Can Flybe shares ride out the turbulence?

Having been stalked by Stobart Group as well as the Beast from the East over the past month, shareholders in Flybe (FLYB) will be hoping that this summer finally signals an upturn in fortunes at the regional airline.

The stock was trading at a record low of 31p as recently as December before a takeover approach from Stobart (STOB), which owns London Southend Airport, lifted the stock to as high as 48p last month.

Flybe subsequently fell back below 35p after Stobart withdrew its interest, leaving many shareholders in need of convincing after the airline said it continues to have “an exciting future as an independent company”.

Today, the company got the chance to prove that its turnaround plans were on track as it looks to become a demand-driven rather than capacity-led airline.

It said the early indications for this summer were encouraging, with an estimated 7.5% increase in passenger revenue per seat offsetting a 7.9% decrease in capacity. So far, the airline has sold 21% of its first-half capacity, against 20% sold at the same time last year.

Unfortunately, the airport closures and flight cancellations in the recent bad weather left an impact of around £4 million from lost revenues and additional care and assistance costs on cancelled and delayed flights.

There were 994 cancelled flights due to bad weather in the final quarter of its financial year, compared with 372 a year earlier. Flybe may have been more affected by the weather than other airlines because it operates from smaller, regional airports where infrastructure might struggle to cope.

Numis Securities now predicts an adjusted loss of £15.7 million for the year just ended, improving to a deficit of £4.7 million in the current year. Following the withdrawal of Stobart’s interest, Numis has reinstated its ‘Hold’ recommendation and 33p target price.

House broker Liberum, which has a target price of 36p, trimmed its forecasts for this year to reflect higher costs such as rising fuel prices.

They believe that a projected EV/earnings multiple of 5.4x adequately reflects both the airline’s recovery potential and risks.

Today’s note added: “Clear evidence of improved unit cost control to allow the unit revenue improvements to drop through to the bottom line, along with a return to positive earnings revisions, is needed for the shares to perform.”

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