Flybe : Sky high
Published : July 2008
Europe’s largest regional low-cost airline Flybe keeps ahead of the game with a business model based on forethought and agility. Becky Done talked to chief commercial officer Mike Rutter to find out more
When entrepreneur the late Jack Walker started Flybe over twenty years ago, his vision for the company was that it would become one of Europe’s most important regional airlines. Today the company has more than achieved its own ambition. Having become Europe’s largest regional airline it now operates in 12 countries on over 160 routes and handles seven million passengers per year. Starting life as Jersey European, the company became British European at the turn of the millennium before acquiring its present name Flybe, and with it, a distinctly modern re-branding. The company appears to have mastered the art of success in a notoriously difficult market.
Figures for the past financial year underscore Flybe’s continuing accomplishments. Turnover for 2007 to 2008 was in the region of £530 million, with profits hitting £30 million. In addition, the company achieved a record operating margin of around seven per cent, alongside record cash reserves of over £60 million.
Chief commercial officer Mike Rutter is convinced that Flybe’s continued success is down to what he calls the company’s “winning formula” – convenience, provision of business travel, and investment in the product. “Our unique selling point is our comprehensive convenience factor,” he explained. “We fly from 24 UK airports and 29 in Europe, and we have a high-frequency service, whereas most of our competitors have a low-frequency service. We fly up to nine times a day per route, giving our passengers plenty of opportunity to go back and forth.” Using this flexibility to retain Flybe’s high percentage of business travellers is something that Rutter sees as key. “We are the only low-cost airline that has maintained a very high percentage of business travel. Over 42 per cent of people who travel with us travel for a reason of business – and that’s because of the investments that we have made within the products.” In addition, the combination of two crucial factors – low fares stacked up against Flybe’s high service standards – is another solution which helps keep the company ahead of the competition.
The “winning formula” is supported by Flybe’s strong emphasis on innovation, which has seen it diversify its offerings to passengers. As well as boasting a comprehensive and wide range of passenger facilities, Flybe has consistently been the first to offer innovative services, some of which are now seen as standard across the industry. These include a low-cost frequent flyer programme, online check-in for those with both hand and hold baggage, a facility enabling passengers to pre-book seats, and the provision of celebrity-endorsed snacks onboard its aircraft. A landmark franchise agreement has also been announced with Scottish regional airline Loganair, due to commence later this year. All of these initiatives have proved highly successful, demonstrating that Flybe’s ability to innovate is an advantage which pays off.
Innovation was also a key factor in Flybe’s highly publicised acquisition and subsequent turnaround of BA Connect, the regional subsidiary airline which was part of British Airways (BA). In the years leading up to the acquisition, BA Connect was making substantial losses; yet Flybe was able to transform the business, retaining 100 per cent of the passenger base. How was it able to achieve what aviation giant BA could not? “We took decisive action on day one of the takeover,” explained Rutter, “and transferred their organisation straight onto our product set. Since then the combination of high frequency, very strong advertising and value fares has allowed us to transform the business.”
Being in a position to make the acquisition a success was all down to the level of priority Flybe was able to afford to BA Connect once the deal had taken place. As part of the negotiations the company secured £140 million of funding from BA – allowing it to make substantial investments in key areas – and in return, BA acquired a 15 per cent stake in the new enlarged Flybe. The result was one of which Rutter is extremely proud: “We successfully concluded the integration of the business some months ago, and I’m
pleased to say we have managed to move the business on substantially, doing what BA couldn’t manage to do. To be successful in the sector that we’re in – the regional sector – you have to have independence of action and be fleet of foot. Obviously BA is a very large brand whose primary concentration is on the long-haul marketplace and that didn’t provide the sort of freedom required to be able to deal with the regional marketplace.”
Is Flybe on keen to repeat this success story? “We’re always on the lookout for acquisitions. In fact, we consider ourselves to be a highly acquisitional organisation,” confirmed Rutter. With the spiralling cost of fuel, Rutter acknowledges that the current challenges for airlines are numerous, but he is confident that Flybe’s business model will enable it to weather the storm. However, he is careful not to allow his confidence to slide into complacency: “I am not in any way complacent,” he confirmed, “because there are currently challenges for all of us. The key thing is to concentrate on your business model and keep your costs low. For those airlines that remain – which will be very few if oil stays at its current high level – there will be the opportunity to take part in a greatly reduced, and very focused, aviation business.” Part of Flybe’s own focus on its business model has included substantial investment in its aircraft. This has recently included a spend of $2 billion on 60 Q400 Bombardier aircraft, alongside 15 Embraer 195s. The purchases were of a strategic nature – not only have they enabled Flybe to phase out older aircraft but they have underpinned its status as an environmentally-efficient airline. “They have one of the lowest carbon footprints of any fleet available,” said Rutter of the new aircraft, “which means that they burn very little fuel, relative to our competition.”
The investment in an environmentally-friendly fleet has provided a boost to Flybe’s Eco Label scheme, which began in the summer of 2007. Labels on the side of each plane and on the company website show how much CO2 each individual aircraft generates, and passengers thus have the ability to understand and monitor their own environmental impact. The impressive scheme was welcomed by the House of Commons’ Treasury Select Committee, who recommended that it be rolled out across the whole of the industry.
