Failure of Flybe’s Finnair Pact Sends U.K. Carrier Tumbling

Flybe Group Plc scrapped a joint venture with Finnair Oyj that had contributed a quarter of its revenue under management after failing to agree plans to end losses, sending the stock down the most in almost three years.

Flybe will sell its 60 percent stake in the three-year venture to Finnair or a new majority shareholder for a nominal 1 euro ($1.25), the companies said, leading the U.K. airline to book a non-cash charge of 9.9 million pounds ($16 million).

While Flybe has been turning a profit on flights provided on a contract-only basis, it lost money on eight joint venture routes that fed Finnair’s lucrative long-haul services, Chief Executive Officer Saad Hammad said in an interview. The Exeter-based company has signed a new contract-based deal with an unspecified major European carrier starting from 2015, he added.

“The commercial flights were heavily loss-making and Flybe wanted to turn those into contract flights or make heavy cuts,” Finnair CEO Pekka Vauramo said of the decision to terminate a venture that had accounted for one-third of its European traffic. “We couldn’t accept that.”

Shares of FlyBe fell 29.75 pence, or 23 percent, to 112 pence in London, closing 15 percent lower at 111.75 pence -- the steepest decline since Jan. 10, 2012. That pares gains this year to 8 percent, valuing the company at 242 million pounds.

Best Deal

Hammad said the agreement to the dissolve the alliance was the “best deal” he’d ever done, and that the “positives” of the decision would probably be recognized in coming weeks.

Finnair closed 4 percent lower at 2.40 euros in Helsinki. It has declined 13 percent this year, giving a market value of 307 million euros, about the same as Flybe’s.

The parties aim to complete the split this year, pending regulatory approval. Hammad said 26 jet and turboprop planes leased to the venture will return to Finnair, while Flybe is close to sealing a deal to dispose of nine remaining Embraer SA E195 jets of 14 separately deemed surplus to requirements.

The U.K. carrier canceled orders for 20 E175 jets in September and deferred others as part of a deal that will bring more Bombardier Inc. Q400 turboprops into the fleet.

Finnair said its own loss from the exit plan could approach 20 million euros, adding that flights will continue normally.

Synergy Rethink

“Finnair continues to examine what the next operating model and ownership structure will be,” Vauramo said. “We know there are synergy benefits to be gained. We’re going to examine the synergies we can create between Finnair and the current venture in the next operating model.”

The Flybe Nordic generated sales of 117.2 million pounds and costs of 121.7 million pounds in the fiscal first half ended Sept. 30, Flybe said.

“None of the commercial routes were profitable and we didn’t want to subsidize their long-haul,” Hammad said by phone. “We won’t be bullied”

Ending the deal should make it easier for Flybe to pursue contract flying as it highlights the carrier’s desire to focus on profitable operations, the executive added.

Flybe had a loss after tax of 15.4 million pounds for the first half, compared with 13.6 million-pound profit a year earlier. In addition to the impairment charge, expenses related to flight-delay compensation and restructuring also weighed on earnings, the airline said in a statement.

The carrier reiterated a target of delivering incremental cost savings of 24 million pounds this year and said it will open bases in Bournemouth, England, and Aberdeen, Scotland.

Before it's here, it's on the Bloomberg Terminal.