YU GROUP PLC — Annual Report 2011

Mar 31, 2011

UK leadership European growth

UK's No. 1 domestic airline

27% domestic market share and largest carrier at 12 UK airports

Europe's largest regional airline

Supported by one of Europe's leading regional MRO operations

Expansion under way

Secured aircraft for future growth plans and developed new and existing relationships with European flag carriers

"Flybe retained its position as Europe's largest regional airline and the UK's largest domestic airline brand, increasing its market share to 27.0%, flew 7.2m passengers and significantly increased its underlying profitability. Flybe is now the largest operator at 12 of the UK's airports and the largest domestic carrier at London Gatwick.

We were delighted to complete the successful flotation of Flybe Group plc in December 2010, raising £60.3m of new capital, net of expenses. This was a major strategic goal for the business in order to assist in the export of the business model into Continental Europe and in funding our fleet expansion programme.

Flybe also reached agreement for the purchase of 35 88-seat E175 regional jets, with options and purchase rights for a further 105 aircraft, ensuring very flexible and cost-effective aircraft expansion capability through to 2020.

With regard to our European expansion, our new partnership with Air France also announced in July 2010 signalled the beginnings of a new stage in the development of Flybe by aligning with one of the leading aviation groups in Europe. We continue to assess, on a selective basis, other European opportunities with both flag carriers and regional airlines."

Jim French CBE Chairman and Chief Executive Officer

Increase in Group revenue

Underlying profit before tax

Overview

Where we fly – At a glance	02
Business highlights
Flybe milestones	04
Delivering UK leadership	06
European business city market place	08
Preparing for European growth	09
Flybe's other opportunities	10

Building revenue in a challenging market

• • Revenue growth of 4.4% to £595.5m (2009/10: £570.5m)
• • Passenger numbers level at 7.2 million at a load factor of 61.7%
• • Passenger revenue per seat up to £46.96 (2009/10: £46.06)

New capital raised to fund our next phase of development

• • Flotation on London Stock Exchange completed on 15 December 2010 with new capital of £60.3m raised, after expenses
• • Cash, including restricted funds, of £105.6m at year end (2010: £62.1m)

Leading the UK domestic market

• • Leading airline brand in the UK domestic with 27.0% market share (2009/10: 26.0%)
• • Operating out of 14 UK bases and serving 73 airports in total over UK and 12 other European countries*
• • Fleet of 69 aircraft with an average age at year end of 4.3 years (2010: 3.3 years)
• • Business travellers represent 45.3% of our customers (2009/10: 43.2%)

Growth and expansion into Europe

* Includes our franchise partner, Loganair.

• • Announced codeshare with Air France in 2010, covering 62 routes
• • Order for 35 Embraer E-Series regional jets, with options and purchase rights for a further 105

2011 £m 2010 £m

• £13.0m Training Academy building opened in February 2011

Revenue 595.5 570.5 Underlying profit before tax** 22.3 7.4 Reported (loss)/profit before tax (4.3) 24.6

** Underlying profit before tax is calculated before the estimated impact of volcanic ash and weather disruptions (2010/11: £18.1m; 2009/10: £nil), IPO expenses (2010/11: £1.7m; 2009/10: £1.1m) and movements

in fair value of financial instruments (2010/11: £6.8m loss; 2009/10: £18.3m gain).

Governance

Business review Chairman and Chief Executive

Board of Directors	36
Corporate governance	38
Shareholder information	44
Directors' remuneration	46
Statement of Directors' responsibilities	52

Financial statements
Independent auditor's report to the
members of Flybe Group plc	53
Consolidated income statement	54
Consolidated statement
of comprehensive income	55
Consolidated statement of changes in equity	55
Consolidated balance sheet	56
Consolidated cash flow statement	57
Notes to the consolidated financial statements 58
Company balance sheet	92
Company statement of changes in equity	93
Company cash flow statement	93
Notes to the Company financial statements	94
Five-year summary	96
Glossary	97

The Directors present the Annual report and accounts for the year ended 31 March 2011. References to 'Flybe', the 'Group', the 'Company', 'we' or 'our' are to Flybe Group plc (registered number 1373432) and its subsidiary companies where appropriate. Pages 01 to 52, inclusive, of this Annual Report comprise the Directors' report that has been drawn up and presented in accordance with English company law and the liabilities of the Directors in connection with that Report shall be subject to the limitations and restriction provided by such law.

01

Officer's Statement 12 Strategy and KPIs 18 Financial review 19 Risks and uncertainties 27 Corporate responsibility 30

Business review

Where we fly At a glance

x4 Flying four times more domestic routes than any other airline

11.6m seats flown

7.2m Passengers (2009/10: 7.2 million)

45.3% 45.3% of Flybe passengers are travelling on business

25% of capacity in summer 2010 was flown on routes with a frequency of six or more services a day

Total fleet of 69 aircraft, comprising 55 Bombardier Q400 78-seat turboprops and 14 Embraer 195 118-seat regional jets.

Operational information

• • Flybe passengers travel on average 5.5 times a year with the airline
• • Bases operated in 2010/11 14 in the UK
• • 73 airports served during 2010/11 40 in the UK and 33 in Europe*
• • Countries 13**
• • 2010 CAA Punctuality Statistics put Flybe ahead of all other major airlines operating in the UK

Other highlights

• • Best Short Haul Airline and Best Environmental Contribution – Business Travel Awards
• • Top UK Airline in Which? Holiday poll
• • National Training Award 2010 South West Regional in recognition of Flybe's 'outstanding contribution and commitment to training, learning and development in the workplace'
• • Recognition of Flybe's achievements through awards for Jim French – Aviation Week's Commercial Air Transport Laureate, British Travel Industry Hall of Fame
• * 11 of which are served exclusively by Loganair, Flybe's franchise partner. ** one of which is served exclusively by Loganair, Flybe's franchise partner.

●

Business highlights Flybe milestones

July 2002

A new beginning for the airline as British European dramatically changes its business model to survive in such a highly competitive and aggressive new low cost travel era. Flybe was born and, along with it, a bright, modern brand and changes to commercial, fleet and operational policies that transformed the airline.

March 2007

Flybe completes the acquisition of BA Connect, British Airways' UK regional airline. In a transformational agreement, Flybe becomes Europe's largest regional airline overnight and integrates the new business within three weeks of acquisition. As part of the deal, BA takes a 15% holding in Flybe.

January 2008

Flybe announces its landmark franchise agreement with Loganair, the Scottish regional airline, that sees it take to the skies in Flybe colours in October 2008. The deal replaces Loganair's previous agreement with British Airways.

2002

April 2006

Lord Digby Jones, then Chief Executive of the CBI, opens Flybe's brand new £12m hangar facility at Exeter airport. Within two years, Flybe's maintenance, renewal and overhaul business becomes one of Europe's biggest with two thirds of its work completed for third party clients like Lufthansa and SAS.

