Flybe stocks take another tumble as Stobart Group ends takeover talks

Shares in UK regional carrier Flybe lost more than a quarter of their value in trading on 22-Mar-2018 after Stobart Group confirmed it had ended discussions on a deal to buy the airline Flybe after it had failed to agree a price for a takeover.

Flybe shares opened the day at 38.5p (GB Sterling), down -17.7% on the 46.8p closing level the previous evening. They fell further to 35.5p within the first hour of trading, before recovering to 36.7p by mid-morning, before ended the day at just 35.0p, down -25.2%.

A previous share slump that had seen more than two thirds of Flybe’s value wiped off is what had caught the interest of Stobart Group, one of the airlines current business partners. The latter confirmed late last month that it had been considering development opportunities as part of an ongoing review of alternative structures for its airline and leasing business as part of a potential consolidation of the regional airline sector.

“Stobart Group and Flybe have a range of shared interests arising from Stobart Group’s ownership of London Southend Airport and its aircraft leasing company and the growing franchise arrangements between the two groups’ airlines,” it said, adding that “a number of potential structures have been considered including taking a non-controlling interest in a vehicle to acquire 100% of Flybe likely to be in cash.”

However, now just over three weeks on Stobart Group says it does not plan to make a formal offer for Flybe after a business proposal was rejected. The infrastructure and support service company says it was unable to reach agreement on satisfactory terms. “The board of Stobart Group has determined that it is not in its shareholders’ best interests to increase its latest proposal for Flybe above the level which was rejected by the board of Flybe,” it adds.

Stobart Group, owners of London Southend and Carlisle airports in the UK and Stobart Air, already operates flights under the Flybe brand under a franchise agreement, and this will likely continue despite the collapse of the takeover. Stobart says it wants to “continue the collaborative working relationship between both companies,” despite the decision.

CHART – Speculation on Stobart Group’s interest in Flybe helped spike its shares to a four month high and their highest price since last year’s second profits warning in Oct-2017, but levels have now fallen back to that lower levelSource: CAPA – Centre for Aviation and stock exchanges

It is business as usual for Flybe, which says its board “remains highly confident in the prospects” of the business and believes that the group “continues to have an exciting future as an independent company, delivering the sustainable business improvement plan as set out in Jun-2017”.

Flybe has had a tough couple of years and twice last year had to issue profit warnings, announcing first half profits of just GBP8.4 million in Nov-2017, half what it had declared in the same period the previous year. It is currently completing a network optimisation that will be based around a smaller fleet of aircraft moving forward.

CHART –Flybe has reduced its year-over-year system capacity by -2.7% during Q1 2018 and this will grow to -4.3% across H1 based on current published schedulesSource: CAPA – Centre for Aviation Fleet Database (data: as at w/c 19-Mar-2018)

The airline says its fleet reached a peak last summer and is set to fall by just under a fifth over the next three years. The previous increase in capacity had a negative impact on its load factor and unit revenue and had caused its fall back into the red.

“This plan is focused on driving sustainable profit and cash generation,” says Flybe, and will see the fleet size “reduce to an optimum level for the number of identified profitable routes and make the business demand-driven rather than capacity-led”.

CHART – The UK market remains the principal focus of the Flybe scheduled network with France, Netherlands and Germany the largest overseas pointsSource: CAPA – Centre for Aviation and OAG (data: w/c 19-Mar-2018)

The Stobart Group announcement follows just a week after it revealed it had secured an airline partner to deliver the first scheduled passenger services this summer from Carlisle Lake District Airport. The partnership with UK regional carrier Loganair will see new flights launched to Belfast City, Dublin and London Southend.

Loganair will operate four return flights per-day across the working week and a total of 12 at weekends, connecting Cumbria and the Lake District, which receives 45 million visitors per year, to the three destinations. Daily weekday flights will operate to Belfast City and Dublin with two flights per weekday to London Southend, all flown using 34-seat Saab 340 turboprops.