/11, operating cash inflow improved by 21.5% to 18.1m and, thanks to the IPO cash injection, we moved from a net debt (defined as total cash less borrowings) position at 31 March 2010 of 21.4m to a net cash position at 31 March 2011 of 21.9m. Net assets amounted to 107.9m. None of these achievements would have been possible without nearly 3,000 loyal and motivated employees whose talent, commitment and can-do attitude make Flybe what it is today. On behalf of the whole Board, I would like to thank them for their hard work and continuing support. Conditions in Flybe s current core UK domestic market remain challenging, but Flybe s leadership in this market leaves us well placed to benefit as the market recovers. Strategy for growth The IPO raised new capital in Flybe of 60.3m, net of expenses at a time of considerable market volatility in Europe. The new capital will assist in the export of our business model into Continental Europe and in funding our fleet acquisition programme, while also strengthening our balance sheet. We were very pleased with the reception to the Offer and we look forward to building long-term relationships with our new shareholders. The balance of the IPO funding, coupled with our own internal resources, will be used to develop relationships with carriers across Europe to provide new opportunities for our regional airline model. During the period, we entered into an important codeshare agreement with Air France, covering 62 routes. This enables us to fly more passengers into Air France s Charles de Gaulle hub from the UK regions, making Paris an attractive long-haul hub airport for UK travellers who wish to avoid the UK s Air Passenger Duty regime. We are confident that our long-standing relationship with Air France will develop further as new strategic opportunities materialise. The investment opportunities for Flybe presented at the time of the IPO are still very much intact and underpin our strategy for growth. Our aim is to become Europe s largest and most profitable regional aviation group. We will achieve this by exporting our robust business model in the UK to other European geographies, through a combination of acquisition and organic development; retaining market leadership in and optimising profits from our core UK domestic market; continuing to develop our operations from the UK regions to European business cities and growing the turnover and profitability of our complementary MRO and Training Academy businesses. We are already Europe s largest regional airline and we have been approached by a number of overseas airlines to use our recognised expertise in the regional aviation sector to make acquisitions, participate in joint ventures or manage the introduction of regional aircraft operations. In addition, we believe we are perfectly placed to capitalise on recovery in the UK as volume, yield and frequency gradually return. We will increase capacity on existing routes, develop new ancillary revenue streams and franchise opportunities and optimise fleet capacity by substituting existing carriers where appropriate. Fleet In July 2010, Flybe announced its plan to purchase 35 Embraer E seat regional jet aircraft (for delivery between 2011 and 2016) together with options and purchase rights over a further 105 E-series regional jets (for delivery up to 2020). These regional jets are of a modern, fuelefficient design. By re-balancing the fleet towards 88-seat Embraer E175 regional jet aircraft that are slightly smaller than our existing fleet of 118-seat E195 jets, we aim to improve the customer product and experience for Flybe s passengers. These new 88-seat E175 aircraft will have similar economics per flight to the 78-seat Bombardier Q400 turboprops they are replacing and, therefore, lower seat costs. During 2016/17, we will have moved based on contracted deliveries and expected retirements to an approximate 50:50 split between regional jet and turboprop aircraft in our fleet. The 35 firm orders and 105 options and purchase rights afford us the opportunity of matching our fleet capacity to expected demand from existing operations while allowing the flexibility to increase the number of aircraft operated should expansion into new markets drive the need for additional capacity.

