Stobart in consortium set to take over struggling budget carrier Flybe

Stobart was part of bid for Flybe

Cumbria-based Stobart Group is part of a consortium taking over struggling budget airline Flybe in a cut-price deal.

It announced details today of a joint venture, involving Virgin Atlantic, and Cyrus Capital Partners, which has made a recommended cash offer for the Exeter-based operator which put itself up for sale in November, blaming currency volatility, rising fuel costs and Brexit-related uncertainty.

The joint venture, Connect Airways, is acquiring all the Flybe stock, and its to-be-issued stock, in a deal valued at just £2.2m.

It values Flybe shares at just 1p each, compared with their closing price of 16.38p last night.

However, following completion of the acquisition, Cyrus, Stobart Group and Virgin Atlantic are intending to provide up to £80m of further funding to the combined group to invest in its business and support its growth, as well as a contribution of Stobart Air.

Stobart, which owns London Southend Airport and which has been at the centre of a bitter courtroom battle between board members and its former chief executive Andrew Tinkler, abandoned a previous bid for Flybe last year.

At the end of September, Flybe operated a fleet of 78 aircraft.

Commenting on the acquisition, Warwick Brady, Stobart Group chief executive, said: “The board of Stobart Group believes that bringing Stobart Air together with Flybe and partnering with Virgin Atlantic and Cyrus Capital is the best way for us to play an active role in UK regional flying.

“The combined entity will be a powerful combination with sufficient scale to compete effectively in the UK and European airline markets.

“It will allow us to continue to work with Flybe and provides an excellent opportunity to continue to grow passenger numbers at London Southend Airport.”

Christine Ourmières-Widener, Flybe chief executive, said: “Flybe plays a vital role in the UK’s transport infrastructure with a UK regional network which positions it well to benefit from growing demands from long haul carriers for passenger feeder traffic.

“We have successfully implemented a clear strategy in recent years focused on tighter fleet management, improving revenue per seat and increasing load factors.

“The pursuit of operational excellence has reduced maintenance times and increased efficiencies and customer satisfaction.

“However, the industry is suffering from higher fuel costs, currency fluctuations and significant uncertainties presented by Brexit.

“We have been affected by all of these factors which have put pressure on short-term financial performance.

“At the same time, Flybe suffered from a number of legacy issues that are being addressed but are still adversely affecting cashflows.”

He added: “By combining to form a larger, stronger, group, we will be better placed to withstand these pressures.

“We aim to provide an even better service to our customers and secure the future for our people.”

Connect Airways is a joint venture, the share capital of which is owned 40% by DLP Holdings, a company wholly-owned by funds managed by Cyrus, 30% by Stobart Aviation, and 30% by Virgin Travel Group Limited.

It is also expected that Connect Airways will acquire Stobart Air, Stobart Group’s regional airline and aircraft leasing business.

The combined group is expected to bring benefits to customers, suppliers and employees, providing stability in a tough trading environment.

Russ Mould, investment director at Manchester investment firm AJ Bell said this morning: “Ouch, any Flybe shareholder hoping for a healthy premium from any takeover bid should look away now.

“A paltry £2.2m or 1p per share is being offered to investors in the company’s equity as part of the rescue deal.

“To put that sum in context it compares with £215m valuation at IPO back in 2010 and even 12 months ago the regional carrier was valued by the market at closer to £100m.

“In some respects, the degree to which the market failed to anticipate such a bargain basement price is a surprise given the big profit warning in October which preceded Flybe’s decision to put itself up for sale.

“Volatile oil prices, strong competition and the uncertainty around Brexit have seen several failures among smaller airlines in recent times and for Flybe to determine a 1p bid is ‘fair and reasonable’ it must have been in pretty dire financial circumstances.

“References by management to pressure on short-term financial performance and legacy issues adversely affecting cash flow suggests it was close to running out of cash.

“Stobart, which pulled out of an earlier approach for Flybe just under a year ago, clearly sees value in the franchise.”

Commenting on the deal, Rob Burgess, who runs one of the UK’s biggest frequent flyer websites, headforpoints.com, said: “This is an interesting structure which has something for everyone.

“Virgin Atlantic gets to protect the feed that its Flybe codeshares delivers to its Manchester operation.

“Virgin is under huge pressure at Manchester from Thomas Cook’s long-haul operation, particularly to the United States, and it can’t afford to lose connecting Flybe passengers if the airline goes bankrupt or is acquired by IAG.

“Virgin Atlantic will presumably get first pick of Flybe’s Heathrow slots for its mainline operation.

“Under the remedies put in place when BA bought BMI, these ‘remedy slots’ will soon become more flexible.

“Whilst Flybe is currently forced to fly to Aberdeen and Edinburgh, the landing slots will soon be available for any route to Europe or to Moscow, Cairo or Riyadh.”

He added: “We need to remember that Virgin Atlantic cannot use Flybe to directly feed its long-haul flights at Heathrow.

“Virgin operates out of Terminal 3, but only Heathrow’s Terminal 2 and Terminal 5 are designed to handle domestic passengers. Virgin’s defunct Little Red operation showed that customers are unwilling to book connecting flights which require cross-terminal transfers at Heathrow.

“Stobart Air benefits from being injected into a larger group.

“Stobart Group also owns London Southend and Carlisle Lake District airports and the offer document highlights plans to build a bigger Flybe base at Southend.

“From a frequent flyer perspective, this is clearly the end of Flybe’s Avios loyalty scheme.

“At the moment, Flybe buys Avios from BA’s parent company to give to its customers. With the airline taking on the Virgin Atlantic branding, it will be offering Virgin Flying Club frequent flyer miles.”

He concluded: “I would also expect it to offer status points in Virgin Flying Club which will, for the first time, allow Flybe customers to earn a shiny status card.

“This should be valid across Virgin Atlantic, Delta and, from mid-2019, Virgin’s new shareholders Air France and KLM, providing additional reasons to travel with Flybe.”

Close