2007

Flybe launches the world's first ecolabelling scheme for the airline industry. The ecolabel shows passengers in a transparent way the environmental impact of their journey and goes on to win a number of awards for innovation and commitment to the environment.

January 2009

Flybe wins the prestigious Air Transport World 'Regional Airline of the Year' award in Washington DC – only the second occasion a UK airline has won the trophy in its 35 year history.

April

2010

Flybe overtakes Easyjet to become the UK's number one domestic airline, with a 26% market share. In an incredible turnaround, Flybe moves from fifth position with an 11% market share to top spot in six and a half years.

£60.3m Cash raised in December 2010 LSE listing

£13.0m Training Academy building completed

Business highlights in 2010/11

• • Initial Public Offering on the London Stock Exchange raising £60.3m, net of expenses
• • Leadership in core UK domestic market 27.0% share*
• • New £13.0m Flybe Training Academy building completed and fitted out**
• • Contract signed for up to 140 Embraer E-series regional jets with 35 firm orders placed
• • Commencement of codeshare with Air France covering 62 routes
• • Successful completion of wet lease of four aircraft to Olympic Air
• * including our franchise partner, Loganair. ** grant funding of £7.1m was received to assist in funding this development.

July 2010

Flybe signs a multi-billion dollar deal with Embraer for up to 140 Embraer 175 and E-family aircraft to support its planned European growth. Later in that month, Flybe and Air France sign an extensive codeshare agreement covering some 62 routes.

2011

Business highlights Delivering UK leadership

Flybe understands the UK regions better than any other airline for the simple reason that it operates over four times more UK domestic routes than any other operator.

Flybe is maintaining and expanding the domestic air network to connect Britain's regions and give choice to millions of UK passengers in accessing flights to European links. It is therefore no surprise to learn that it is the largest scheduled airline, measured by air traffic movements, at 12 airports including Belfast City, Birmingham, Cardiff, Exeter, Inverness, Manchester and Southampton (CAA statistics – 2010/11).

Flybe is also the largest domestic airline at London Gatwick airport, carrying 1.2 million passengers in 2010/11, linking the capital city with eight airports around the UK and providing crucial lifeline services to London.

Flybe understands that for journey times of under two and a half hours, the train can offer a more convenient option. There are fast rail links to the likes of Manchester, Birmingham and Exeter from London terminals; however, it is a very London-centric view to suggest that rail travel is a realistic option for all passengers. The rail network remains based around the terminals in the capital city – as indeed will the High-Speed Rail network planned for circa 2020. Regional air travel offers the flexibility and convenience of non-London-centric journeys that airlines like Flybe are committed to providing for passengers.

For example, a trip from Southampton to Newcastle by train takes up to six hours, including a tube journey through London. By contrast this would take 80-minutes on a Flybe flight. Exeter to Manchester by train is around 4 hours 30 minutes compared to a 50-minute flight time. Norwich to Edinburgh using the rail network is over 6 hours (via Grantham and Darlington) while flying takes 80-minutes. Regional economies rely on fast, reliable air links and any policy shift to limit such services runs the risk of damaging regional businesses.

"I'm proud to be part of the team that ensured Flybe's punctuality was better than all other major carriers in the UK in 2010."

27.0%

UK domestic market share (including our franchise partner, Loganair)

Markets

Our Airline business targets three distinct passenger groups:

Passenger groups

28.0% were visiting friends and relatives (2009/10: 28.2%)

Flybe's route network is focused on the three main passenger groups. It is also aimed at passengers in airline-dependent locations (such as Northern Ireland, the Channel Islands and the Isle of Man) and other locations where surface transportation may be a less attractive option. In regional communities within the UK mainland where there are limited or no direct rail services, such as the areas in and around Inverness and Aberdeen, the competitive impact of surface modes of transport can be significantly less.

Flybe's position as the UK's number one domestic airline is underpinned by a punctuality record that is second to none among major carriers in the UK.

Taking those airlines that operated more than 25,000 flights during 2010 from the ten CAA reporting airports, the figures showed that Flybe outperformed all the major industry suppliers for its on-time performance, with an 81% on-time ranking for its reported sample of 112,042 flights. Four other airlines achieved a punctuality rating of over 70%, while a further five were in the 60% to 70% range. Across the network, our performance was even better, reaching an 83% punctuality level.

Hannah Ringland, Northern Ireland – Newcastle

Hannah Ringland, 20, is studying to be a primary school teacher at Northumbria University and travels with Flybe every term from her home city of Belfast. Without Flybe's direct service to Newcastle airport, her journey would be expensive and involve a time-consuming combination of trains and ferries.

"The knowledge that I could book my flights months ahead with Flybe was incredibly reassuring and meant I was able to select the university of my choice knowing that a good value flight would get me to and from Belfast City airport whenever I needed to travel. I love Newcastle and because the flights are so regular, my Mum and Dad have been able to visit as well."

Hannah Ringland

Business highlights European business city market place

Flybe offered the second largest number of flights to European business cities from the UK regions in 2010/11 based on flights operated.

The Flybe route between Southampton and Amsterdam is a perfect example of how the application of the Group's business model has been of major benefit to a UK regional economy, in this case southern England.

When Flybe entered the market in 2006, there were 101,000 seats on sale on that route. By 2010, thanks to Flybe's vigorous marketing of the route, competitive pricing, strong corporate ticket sales and an educated passenger base who understand the benefits of quick transit through Southampton rather than London Heathrow, there were more than 159,000 seats on sale.

Air France codeshare

Flybe's first expansion into Europe took place in July 2010 when it signed a landmark codeshare agreement with Air France. The deal gave Flybe passengers access to five additional routes between the UK and France as well as seven new domestic French routes and 11 international routes. Air France codeshare customers are provided with access to 45 new routes from France to the UK, as well as seamless connections through Birmingham, Manchester and Southampton on a further 17 UK domestic routes.

Ticket sales for the codeshare commenced in September 2010, with the flights being fully operational from October 2010. The deal clearly supports Flybe's strategy of exporting the business model to Europe, provides a solution to Air France's operations from UK regions to Paris and is an excellent opportunity for further partnership within the Air France/KLM Group.

Commenting on the agreement soon after its launch, Bruno Matheu, Air France's Executive Vice President Network Revenue Management, and Marketing said: "This partnership is dealing with all the routes between the UK and France. The idea is to combine the commercial strengths of both airlines, but also to improve the feeding of the Charles de Gaulle hub".

"The Air France codeshare agreement has radically altered how Flybe is viewed and I am looking forward to the next few years being very exciting for Flybe in France."

Evelyne Faure Market Manager, France

Preparing for European growth

Flybe is Europe's largest regional airline. When the Company announced its intention to float on the London Stock Exchange in December 2010, the Board was very clear that the airline's strategy is focused on becoming Europe's largest and most profitable regional aviation group.

