Can Flybe weather the turbulence? City analysts react to its profit warning

 
Rebecca Smith
The airline issued a profit warning
The airline issued a profit warning (Source: Getty)

It's a tough time for the aviation sector at present, with Alitalia announcing it was entering administration, Air Berlin filing for insolvency in August, and Monarch collapsing earlier this month.

Today, Flybe became the latest carrier to announce it was having a tricky time, saying profits will be lower than expected following a rise in aircraft maintenance costs. Adjusted pre-tax profit is now expected to be in the range of £5m to £10m in the first half of the financial year, compared with £15.9m for the same time last year.

Read more: Flybe shares are in a nosedive after the firm warned on profits

While chief executive Christine Ourmieres-Widener said she was confident that Flybe is "still on a clear sustainable path to profitability", shares dived in early trading, and at the time of writing were down nearly 14 per cent.

So how have the capital's analysts taken to the news?

Shares will struggle to perform

Gerald Khoo, an analyst at Liberum, has downgraded Flybe shares to "hold" from "buy", calling the higher maintenance costs "a clear disappointment in the short term".

He's expecting a £15m hit this year, though adds that "ought to be conservative and one-off".

On the bright side, Khoo points to the commercial performance, which he said "appears encouraging, with improvements in both yields and load factors".

But until there is greater clarity on maintenance costs, along with further evidence of capacity cuts supporting better unit revenue trends, Khoo says, "we believe the shares will struggle to perform".

Does not have as firm a grip on costs as shareholders may wish

Neil Wilson, senior market analyst at ETX Capital, said the airline is "pursuing the right path in cutting capacity and costs", but the headwinds in the sector are making it tough.

He said:

Flybe faces the industry-wide problems that have bedevilled carriers this year; chiefly low fares and too much capacity.

But it must also contend with an unusual legacy commitment to acquire additional aircraft, which caused capacity to increase by 12.3 per cent to 12.7m seats last year. This was unwanted and it is now taking steps to reduce capacity, which should help.

"It's clearly troubled," he added, but thinks there could be progress on the cards if it can "get a grip on costs and clear out the excess capacity". Last year, operating costs rose by 14.6 per cent, while cost per seat was two per cent higher. For the first quarter, cost per seat rose 4.3 per cent.

"The concern is that today's update further suggests management does not have as firm a grip on costs as shareholders may wish," Wilson added.

Elsewhere, analysts at Goodbody said the revised guidance today includes the already announced £6m IT charge, relating to the development of a new digital platform.

But what has come as a surprise to them is "the range as given for the period to September 2017 now closed, with this suggesting that this is an issue still being worked on".

Read more: British Airways owner IAG eyeing collapsed Monarch's Gatwick slots

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