17 Flybe Annual Report and Accounts 2010/ m Underlying EBITDAR (2009/10: 90.9m) 100.9m Unadjusted EBITDAR (2009/10: 90.9m) In the year to 31 March 2011, Flybe took delivery of one Bombardier Q400 turboprop aircraft and completed the sale and leaseback of one Q400. With the delivery since 31 March 2011 of a further two Q400s, our fleet now stands at 71 aircraft with an average age of 4.4 years consisting of seat Q400 turboprops and seat E-series jets. EDF Energy As part of our continuing strategy to balance capacity and demand, we are at an advanced stage of negotiations with a purchaser regarding the sale of up to seven Q400 aircraft as we identified that European growth opportunities were more likely to come through acquisitions (with existing aircraft) and we adjusted our organic growth capacity accordingly. The deal removed surplus capacity from the UK market for 2011/12 to reflect the lower level of passenger demand resulting from the recovery of the UK economy being slower and shallower than expected. In 2011/12, Flybe has scheduled deliveries of three 78-seat Q400 turboprops (two of which were delivered by 29 June 2011) and four 88-seat E175 regional jets, all of which are due to be delivered during the period to 30 September Two Q400 leases will expire in the second half of the year. The Group will continue to act opportunistically to match capacity to demand, particularly in its core UK market, which drives about 88% of revenues. As at 31 March 2011, Flybe s fleet was as follows: Seats Leased Owned Total Embraer E-series regional jets Bombardier Q400 turboprops We also have the opportunity to acquire further aircraft as follows: In 2011/12 Committed Between 2011/12 and 2016/17 Total Options and purchase rights Up to 2019/20 Embraer E-series regional jets Bombardier Q400 turboprops Of these, two Q400 turboprops had been delivered by 29 June EDF Energy is Britain s largest generator of low carbon electricity and one of the best known names in European business, with more than 15,000 employees in the UK. Having offices and operations throughout the UK, its workforce uses a range of different travel options, including the Flybe shuttle service between Birmingham and Glasgow which operates up to seven times a day. Flybe has many corporate agreements with clients such as EDF, guaranteeing them a fixed price dependent upon the nature and regularity of travel. It is one of the reasons why more than 45% of Flybe s passengers are business travellers. Says Graham Bruce, Facilities Manager at EDF Energy: To ensure our staff can make their meetings with a minimum of fuss, EDF Energy needs a good-priced, regular, flexible, punctual and reliable air service from airports that are near to their place of work. Flybe s network of UK domestic flights is second to none and that s why we are users of the Birmingham to Glasgow route: and given our commitment to sustainable energy production, it s good to know that Flybe s aircraft fleet is one of the youngest in the world. Business review

18 16 Chairman and Chief Executive Officer s statement Business review Chairman and Chief Executive Officer s statement Continued Aviation Services This business consists of two activities: Flybe s MRO operation, Flybe Aviation Services, and the Flybe Training Academy. Flybe Aviation Services has been more affected in 2010/11 by the 2008/09 economic downturn due to the late cycle nature of the MRO industry, where the reduced flying programmes of our regional airline customers led to the deferral of major maintenance programmes. This was reflected in the man-hours worked which were down from 680,000 in 2009/10 to 564,000 in 2010/11. Of these total man hours, some 66.6% were for third party customers in 2009/10 (the balance being work on behalf of Flybe), reducing slightly to 63.1% in 2010/11. The improvement in economic conditions seen from 2010, particularly in Continental Europe, where most of our third party MRO customers are based, means we expect to see an improvement in activity as 2011/12 progresses. Our Training Academy has had a successful year both in terms of development of the facilities and revenue growth. The new Flybe Training Academy building, opened officially by the Chancellor of the Exchequer on 20 April 2011, is now in use with 26 classrooms, workshop training facilities, cabin crew emergency training facilities and a flight simulator hall which can accommodate up to four flight simulators. We currently have one simulator installed and another is due to start operating in early This facility brings together all our training activities under one roof and will allow us to provide a much more attractive proposition to other regional airlines as we look to replicate the third party work profile already achieved by our MRO business. The year also saw good growth in third party training revenues which reached 1.3m, up from 0.9m last year. Impact of current fuel prices This calendar year has seen a sustained and high price for oil, with Brent Crude priced over $110 per barrel on all but one day since late February 2011 until 23 June 2011 when the International Energy Agency released 60 million barrels from government stocks. Although we have a strong hedge book for 2011/12 (being 69% hedged at the beginning of the year at $783 per tonne), this only provides protection for a limited period of time, with higher fuel prices impacting the Group from the second half of 2011/12 onwards, as the current hedging arrangements start to unwind. Flybe has therefore introduced a fuel surcharge of 3 per passenger for flights on or after 1 September The surcharge will be removed should the price of Brent Crude return to below $75 per barrel for a period of 28 consecutive days. Board There have been no changes to the Group Board or Operating Board structures during the year, although we were sorry to lose the wise counsel of Non-Executive Director David Brown who retired from his long-standing Board membership which included a five year period as Chairman and representation for our major shareholder, Rosedale. I would like to thank David for his tremendous contribution to Flybe over many years. Anita Lovell replaced David as Non-Executive Director representing Rosedale in July 2010 and her depth of experience and supportive approach has already shown that she will be a strong contributor to our continuing development. The stability of our Board underpins the resilience of our business, and the expert and experienced advice of our independent Non-Executive Directors has helped us to remain robust during the economic downturn and to effectively position ourselves for growth. The Executive Management team, comprising the second tier of management reporting to the Operating Board, has provided tremendous support to the Operating and Group Boards during the year, and continues to be developed and strengthened.