The Company's senior management carefully examined a number of different ways to expand the business into Europe, including new strategic arrangements with legacy carriers to provide economic feed from the regions into primary hubs by means of codeshares and capacity shares, contract flying or joint ventures.

The contract to purchase up to 140 Embraer E-Series regional jets announced in July 2010 allows Flybe to introduce further improvements in its offering to passengers on a cost basis comparable with the turboprop aircraft they will be replacing. The structuring of the relationship with Embraer allows Flybe to factor in potential organic expansion of the business in the period to 2020 as well, via the options and purchase rights it has in place for a further 105 aircraft over and above the committed order for 35 88-seat E175s.

We are developing relationships with carriers across Europe to provide new opportunities for our regional airline model. During the period, we entered into an important codeshare agreement with Air France, covering 62 routes. These and other investment opportunities for Flybe presented at the time of the IPO are still very much intact and underpin our strategy for growth. We are already Europe's largest regional airline and we have been approached by a number of overseas airlines to use our recognised expertise in the regional aviation sector to make acquisitions, participate in joint ventures or manage the introduction of regional aircraft operations.

Teignmouth Maritime Services

Teignmouth Maritime Services Ltd ('TMS') is a South Devon-based marine civil engineering company with a £3m a year turnover that employs 45 people. In a highly competitive industry, it provides specialist marine-based services such as piling, dredging, diving and all kinds of river-fronted construction like landing stages, pontoons and jetties. As well as winning contracts around the UK, TMS has recently expanded to undertake projects in mainland Europe and even North Africa, so the ability to travel quickly to meet potential clients is hugely important, as Paul Hunt, TMS's Contracts Manager, highlights:

"To consistently win tenders for the business, I need to price-up jobs on the ground – it's not really possible to provide an accurate estimate for what might be a quarter of a million pound contract over the phone or by video link! It's crucial that I make the most of my time out of the office and the fact that Flybe offers as many routes as it does from Exeter airport, just a 30 minute drive away, means I can be anywhere in the UK, or further afield, in a matter of hours.

We recently won a significant contract in North Africa and were able take the first leg of the journey with Flybe via Paris, rather than having to slog all the way up the M4 to Heathrow, wasting valuable fuel and spending a fortune on car-parking in the process. Regional links to European airports are a big bonus for a company like ours and means we can compete for bigger and bigger jobs and grow the company while remaining based in the South West."

Business highlights Flybe's other opportunities

Aviation Services

Despite challenging conditions in global aviation in 2010/11, Flybe's Maintenance Repair and Overhaul ('MRO') business maintained more than 200 aircraft, 63% of which were for third party customers.

As part of a strategy to remove risk and widen the base of approved aircraft types, 2010/11 saw additional business jets, such as the Challenger, supported by the MRO – a significant achievement which helped the business develop. The customer base widened also in terms of geography, with new work coming from European operators in Austria, Finland, Poland and Greece. The MRO also provided engineers in support of customers as far away as the Ukraine, Kazakhstan, the UAE and Mozambique, extending the reach of the business into new markets.

2010/11 saw the business launch a review of its capabilities to ensure it maximised bay capacity for the use of advanced materials as well as the fabrication of aircraft parts. This strategic shift involved a successful restructuring of the workforce to not only allow for greater flexibility as work streams changed but also allowed for the workforce to expand their skill sets.

The MRO business now offers the regional aviation sector one of the most comprehensive records and maintenance monitoring systems in the market place, the Electronic Task Management System. The internal system links many of the MRO processes in order to generate accurate information on the progress of a contract as well as an even clearer understanding of the job cost.

"Our engineering facilities are second to none and it's no surprise that Flybe is maintaining more and more aircraft belonging to other airlines."

Rachel Stevens Aircraft Maintenance Fitter, Exeter

Overview

80 Flybe apprentices trained in the first 3 years

Training Academy

The new Q400 simulator in the Training Academy building completed February 2011.

Chancellor of the Exchequer George Osborne at the controls with Dave McMullon, Fleet Training Manager Q400.

Training Academy

2010/11 was a landmark year for staff development at Flybe with the construction and official opening of its brand new Training Academy at Exeter International Airport.

The state-of-the-art building cost £13.0m to construct and is designed to BREEAM* Excellent specifications. It features 26 classrooms and incorporates a flight simulator complex, an integrated apprentice workshop and cabin door trainer, all of which contribute to increasing the wide range of training opportunities available to third party customers.

The construction programme was completed in February 2011 and officially opened by the Rt. Hon. George Osborne MP, the Chancellor of the Exchequer, on 20 April 2011. On unveiling the commemorative plaque, the Chancellor said: "It's a great honour to come here today and to see this fantastic facility. I know what a success story Flybe is and it's great to see a big company investing in the future and working with local education establishments. Think about what Britain needs… Britain needs more people to study engineering. Congratulations for what you have achieved here."

Moving forward, the Training Academy, like Flybe's MRO business, will market its world-class facilities to customers not only in Europe but also further afield.

* BREEAM – the Building Research Establishment Environmental Assessment Method is the world's most widely used environmental assessment method for buildings. BREEAM assesses buildings against set criteria and provides an overall score which falls within a band providing either a Pass, Good, Very Good or Excellent rating.

Chairman and Chief Executive Officer's statement

"As the leading UK domestic airline, with a well-recognised brand, Flybe is seen as a strong potential partner by other European operators, as demonstrated by the interest they show in pursuing opportunities with us."

Jim French CBE Chairman and Chief Executive Officer

Key financial headlines

	2011 £m	2010 £m	Change %
Revenue	595.5	570.5	4.4
EBITDAR – underlying*	119.0	90.9	30.9
EBITDAR – unadjusted	100.9	90.9	11.0
Profit before tax – underlying**	22.3	7.4	201.4
(Loss)/profit before tax – unadjusted	(4.3)	24.6	n/a
Profit after tax – unadjusted	3.8	22.2	(82.9)
Operating cash inflow	18.1	14.9	21.5
Net cash/(debt)***	21.9	(21.4)	n/a

* EBITDAR defined as operating profit or loss after adding back unrealised gains and losses on fuel and foreign exchange hedges, IPO expenses, depreciation, amortisation and aircraft rental charges. Underlying EBITDAR is EBITDAR after adding back the estimated impact of the disruption caused by volcanic ash and winter weather.

** Underlying profit before tax defined as profit before tax before the estimated impact of the disruption from volcanic ash and weather, unrealised gains and losses on fuel and foreign exchange hedges and IPO expenses.

