Flybe-BA deal forms largest Euro regional

 - March 26, 2007, 8:22 AM

UK regional Flybe has completed acquisition of much of Manchester-based British Airways subsidiary BA Connect, receiving the business and some £130 million ($250 million) in exchange for granting British Airways a 15-percent stake in the enlarged operation. As it restructures the new grouping, Flybe will buy more Bombardier Q400 turboprops and Embraer E195s, said the Exeter-based low-fare regional.

BA Connect, which has not made a profit for five years and suffered a £6 million ($11.6 million) operating loss in the six months leading up to last September 30, constituted the remains of Brymon Airways, British Regional Air Lines and British Airways Regional. Known as BA CitiExpress until February of last year, it consisted of BA’s non-London Heathrow/London Gatwick operations, but the deal excluded its London City operation (including nine BAe Avro RJ100s and now to be re-branded BA CityFlyer under a new air operator’s certificate) and Manchester-New York service.

BA plans to cash in its 15-percent stake when Flybe sells about 50 percent of its stock–possibly next year– for up to an estimated £100 million, which it plans to use toward new replacement aircraft. Having previously taken a £106 million charge on the business, BA has paid Flybe £62 million in cash, put £33 million into the BA Connect pension fund, set aside up to £10 million to cover refunds for bookings on flights that Flybe will not perform and provided £34 million to cover higher operating costs on former BA Connect aircraft.

Previous BA Connect services will operate under the low-cost business model Flybe developed to avoid collapse in 2002: charges for meals, baggage and seat booking, closure of unprofitable routes and adoption of a two-type fleet. The enlarged business–Europe’s largest regional airline in passenger numbers–likely will generate revenues of more than £500 million and carry almost 10 million passengers a year.

Flybe has identified potential savings of £30 million, said chief commercial officer Mike Rutter, and has written down by £6.4 million the asset value of its soon-to-be-retired BAe 146 regional jets. All told, Flybe will fly 152 routes from 22 UK and 34 European airports. Domestic UK services account for 70 percent of its flight capacity.

Flybe’s 80-strong fleet now consists of three Embraer E195s, 28 ERJ 145s, 13 BAe 146, 30 Bombardier Q400s and six Q300s. Delivery schedules show four more Q400s and four E195s arriving later this year and 12 Q400s and seven E195s next year. Although first disposals will likely involve the ERJ 145 fleet, Flybe said it will not convert any of its options on 12 E195 to smaller types.