19 Flybe Annual Report and Accounts 2010/ aircraft 55 Q400 turboprops and 14 E-Series regional jets at 31 March 2011 Outlook We expect single digit percentage growth in 2011/12 in passenger numbers and revenues in our core UK domestic and UK to Europe businesses. Current trading is encouraging, with forward ticket sales revenue up 8.4% year-on-year on broadly flat capacity. We repeat our guidance for 2011/12 of a profit before tax broadly comparable to the 2010/11 underlying profit before tax and one-off items. Embraer aircraft order Flybe s main opportunities for revenue growth will come from delivering our strategy of expansion into new European markets. As the UK s number one domestic airline and already Europe s largest regional airline, Flybe is seen as an attractive potential partner by European flag carriers, and we remain in active discussions with several of them. These discussions have already led to the Air France codeshare announced in July 2010 and we expect further announcements to be made in due course. Business review We take delivery this summer of our first four aircraft from the 35 E175 aircraft order announced last summer. This order, together with the 105 options and purchase rights, affords us a cost effective and flexible fleet growth plan through to Flybe enjoys a market leading position in the UK and is actively pursuing clear opportunities for further growth in Europe. With our strong brand, robust business model and financial stability, we are well placed to continue our European expansion and to capitalise on economic upturn in the UK. We therefore look forward to the future with confidence. Jim French CBE Chairman and Chief Executive Officer Flybe signed a major aircraft deal in July 2010 at the Farnborough Air Show for up to 140 Embraer E-series aircraft, comprising of 35 firm orders (value $1.3bn), with options for 65 more (value $2.4bn) and purchase rights for a further 40 (value $1.5bn). Designed to support the Company s planned European growth, the 88-seat E175 was chosen for five key reasons: It allows the Company to maintain its core principal of a two fleet strategy as the E195 is common rated with the E175. Flybe will continue to operate Bombardier Q400 aircraft The economic and environmental performance is in line with Flybe s strategy of only buying A and B rated eco-label aircraft as part of its strategy to invest in lower emission new technology aircraft It maintains the Company s product commitment to a minimum of 30 leg room and 2x2 seating which underpins our customers preference for Flybe over low cost carrier airlines The economic performance of the aircraft on our target market sector lengths and within our frequency driven business model is the best available The aircraft provides a modern aviation technology base for the Company for the next 10 years The first aircraft will be delivered in summer 2011 with the final scheduled delivery on the firm orders being made in March 2017.

20 18 Strategy and KPIs. Financial review Business review Strategy and KPIs Flybe s strategy is focused on becoming Europe s largest and most profitable regional aviation group. Description Safety underpins everything we do Build on the Group s track record of passenger revenue growth Capitalise on leading positions in Flybe s core UK domestic and regional UK to European city and leisure markets Drive European expansion Deliver the lowest cost base for the European regional airline sector Expand Flybe MRO operation, Aviation Services and develop the Flybe Training Academy Key measures * Includes passengers travelling with our franchise partner, Loganair. ** Constant currency is calculated for the 2009/10 year by applying the effective exchange rates that prevailed for reporting the 2010/11 results of $1.62 and Well-developed safety procedures are in place to generate continuous improvement in performance see page 30 Our aircraft, operational and employee safety records demonstrate the effectiveness of Flybe s approach with a low incidence of issues arising Passenger revenue up from 520.7m to 545.7m Passenger revenue per seat has grown to from in 2010 Customer satisfaction based on punctuality on-time departures were at 83.0% in 2011 (2010: 83.5%) and complaints were 2.9 per thousand passengers (2010: 2.0 per thousand passengers) No. 1 in UK domestic market (27.0% market share, up from 26.0% in 2010)* No. 2 in UK regions to European business cities Flybe has strong relationships with other major carriers. The Air France codeshare started operating in October 2010 and Flybe also deepened the codeshare relationship with British Airways Group operating costs at constant currency** per seat have decreased from to Man hours in the MRO operation decreased from 680,000 to 564,000 this year Flybe s Training Academy opened its new building and increased its revenue from 1.8m to 2.2m The purpose of the strategy is to deliver long-term returns to shareholders that are above those of other companies operating in our sector. To achieve this Flybe looks to financial performance indicators as measures of its progress as follows: Description Achieve revenue growth Maintain profitability Maintain appropriate debt profile Key measures Revenue up from 570.5m to 595.5m Underlying EBITDAR at 119.0m from 90.9m last year with underlying profit before tax up from 7.4m to 22.3m Net debt of 21.4m converted into net funds of 21.9m