***Net cash/(debt) includes restricted cash.

Overview

Looking at the past year, I am pleased to report on a robust performance by Flybe during what has been a transformational and eventful period for the Group. The start of the reporting period saw the eruption of the Eyjafjallajökull volcano in Iceland and the well-publicised disruptions to air travel throughout Europe that ensued. Towards the end of the period, in November and December 2010, extreme weather conditions across the UK also had a negative impact on all airlines, as flights were grounded or cancelled. All airlines also had to contend with an extremely challenging macro-economic environment, as consumer confidence remained fragile.

It was also a year of achievement for Flybe. Our successful flotation on the London Stock Exchange in December 2010 raised £60.3m of new capital, net of expenses. This will enable us to pursue our strategy of expanding our operations on mainland Europe and provides us with a platform for future growth by acquisition, purchase of new aircraft and by developing relationships with carriers across Europe. During the period Flybe reached an important codeshare agreement with Air France by which we became a feeder airline from the UK regions for Air France's transcontinental flights. We also continued our planned fleet expansion with an order placed for up to 140 Embraer E series regional jets.

£22.3m Underlying profit before tax up from £7.4m in 2009/10

Against the backdrop of an extremely eventful – and sometimes disruptive – environment, we are pleased to have increased our share of the UK domestic market to 27.0% and with the year's results, which demonstrate the robustness of our business model and the strength of our position to capitalise on future growth opportunities, both in the UK and Europe.

Results

Underlying profit before tax for the year was £22.3m compared to an underlying profit before tax of £7.4m in 2009/10. Group revenue was up 4.4% to £595.5m and underlying EBITDAR improved 30.9% to £119.0m.

After IPO costs and losses on fuel and foreign exchange hedges (unwinding gains recognised in the previous year), we reported a loss of £4.3m compared to a profit of £24.6m last year. This result is in line with the Board's expectations for the year and represents a strong performance in view of the challenging conditions faced by all airlines in the period.

£595.5m Steady growth achieved against a background of challenging economic and operational conditions

72.2 90.9 119.0 2009 2010 2011

Underlying EBITDAR £119.0m Growth in EBITDAR outstrips growth in revenue

£18.1m Operating cash inflow, up 21.5% from 2009/10

Strategy

Flybe remains focused on our strategy of becoming Europe's largest and most profitable regional aviation group. The key elements underpinning this strategy are:

• retaining market leadership in the UK domestic market and optimising profits from this core market
• continuing to develop our operations from the UK regions to European business cities
• exporting our regional airline business model into other European geographies, through a combination of acquisitions and organic development
• growing the turnover and profitability of our complementary MRO and Training Academy businesses

Strategic opportunities

Given the considerable restructuring and consolidation currently being undertaken within the aviation industry in Europe, it is the Board's belief that there will be further European regional opportunities for Flybe as this process of consolidation matures and stabilises. The Board has therefore been very active in ensuring that Flybe is well positioned across Europe to capitalise on any future opportunities which may arise. As a result of Flybe being Europe's largest regional airline, we have been approached by various overseas airlines to use our recognised expertise in the regional aviation sector to:

• participate in new regional airline joint ventures
• support or acquire existing regional operations
• manage the introduction of regional aircraft operations for others

Such approaches vary from project to project but incorporate the various key regional aviation skills which we have developed – flight operations, engineering, training and commercial.

Chairman and Chief Executive Officer's statement

Continued

Flybe ended the year in its strongest ever financial position. During 2010/11, operating cash inflow improved by 21.5% to £18.1m and, thanks to the IPO cash injection, we moved from a net debt (defined as total cash less borrowings) position at 31 March 2010 of £21.4m to a net cash position at 31 March 2011 of £21.9m. Net assets amounted to £107.9m.

None of these achievements would have been possible without nearly 3,000 loyal and motivated employees whose talent, commitment and can-do attitude make Flybe what it is today. On behalf of the whole Board, I would like to thank them for their hard work and continuing support.

Conditions in Flybe's current core UK domestic market remain challenging, but Flybe's leadership in this market leaves us well placed to benefit as the market recovers.

Strategy for growth

The IPO raised new capital in Flybe of £60.3m, net of expenses at a time of considerable market volatility in Europe. The new capital will assist in the export of our business model into Continental Europe and in funding our fleet acquisition programme, while also strengthening our balance sheet. We were very pleased with the reception to the Offer and we look forward to building long-term relationships with our new shareholders.

The balance of the IPO funding, coupled with our own internal resources, will be used to develop relationships with carriers across Europe to provide new opportunities for our regional airline model. During the period, we entered into an important codeshare agreement with Air France, covering 62 routes. This enables us to fly more passengers into Air France's Charles de Gaulle hub from the UK regions, making Paris an attractive long-haul hub airport for UK travellers who wish to avoid the UK's Air Passenger Duty regime. We are confident that our long-standing relationship with Air France will develop further as new strategic opportunities materialise.

The investment opportunities for Flybe presented at the time of the IPO are still very much intact and underpin our strategy for growth. Our aim is to become Europe's largest and most profitable regional aviation group. We will achieve this by exporting our robust business model in the UK to other European geographies, through a combination of acquisition and organic development; retaining market leadership in and optimising profits from our core UK domestic market; continuing to develop our operations from the UK regions to European business cities and growing the turnover and profitability of our complementary MRO and Training Academy businesses.

We are already Europe's largest regional airline and we have been approached by a number of overseas airlines to use our recognised expertise in the regional aviation sector to make acquisitions, participate in joint ventures or manage the introduction of regional aircraft operations. In addition, we believe we are perfectly placed to capitalise on recovery in the UK as volume, yield and frequency gradually return. We will increase capacity on existing routes, develop new ancillary revenue streams and franchise opportunities and optimise fleet capacity by substituting existing carriers where appropriate.

Fleet

In July 2010, Flybe announced its plan to purchase 35 Embraer E175 88-seat regional jet aircraft (for delivery between 2011 and 2016) together with options and purchase rights over a further 105 E-series regional jets (for delivery up to 2020). These regional jets are of a modern, fuelefficient design. By re-balancing the fleet towards 88-seat Embraer E175 regional jet aircraft that are slightly smaller than our existing fleet of 118-seat E195 jets, we aim to improve the customer product and experience for Flybe's passengers. These new 88-seat E175 aircraft will have similar economics per flight to the 78-seat Bombardier Q400 turboprops they are replacing and, therefore, lower seat costs. During 2016/17, we will have moved – based on contracted deliveries and expected retirements – to an approximate 50:50 split between regional jet and turboprop aircraft in our fleet.

The 35 firm orders and 105 options and purchase rights afford us the opportunity of matching our fleet capacity to expected demand from existing operations while allowing the flexibility to increase the number of aircraft operated should expansion into new markets drive the need for additional capacity.

