Flybe says UK's domestic air travel boom is over

Flybe has declared an end to the boom in domestic air travel as the regional airline reported a deepening drop in demand for British routes.

The Exeter-based carrier runs domestic services which include Manchester to Norwich and Aberdeen to Gatwick, but the fallibility of its business to UK demand has been underlined by two profit warnings this year.

Flybe avoided another surprise on earnings on Wednesday as it published first-half results, though an increase of pre-tax profits in the six months to 30 September of £8.2m to £14.3m had been forecast to be significantly higher at one point this year. Before the profit warnings, Flybe had been expecting to make £36m.

As well as the poor profits performance, the results contained a further admission of weakness in the UK market. Flybe said winter bookings were down 1% compared with last year, confirming a deterioration of sales on top of an already poor outlook. Only last month Flybe had forecast a 1% increase in winter bookings. It carries 7 million passengers a year.

At the time of its second profit warning Flybe said it was still gauging whether the decline in UK travel – which accounts for seven out of 10 Flybe passengers – was due to a faltering economy or a fundamental move away from domestic routes. Jim French, Flybe's long-standing chairman and chief executive, said the fall appeared to be deep-set. "This is a trend we have picked up across the industry You have got to look at the industry, not just Flybe. I think we are seeing a very, very flat situation."

French added that, according to the Civil Aviation Authority, domestic air travel had fallen 20% over the past four years, as an over-supplied market bottomed out. "It is a combination of the economic and business cutbacks over the period, but I truthfully think that the market was over-supplied five to 10 years ago," said French, pointing to a subsequent scaling down of domestic routes by Ryanair and easyJet, as well as the sale of British Airways' domestic operations to Flybe in 2006.

Flybe has emphasised plans to expand in Europe, including the acquisition of Finncomm Airlines in a joint venture with Finnish carrier Finnair.

According to the Civil Aviation Authority, UK airports handled 48.7 million passengers in 2007, but that number fell to 38 million last year – a fall of 22%. Rail appears to have been a major beneficiary and competitor. The Association of Train Operating Companies said intercity rail journeys had risen by 19% since 2007, while on the top 10 domestic air routes, including London to Manchester, Edinburgh and Glasgow, rail's market share versus airlines has risen from 32% to 44% since 2007. "In what is a highly competitive market, better services and more cheap tickets are encouraging more and more people to choose rail to travel between the UK's main cities," said ATOC.

Shares in Flybe rose 2p to 70p, despite the gloomier UK outlook. Analysts said the airline's tough action on costs – the cost of flying a single passenger rose slightly – had calmed investors.

"Demand looks as weak as it did last month, but the saving grace is a tight grip on costs, which are hardly growing at all," said Douglas McNeill, analyst at Charles Stanley Securities.

Guardian 9th Nov 2011