21 Flybe Annual Report and Accounts 2010/11 19 Financial review Flybe delivered a strong performance in the year, increasing its underlying profit before tax by over 200% to 22.3m. Andrew Knuckey Chief Financial Officer Summary Flybe has had a successful 2010/11 year, a highlight of which was the successful listing of our shares on the London Stock Exchange on 15 December 2010, raising 60.3m net of expenses. We have grown revenue and underlying profits, maintained our position as the leading carrier of UK domestic passengers with a 27.0% market share and our passenger numbers have been stable at 7.2 million. Flybe finished the year in its strongest ever financial position, with net assets of 107.9m, total cash of 105.6m and net cash (i.e. total cash less borrowings) of 21.9m. In addition, we completed the construction of the new Training Academy building, providing us with a superb facility for our own pilots, cabin crew and engineers and our third party customers. 2010/11 also saw the completion of our contract with Olympic Air which had started over a year previously. This wet lease of up to four Q400 aircraft ensured we had no surplus capacity through the economic recession. Business review Key financial headlines Change m m % Revenue EBITDAR underlying* EBITDAR unadjusted Profit before tax underlying* (Loss)/profit before tax unadjusted (4.3) 24.6 n/a Profit after tax unadjusted (82.9) * See table below for reconciliation from unadjusted to underlying results. Revenue increased by 4.4% despite the impact of volcanic ash and weather disruption, without which the growth rate would have been significantly higher. Underlying EBITDAR grew by 28.1m (or 30.9%) to 119.0m, and underlying profit before tax also advanced strongly, increasing by 14.9m (or 201.4%) to 22.3m.

22 20 Financial review Business review Financial review Continued After adjusting for the estimated impact of disruption from volcanic ash and extreme weather, unrealised gains and losses on fuel and foreign exchange hedges and IPO expenses incurred, Flybe reported an EBITDAR of 100.9m and a loss before tax of 4.3m. Set out below is a reconciliation from unadjusted EBITDAR and profit before tax to underlying figures: Change m m % Operating profit before IPO expenses and unrealised gains and losses on fuel and foreign exchange hedges Depreciation and amortisation Aircraft rental charges EBITDAR unadjusted Estimated impact of disruption from volcanic ash ( 11.6m) and weather ( 6.5m) 18.1 EBITDAR underlying (Loss)/profit before tax unadjusted (4.3) 24.6 Estimated impact of disruption from volcanic ash and weather 18.1 Unrealised gains and losses on fuel and foreign exchange hedges 6.8 (18.3) IPO expenses Profit before tax underlying Volcanic ash and weather disruption During 2010/11, Flybe experienced two significant periods of disruption, both of which were communicated to shareholders during the course of the year: Ash cloud resulting from the eruption of the Eyjafjallajökull volcano in Iceland during April and May 2010 shut down airspace across northern Europe and, in particular, our main operations in the UK. This led to Flybe cancelling 3,177 flights, representing approximately 2.2% of our planned flying programme for the year. We have estimated that the net negative impact on profits amounted to 11.6m, representing approximately 2.0% of the Group s revenues. With the changes implemented by the CAA (in May 2010) in the regulations concerning the safe flying of aircraft in the presence of volcanic ash, future eruptions are likely to have a much lower impact on Flybe s flying programme when compared to the disruption experienced in This was borne out during the recent eruption of the Grimsvotn volcano, during which only 90 flights were cancelled under the new regulations. The widely reported extreme weather conditions across a major part of the UK s regions in November and December 2010 resulted in prolonged disruption to a significant proportion of our network. Some airports were either closed or seriously restricted for up to 30% of the time available, with Scotland, Northern Ireland and the South Coast of England being particularly badly affected. As a result, some 1,980 of Flybe s flights were cancelled, representing approximately 1.4% of our planned flying programme for the year. We have estimated that the net negative impact on profits amounted to 6.5m. The table below details our estimate of the financial impact of the above disruptions in the year to 31 March 2011: Volcanic ash Weather Total m m m Lost ticket revenue (including the immediate aftermath of volcanic ash disruption) (17.6) (5.6) (23.2) Lost ancillary revenue (2.4) (1.2) (3.6) Savings on operating costs (net of additional costs such as de-icing and positioning) Estimated impact of disruption from volcanic ash and weather (11.6) (6.5) (18.1)