£119.0m Underlying EBITDAR (2009/10: £90.9m)

£100.9m Unadjusted EBITDAR (2009/10: £90.9m)

In the year to 31 March 2011, Flybe took delivery of one Bombardier Q400 turboprop aircraft and completed the sale and leaseback of one Q400. With the delivery since 31 March 2011 of a further two Q400s, our fleet now stands at 71 aircraft with an average age of 4.4 years consisting of 57 78-seat Q400 turboprops and 14 118-seat E-series jets.

As part of our continuing strategy to balance capacity and demand, we are at an advanced stage of negotiations with a purchaser regarding the sale of up to seven Q400 aircraft as we identified that European growth opportunities were more likely to come through acquisitions (with existing aircraft) and we adjusted our organic growth capacity accordingly. The deal removed surplus capacity from the UK market for 2011/12 to reflect the lower level of passenger demand resulting from the recovery of the UK economy being slower and shallower than expected.

In 2011/12, Flybe has scheduled deliveries of three 78-seat Q400 turboprops (two of which were delivered by 29 June 2011) and four 88-seat E175 regional jets, all of which are due to be delivered during the period to 30 September 2011. Two Q400 leases will expire in the second half of the year. The Group will continue to act opportunistically to match capacity to demand, particularly in its core UK market, which drives about 88% of revenues.

As at 31 March 2011, Flybe's fleet was as follows:

	Seats	Leased	Owned	Total
Embraer E-series regional jets	118	14	–	14
Bombardier Q400 turboprops	78	45	10	55
		59	10	69

We also have the opportunity to acquire further aircraft as follows:

	Committed			Options and purchase rights
	In 2011/12	Between 2011/12 and 2016/17	Total	Up to 2019/20
Embraer E-series regional jets	4	31	35	100
Bombardier Q400 turboprops	3	–	3	15
	7	31	38	115

Of these, two Q400 turboprops had been delivered by 29 June 2011.

EDF Energy

EDF Energy is Britain's largest generator of low carbon electricity and one of the best known names in European business, with more than 15,000 employees in the UK. Having offices and operations throughout the UK, its workforce uses a range of different travel options, including the Flybe 'shuttle service' between Birmingham and Glasgow which operates up to seven times a day.

Flybe has many corporate agreements with clients such as EDF, guaranteeing them a fixed price dependent upon the nature and regularity of travel. It is one of the reasons why more than 45% of Flybe's passengers are business travellers.

Says Graham Bruce, Facilities Manager at EDF Energy:

"To ensure our staff can make their meetings with a minimum of fuss, EDF Energy needs a good-priced, regular, flexible, punctual and reliable air service from airports that are near to their place of work. Flybe's network of UK domestic flights is second to none and that's why we are users of the Birmingham to Glasgow route: and given our commitment to sustainable energy production, it's good to know that Flybe's aircraft fleet is one of the youngest in the world."

Chairman and Chief Executive Officer's statement

Continued

Aviation Services

This business consists of two activities: Flybe's MRO operation, Flybe Aviation Services, and the Flybe Training Academy.

Flybe Aviation Services has been more affected in 2010/11 by the 2008/09 economic downturn due to the late cycle nature of the MRO industry, where the reduced flying programmes of our regional airline customers led to the deferral of major maintenance programmes. This was reflected in the man-hours worked which were down from 680,000 in 2009/10 to 564,000 in 2010/11. Of these total man hours, some 66.6% were for third party customers in 2009/10 (the balance being work on behalf of Flybe), reducing slightly to 63.1% in 2010/11. The improvement in economic conditions seen from 2010, particularly in Continental Europe, where most of our third party MRO customers are based, means we expect to see an improvement in activity as 2011/12 progresses.

Our Training Academy has had a successful year both in terms of development of the facilities and revenue growth. The new Flybe Training Academy building, opened officially by the Chancellor of the Exchequer on 20 April 2011, is now in use with 26 classrooms, workshop training facilities, cabin crew emergency training facilities and a flight simulator hall which can accommodate up to four flight simulators. We currently have one simulator installed and another is due to start operating in early 2012. This facility brings together all our training activities under one roof and will allow us to provide a much more attractive proposition to other regional airlines as we look to replicate the third party work profile already achieved by our MRO business. The year also saw good growth in third party training revenues which reached £1.3m, up from £0.9m last year.

Impact of current fuel prices

This calendar year has seen a sustained and high price for oil, with Brent Crude priced over \$110 per barrel on all but one day since late February 2011 until 23 June 2011 when the International Energy Agency released 60 million barrels from government stocks. Although we have a strong hedge book for 2011/12 (being 69% hedged at the beginning of the year at \$783 per tonne), this only provides protection for a limited period of time, with higher fuel prices impacting the Group from the second half of 2011/12 onwards, as the current hedging arrangements start to unwind. Flybe has therefore introduced a fuel surcharge of £3 per passenger for flights on or after 1 September 2011. The surcharge will be removed should the price of Brent Crude return to below \$75 per barrel for a period of 28 consecutive days.

Board

There have been no changes to the Group Board or Operating Board structures during the year, although we were sorry to lose the wise counsel of Non-Executive Director David Brown who retired from his long-standing Board membership – which included a five year period as Chairman – and representation for our major shareholder, Rosedale. I would like to thank David for his tremendous contribution to Flybe over many years. Anita Lovell replaced David as Non-Executive Director representing Rosedale in July 2010 and her depth of experience and supportive approach has already shown that she will be a strong contributor to our continuing development. The stability of our Board underpins the resilience of our business, and the expert and experienced advice of our independent Non-Executive Directors has helped us to remain robust during the economic downturn and to effectively position ourselves for growth.

The Executive Management team, comprising the second tier of management reporting to the Operating Board, has provided tremendous support to the Operating and Group Boards during the year, and continues to be developed and strengthened.

69 aircraft 55 Q400 turboprops and 14 E-Series regional jets at 31 March 2011

Outlook

We expect single digit percentage growth in 2011/12 in passenger numbers and revenues in our core UK domestic and UK to Europe businesses. Current trading is encouraging, with forward ticket sales revenue up 8.4% year-on-year on broadly flat capacity. We repeat our guidance for 2011/12 of a profit before tax broadly comparable to the 2010/11 underlying profit before tax and one-off items.

Flybe's main opportunities for revenue growth will come from delivering our strategy of expansion into new European markets. As the UK's number one domestic airline and already Europe's largest regional airline, Flybe is seen as an attractive potential partner by European flag carriers, and we remain in active discussions with several of them. These discussions have already led to the Air France codeshare announced in July 2010 and we expect further announcements to be made in due course.

We take delivery this summer of our first four aircraft from the 35 E175 aircraft order announced last summer. This order, together with the 105 options and purchase rights, affords us a cost effective and flexible fleet growth plan through to 2020.

Flybe enjoys a market leading position in the UK and is actively pursuing clear opportunities for further growth in Europe. With our strong brand, robust business model and financial stability, we are well placed to continue our European expansion and to capitalise on economic upturn in the UK. We therefore look forward to the future with confidence.