Passengers are also able to offset the carbon footprint of their journey thanks to Flybe’s partnership with carbon offset provider PURE. The facility allows passengers to donate during the booking process or separately via Flybe’s website. Flybe also fully supports the inclusion of aviation in the EU Emissions Trading Scheme, and has a wide range of environmental policies in place throughout the company itself – from recycling to the capture of waste. “Flybe has taken the view that the aviation industry has to take climate change seriously,” said Rutter. “We acknowledge and recognise our part in creating climate change and we are determined to practice what we preach.”
Another key area of investment for the airline has been in creating a training academy at the company HQ in Exeter. Prior to the academy’s establishment, Flybe was heavily involved with the government initiative on skills pledges, and the academy has allowed the company to be one of the forerunners in providing the capability to award its own qualifications. It can award the equivalent of GCSEs and A levels, and in addition, is the first company in Britain to be able to award its own QCA-approved degrees. Rutter explained the thinking behind setting up the academy: “As an airline we must adhere to substantial amounts of legislation and best practice issued by the Civil Aviation Authority. As a result of that we are constantly investing in training, so we therefore decided to formalise that investment to create a training academy.” The academy currently works with partners such as Exeter College and Exeter University which will enable Flybe to centralise all of its training in Exeter, and which will also allow it to have up to four flight simulators in addition to substantial classroom-based training for Flybe’s 3,100 members of staff. It is a commitment to the tune of around £25 million, and Flybe sees it very much as an investment for the future.
It is clear from this alone that Flybe's staff are seen as crucial to the business’ success. Confirming this, Rutter illustrated the engaging culture of the company: “We believe that the key to survival in a business such as aviation is agility, so we try to instill that in our activity. We also believe in honest ommunication – so we’ll send out emails to staff, and I’ll post on our own internal networking sites to keep people up to date. We also believe in passion, and therefore look for passionate people when we’re recruiting. The aviation industry business is a low-margin one; if you’re not passionate about it and the challenges that come up, then you really shouldn’t be in the industry. Finally, we look to reward those who deliver; and we do this in both the financial and the promotional sense.” Jim French, CEO and chairman of Flybe, clearly sets an influential example to his staff in this area, having received numerous awards over the past two years for his contribution to the aviation industry.
Having established such a solid platform for future growth, it comes as no surprise that Flybe is preparing for flotation on the London Stock Exchange. Currently 69 per cent of the company is owned by the Walker Trust, 16 per cent by staff through an employee shares scheme and the remaining 15 per cent by BA as a result of the BA Connect deal. Flotation is a move which Rutter believes will reward existing shareholders – “It’s an opportunity to recognise Flybe’s value for the shareholders who have supported the business for
a number of years,” – as well as boosting the company’s profile and encouraging expansion into new markets.
And the company is well-positioned to approach the challenge of further growth. It has a successful and experienced aviation services arm, which is the largest regional one of its kind in Europe. Services include base maintenance, line maintenance, component repair, design and technical support. The centre is the European service centre for aircraft manufacturers Bombardier and Embraer, and Rutter has found that the benefits of this branch of Flybe have proved numerous: “It provides Flybe with the flexibility required of having one of the largest overhaul and maintenance facilities. It is also a profit centre rather than a cost centre, which helps us substantially in managing the bottom line.”
Flybe shares some of this bottom-line profitability not only with its staff but also with a nominated charity, which is chosen every three years. Currently the company supports the Make-A-Wish Foundation, due to finish its term this year, and is currently in talks with four other charities, one of whom Flybe will choose to support in the next three years to come. The company is also keen to make a positive impact on the communities in which it operates, and as such is heavily involved with community projects such as the sponsorship of football clubs, promotion of football in schools and involvement in the development and
promotion of local hero awards, which recognise members of local communities. All of these initiatives underscore Flybe’s commitments to being a socially responsible airline and as such, add value to its operations.
The company has added up to 40 new routes per year for the past five years, but in an industry so critically dependent on fuel, Rutter’s prediction for Flybe over the next couple of years is realistic. Factors such as fuel prices and the status of weaker airlines (which Rutter says “may or may not depart this mortal coil”), may stall such rapid expansion for the company in the near future, but Rutter is happy to acknowledge the shift in market conditions: “If fuel continues where it is then I think there might be a year or so of pause; not just for Flybe but for everybody else out there.”
If there is to be a vast drop in the number of operating airlines as a result of the global fuel crisis, Rutter is adamant that only the ones with the most robust business models will survive: “I think there will be a reduced number of major intercontinental flight carriers. I believe there will still be very strong flight carriers from the Middle east, three to four in Europe; and two in the US. I would also imagine that there will be three to four strong low-cost airlines and one or two major regional airlines – of which Flybe will be the pre-eminent player,” he added.
It’s a confident projection in uncertain times, but Rutter is convinced that Flybe’s proactive and innovative approach affords it protection from the downturn. “When I arrived at Flybe it was a loss-making regional airline which was struggling to find a role and a passenger base,” he said. “But we’ve transformed it into the largest regional airline in Europe. It’s making healthy profits and is respected by everybody in the industry.”
With a success story like that already to its name and a sound, strategic approach to the future, Flybe appears well positioned to overcome industry hardships and to emerge head and shoulders above the competition. END