Flybe turbulence queasy, not terminal

Flybe is the latest small European carrier to hit severe turbulence this year

High-cost carrier

Flybe has become the latest small European carrier to hit severe turbulence, following a profit warning. Whilst the direct trigger of its announcement that first half profit would miss forecasts was an unexpected cost overrun due to maintenance expenses, expense shocks are a bigger problem for small-cap airlines with stripped-to-the-bone business models. Flybe is a typical small European airline in that financially, it has been running on fumes of late. "The increased maintenance costs are disappointing, but we are already addressing these in the second half and remain focused on improving our cost base and reliability performance" said CEO Christine Ourmieres-Widener on Wednesday. Evidently, targeting such improvements is a long-term project. The group has posted a positive interim operating cash flow only once since the end of 2015 and is has not burnt cash faster since sending £125m up in smoke in the first half of 2013. It is little surprise that Flybe’s operating margin is also tracking slightly in the red looking at interim results.

Fare war

These are not optimal internal conditions for an airline to face one of the most punishing European ticket price wars for decades. Fierce competition has already pushed a clutch of carriers over the cliff edge into insolvency this year. Others appear to be living on borrowed time. We would stop short of suggesting Flybe might join that group. But it’s worth pointing out that Flybe ranks lowest in the sector in a Thomson Reuters’ Combined Credit Risk model. The risk of default on Flybe’s BB-rated debt is a negligible 0.3%. Furthermore, even after Wednesday’s warning the group has maintained guidance for the year. And while its interim forecast reduction will weigh on estimates, Flybe is still set to post an underlying rise of more than 20%.

A long four weeks 

Growth estimates had previously projected a rise of as much as 30%. The grim reality is that when larger airlines go all-in with price cuts, the weak struggle, and the strong thrive. For instance, note the striking revival of fortunes of easyJet which has seen its shares gain 30% this year as costs stabilize. Rivals’ insolvencies have offered Europe’s number two discount carrier the opportunity to increase market share, sometimes directly by picking up insolvent assets. For Flybe investors, the most immediate concern is further clarification of the specific cost issue reported on Wednesday. Flybe said it would provide more information with interim results on 9th November. Unfortunately, that leaves the stock at the mercy of uncertainty, rumour, speculation—and shorts. The stock is in the highest quartile of London’s most shorted-shares.

Technical Spec

Technically, Flybe’s shares price chart backs the air of stock that is in a long-term decline. The stock has fallen in every quarter since the middle of 2014 and has never returned to highs around 330p traded on the day of its IPO in December 2010.  The stock’s most recent gyration was triggered by a repeat visit to pronounced resistance in place since March at 44p. The downswing following failure there earlier this week culminated in a triangle breakout as the uptrend since mid-June—already badly damaged—definitively gave way. The stock’s 20% plunge on Wednesday has landed right on 35p, the pivot for much of the year’s price action. Whilst support was seen there over the last month or so, there’s no guarantee the level will hold whilst fine momentum gauges like the Relative Strength Index corroborate a collapse in sentiment. In the event of a break of 35p we can expect the bears to steer Flybe towards record lows, near 30p. 

Figure 1 - Flybe Group Plc. price chart

Source: Thomson Reuters and City Index

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