Jim French CBE Chairman and Chief Executive Officer

Embraer aircraft order

Flybe signed a major aircraft deal in July 2010 at the Farnborough Air Show for up to 140 Embraer E-series aircraft, comprising of 35 firm orders (value \$1.3bn), with options for 65 more (value \$2.4bn) and purchase rights for a further 40 (value \$1.5bn).

Designed to support the Company's planned European growth, the 88-seat E175 was chosen for five key reasons:

• It allows the Company to maintain its core principal of a two fleet strategy as the E195 is common rated with the E175. Flybe will continue to operate Bombardier Q400 aircraft
• The economic and environmental performance is in line with Flybe's strategy of only buying A and B rated eco-label aircraft as part of its strategy to invest in lower emission new technology aircraft
• It maintains the Company's product commitment to a minimum of 30" leg room and 2x2 seating which underpins our customers' preference for Flybe over low cost carrier airlines
• The economic performance of the aircraft on our target market sector lengths and within our frequency driven business model is the best available
• The aircraft provides a modern aviation technology base for the Company for the next 10 years

The first aircraft will be delivered in summer 2011 with the final scheduled delivery on the 'firm' orders being made in March 2017.

Strategy and KPIs

Flybe's strategy is focused on becoming Europe's largest and most profitable regional aviation group.

Description	Key measures
Safety underpins everything we do	Well-developed safety procedures are in place to generate continuous improvement in performance – see page 30
	Our aircraft, operational and employee safety records demonstrate the effectiveness of Flybe's approach with a low incidence of issues arising
Build on the Group's track record of passenger revenue growth	Passenger revenue up from £520.7m to £545.7m
	Passenger revenue per seat has grown to £46.96 from £46.06 in 2010
	Customer satisfaction based on punctuality – on-time departures were at 83.0% in 2011 (2010: 83.5%) and complaints were 2.9 per thousand passengers (2010: 2.0 per thousand passengers)
Capitalise on leading positions in Flybe's core UK domestic and regional UK to European city and leisure markets	No. 1 in UK domestic market (27.0% market share, up from 26.0% in 2010)*
	No. 2 in UK regions to European business cities
Drive European expansion	Flybe has strong relationships with other major carriers. The Air France codeshare started operating in October 2010 and Flybe also deepened the codeshare relationship with British Airways
Deliver the lowest cost base for the European regional airline sector	Group operating costs at constant currency** per seat have decreased from £51.39 to £50.68
Expand Flybe MRO operation, Aviation Services and develop the Flybe Training Academy	Man hours in the MRO operation decreased from 680,000 to 564,000 this year
	Flybe's Training Academy opened its new building and increased its revenue from £1.8m to £2.2m

* Includes passengers travelling with our franchise partner, Loganair.

** Constant currency is calculated for the 2009/10 year by applying the effective exchange rates that prevailed for reporting the 2010/11 results of \$1.62 and €1.18.

The purpose of the strategy is to deliver long-term returns to shareholders that are above those of other companies operating in our sector. To achieve this Flybe looks to financial performance indicators as measures of its progress as follows:

Description	Key measures
Achieve revenue growth	Revenue up from £570.5m to £595.5m
Maintain profitability	Underlying EBITDAR at £119.0m from £90.9m last year with underlying profit before tax up from £7.4m to £22.3m
Maintain appropriate debt profile	Net debt of £21.4m converted into net funds of £21.9m

Financial review

"Flybe delivered a strong performance in the year, increasing its underlying profit before tax by over 200% to £22.3m."

Andrew Knuckey Chief Financial Officer

Summary

Flybe has had a successful 2010/11 year, a highlight of which was the successful listing of our shares on the London Stock Exchange on 15 December 2010, raising £60.3m net of expenses. We have grown revenue and underlying profits, maintained our position as the leading carrier of UK domestic passengers with a 27.0% market share and our passenger numbers have been stable at 7.2 million.

Flybe finished the year in its strongest ever financial position, with net assets of £107.9m, total cash of £105.6m and net cash (i.e. total cash less borrowings) of £21.9m.

In addition, we completed the construction of the new Training Academy building, providing us with a superb facility for our own pilots, cabin crew and engineers and our third party customers. 2010/11 also saw the completion of our contract with Olympic Air which had started over a year previously. This wet lease of up to four Q400 aircraft ensured we had no surplus capacity through the economic recession.

Key financial headlines

	2011 £m	2010 £m	Change %
Revenue	595.5	570.5	4.4
EBITDAR – underlying*	119.0	90.9	30.9
EBITDAR – unadjusted	100.9	90.9	11.0
Profit before tax – underlying*	22.3	7.4	201.4
(Loss)/profit before tax – unadjusted	(4.3)	24.6	n/a
Profit after tax – unadjusted	3.8	22.2	(82.9)

* See table below for reconciliation from unadjusted to underlying results.

Revenue increased by 4.4% despite the impact of volcanic ash and weather disruption, without which the growth rate would have been significantly higher.

Underlying EBITDAR grew by £28.1m (or 30.9%) to £119.0m, and underlying profit before tax also advanced strongly, increasing by £14.9m (or 201.4%) to £22.3m.

Financial review

Continued

After adjusting for the estimated impact of disruption from volcanic ash and extreme weather, unrealised gains and losses on fuel and foreign exchange hedges and IPO expenses incurred, Flybe reported an EBITDAR of £100.9m and a loss before tax of £4.3m. Set out below is a reconciliation from unadjusted EBITDAR and profit before tax to underlying figures:

	2011 £m	2010 £m	Change %
Operating profit before IPO expenses and unrealised gains and losses on
fuel and foreign exchange hedges	7.6	10.4
Depreciation and amortisation	15.9	16.8
Aircraft rental charges	77.4	63.7
EBITDAR – unadjusted	100.9	90.9	11.0
Estimated impact of disruption from
volcanic ash (£11.6m) and weather (£6.5m)	18.1	–
EBITDAR – underlying	119.0	90.9	30.9
(Loss)/profit before tax – unadjusted	(4.3)	24.6
Estimated impact of disruption from
volcanic ash and weather	18.1	–
Unrealised gains and losses on fuel
and foreign exchange hedges	6.8	(18.3)
IPO expenses	1.7	1.1
Profit before tax – underlying	22.3	7.4	201.4

Volcanic ash and weather disruption

During 2010/11, Flybe experienced two significant periods of disruption, both of which were communicated to shareholders during the course of the year:

• • Ash cloud resulting from the eruption of the Eyjafjallajökull volcano in Iceland during April and May 2010 shut down airspace across northern Europe and, in particular, our main operations in the UK. This led to Flybe cancelling 3,177 flights, representing approximately 2.2% of our planned flying programme for the year. We have estimated that the net negative impact on profits amounted to £11.6m, representing approximately 2.0% of the Group's revenues. With the changes implemented by the CAA (in May 2010) in the regulations concerning the safe flying of aircraft in the presence of volcanic ash, future eruptions are likely to have a much lower impact on Flybe's flying programme when compared to the disruption experienced in 2010. This was borne out during the recent eruption of the Grimsvotn volcano, during which only 90 flights were cancelled under the new regulations.
• • The widely reported extreme weather conditions across a major part of the UK's regions in November and December 2010 resulted in prolonged disruption to a significant proportion of our network. Some airports were either closed or seriously restricted for up to 30% of the time available, with Scotland, Northern Ireland and the South Coast of England being particularly badly affected. As a result, some 1,980 of Flybe's flights were cancelled, representing approximately 1.4% of our planned flying programme for the year. We have estimated that the net negative impact on profits amounted to £6.5m.

The table below details our estimate of the financial impact of the above disruptions in the year to 31 March 2011:

	Volcanic ash £m	Weather £m	Total £m
Lost ticket revenue (including the immediate aftermath of volcanic
ash disruption)	(17.6)	(5.6)	(23.2)
Lost ancillary revenue	(2.4)	(1.2)	(3.6)
Savings on operating costs (net of additional costs such
as de-icing and positioning)	8.4	0.3	8.7
Estimated impact of disruption from
volcanic ash and weather	(11.6)	(6.5)	(18.1)

£62.35 Ticket yield, up 3.0% from £60.56 in 2009/10

Fleet

Our fleet transition to a two-type modern, fuel-efficient aircraft was completed in May 2009, and 2010/11 saw little activity in terms of fleet movement. One Q400 aircraft was acquired during the year and one was sold and leased back.

Flybe's fleet profile in the 2010/11 year is summarised below:

		Number of aircraft
	Number of seats	At 1 April 2010	Movements	At in year 31 March 2011
Embraer E195 regional jet	118	14	–	14
Bombardier Q400 turboprop	78	54	1	55
Total		68	1	69
Held on operating lease		58	1	59
Owned and debt financed		10	–	10
Total		68	1	69
Total seats in fleet		5,864		5,942
Average seats per aircraft		86.2		86.1
Average age of fleet (years)		3.3		4.3

Revenue

Even with the challenges highlighted previously, revenue grew to £595.5m from £570.5m in the previous year. Without the impact of the disruption caused by the volcanic ash cloud and the adverse weather in November and December 2010 passenger numbers would have grown rather than remain broadly stable at 7.2 million. Seat capacity rose from 11.3 million in 2009/10 to 11.6 million and sectors flown increased to 138,200 from the 135,100 flown in 2009/10.

	2011		2010
	£m	£ per seat	£m	£ per seat
Ticket revenue	446.8	38.45	434.7	38.45
Ancillary revenue	98.9	8.51	86.0	7.61
Passenger revenue	545.7	46.96	520.7	46.06
Maintenance and other revenue	49.8		49.8
Revenue	595.5		570.5

The growth in revenue has largely come from improved ticket and ancillary yields. Total passenger yield was up 5.0% to £76.15 from £72.54 in 2009/10, comprising a 3.0% increase in ticket yield (from £60.56 to £62.35) and a 15.2% increase in ancillary yield (from £11.98 to £13.80). This improvement in yields per passenger meant that, despite a reduction in load factor of 1.8 percentage points (from 63.5% to 61.7%), passenger revenue per seat increased by 2.0% from £46.06 to £46.96, and total passenger revenues increased by 4.8% from £520.7m to £545.7m.

£13.80 Ancillary yield, up 15.2% from £11.98 in 2009/10

Maintenance, training and other revenue was flat year-on-year at £49.8m. Our MRO and training businesses suffered in 2010/11 from the late cycle nature of these sectors within the aviation industry, as airlines' reduced flying programmes during the economic recession resulted in delayed maintenance programmes. We expect to see third party revenue from MRO activities return to more normal levels during the course of 2011/12. At the same time, we expect to see continued growth in third party training revenues.

Operating costs

		2011 2010
	£m	£ per seat	£m	£ per seat	£ per seat on constant currency**
Staff costs	(110.3)	(9.51)	(111.7)	(9.88)	(9.88)
Fuel	(92.5)	(7.97)	(86.6)	(7.66)	(8.62)
Net airport costs, en route charges and
ground operations Aircraft	(202.6)	(17.47)	(195.0)	(17.26)	(17.10)
ownership costs Marketing and	(125.3)	(10.80)	(109.5)	(9.69)	(10.71)
distribution costs	(24.5)	(2.11)	(24.1)	(2.13)	(2.13)
Other operating costs	(32.7)	(2.82)	(33.2)	(2.94)	(2.95)
Underlying operating costs*	(587.9)	(50.68)	(560.1)	(49.56)	(51.39)
IPO expenses incurred	(1.7)		(1.1)
(Losses)/gains on fuel and foreign
exchange hedges	(6.8)		18.3
Operating costs – total	(596.4)		(542.9)

* Underlying operating costs are defined as operating costs before IPO expenses and unrealised gains and losses on fuel and foreign exchange hedges.

** Constant currency is calculated for the 2009/10 year by applying the effective exchange rates that prevailed for reporting the 2010/11 results of \$1.62 and €1.18.

Underlying operating costs increased by 5.0% from £560.1m to £587.9m largely as a result of a weaker sterling to US dollar exchange rate (\$1.86 in 2009/10 but \$1.62 in 2010/11), and volume-related increases. On a constant currency basis, underlying operating costs were broadly stable at £587.9m (2009/10: £580.8m).

Underlying operating costs per seat increased by 2.2% from £49.56 to £50.68. On a constant currency basis, this unit cost measure showed a reduction from £51.39 to £50.68.

Financial review

Continued

Fuel

Fuel is a significant variable cost which has a material impact on Flybe's results. A variety of external factors, such as changes in supply and demand for oil and oil-related products, and the increasing role of speculators and funds in the futures markets, have played their part in making aviation fuel prices highly volatile. During the course of the year to 31 March 2011, the price of jet fuel has risen from \$740 per tonne, peaking at \$1,074 per tonne at 31 March 2011.

During the year to 31 March 2011, Flybe used some 185,000 tonnes of jet fuel. The average market price during the year was \$795 per tonne, with the Group paying a blended rate (net of hedges) of \$735 per tonne. Including 'into plane' costs, Flybe's fuel costs of £92.5m represent an all-in cost of \$810 per tonne for 2010/11. Using constant currency and fuel prices, our fuel costs per seat improved by 7.5% from £8.62 to £7.97 reflecting a continuing reduction in fuel burn per seat.

During normal market conditions, Flybe operates a policy of managing fuel price volatility by entering into derivative contracts representing a portion (between 60% and 90%) of its aviation fuel requirements up to 12 months forward. The intention of this programme is to provide a significant element of certainty over its fuel costs for any forthcoming IATA season. As at 24 June 2011, 79.0% of the year to 31 March 2012 was hedged at an average price of \$817 per tonne. Further details are given in note 35 to the consolidated financial statements.

Efficiencies have been derived from our fleet replacement programme, operational improvements and careful management of routes and frequencies. The fuel used by the Group was 182,400 tonnes in the year to 31 March 2010 (representing 16.1kg per seat) and 185,000 tonnes in the year to 31 March 2011 (15.9kg per seat). Fuel efficiency has continued to improve (in 2007/08, our fuel usage was 19.1kg per seat), reflecting our investment in a modern, fuel efficient two-type aircraft fleet best suited to regional flying.

As a private company, Flybe had historically prepared its financial statements under UK GAAP, and its fuel hedges qualified for hedge accounting under the requirements of UK accounting standards. However, IFRS requires significantly greater documentation at the time of entering the hedges in order for financial instruments to qualify for hedge accounting. Therefore, hedges entered into by Flybe up to 31 March 2010 did not qualify for hedge accounting under IFRS, hence the unrealised gains and losses on hedges recorded in the IFRS accounts for 2009/10 (gain £18.3m) and 2010/11 (loss £6.8m). All hedges entered into since 1 April 2010 have been documented to the standards required to meet IFRS hedging requirements, and we do not therefore expect to see material unrealised gains or losses on hedges in future years' income statements.

Other operating costs

Staff costs decreased by 1.3% due to the reduced use of contract workers and overtime to meet the lower level of demand for services within our Aviation Services' business, together with a number of Group-wide voluntary staff cost saving initiatives completed during the year including salary sacrifice for pensions and extra holidays as well as voluntary sabbaticals, part time working and early retirement/ severance. The combined effect of these initiatives more than offset the slight increase in permanent Airline staff numbers and average employee costs as a result of agreed pay awards.

Net airport costs, en route charges and ground operations increased largely due to higher charges levied by air traffic control providers coupled with movements in exchange rates. The extreme weather conditions in November and December 2010 also had an impact, with de-icing costs increasing significantly year-on-year. On a constant currency per seat basis, net airport costs, en route charges and ground operations increased by 2.2% to £17.47 (2009/10: £17.10).

Aircraft ownership costs increased because of movements in exchange rates, maintenance rate increases and additional leased aircraft. On a constant currency per seat basis, aircraft ownership costs were stable at £10.80 (2009/10: £10.71).

Other operating costs include a net gain of £2.5m recognised on settlement of the Group's claims against the manufacturer of some of the landing gear used on aircraft in the Group's fleet. The original faults became apparent in the service of another airline in 2007 and were quickly resolved with a design that was developed by Flybe Aviation Services before being approved by the manufacturers of both the aircraft and that of the landing gear.

£21.9m Net funds (2009/10: net debt of £21.4m)

£105.6m Cash, including restricted funds (2010: £62.1m)

Foreign exchange

The Group manages its foreign exchange positions based on its net foreign currency exposure. As regards 'net' foreign currency exposure (i.e. foreign currency expenditure less associated revenues), Flybe currently has a relatively small net exposure to the Euro, but has to purchase a significant volume of US dollars to settle expenditure on items such as fuel, maintenance and aircraft operating leases. Flybe generates no significant US dollar revenues and actively manages its US dollar position through a foreign exchange forward purchase programme similar to that outlined for fuel. As at 24 June 2011, 91.0% our anticipated US dollar requirements for the year to 31 March 2012 were hedged at an average exchange rate of \$1.58. All existing derivative financial instruments are forward swap arrangements.

The table below sets out for each of the periods under review (i) Flybe's US dollar and Euro requirements, (ii) forward derivative instruments taken out in each currency and (iii) blended exchange rate achieved for each currency:

	2011	2010
US dollar
Foreign currency requirement	\$322m	\$338m
Proportion hedged at beginning of period	79%	72%
Effective exchange rate	\$1.62	\$1.86
Euro
Net foreign currency requirement	€11m	€10m
Proportion hedged at beginning of period	0%	0%
Effective exchange rate	€1.18	€1.13

Profit after tax

Profit after tax was £3.8m (2010: £22.2m). The current year tax credit was £8.1m (2010: charge of £2.4m). The tax credit results from the historical position of the Group, which had been loss-making, being converted into a profitable position and the associated deferral of build-up of accumulated capital allowances. The tax credit results from the recognition of previously unrecognised deferred tax assets (relating primarily to capital allowances) due to our expectation that taxable profits will increase as time progresses.

EPS and dividends

Basic earnings per share for the year were 6p, compared with 42p in 2009/10. Adjusted earnings per share (see note 13 to the consolidated financial statements) were 17p, compared with 19p for 2009/10.

No dividends were paid or proposed in either the current or prior financial year.

Cash flow

	2011 £m	2010 £m	Change £m
Net cash from operating activities	18.1	14.9	3.2
Net proceeds from IPO Net capital expenditure after	60.3	–	60.3
disposal proceeds	(35.7)	12.7	(48.4)
Net interest paid	(2.3)	(3.9)	1.6
Net proceeds from new loans/(repayment)
of borrowings	1.2	(22.3)	23.5
Net increase in cash and cash equivalents Cash and cash equivalents at beginning	41.6	1.4	40.2
of year	46.1	44.7	1.4
Cash and cash equivalents at end of year	87.7	46.1	41.6

Financial review

Continued

The IPO, on 15 December 2010, was the most significant event during 2010/11 from a cash flow perspective, bringing in £60.3m of net cash to the Group. In addition, net cash from operating activities increased by 21.5% to £18.1m.

The largest movements in net capital expenditure were in relation to deposits for aircraft and the new Training Academy building. As at 31 March 2011, there were four aircraft deposits in place against deliveries due in the early part of the year to March 2012; only one option deposit was in place at 31 March 2010. Other aircraft-related capital expenditure movements reflect the one Q400 that was delivered in January 2011 and the disposal of another on a sale and leaseback transaction in April 2010. The funding of the Training Academy building construction and fit-out was achieved through a mix of contributions from government agencies (reflected in deferred income and the movement in working capital), loan finance and Flybe's own resources.

Balance sheet

	2011 £m	2010 £m	Change £m
Airport landing slots	8.5	8.5	–
Aircraft	110.9	113.5	(2.6)
Net funds/(debt)	21.9	(21.4)	43.3
Other working capital – net	(56.8)	(91.8)	35.0
Deferred taxation	(1.7)	(4.3)	2.6
Other non-current assets and liabilities	25.1	17.0	8.1
Net assets	107.9	21.5	86.4

The value of airport landing slots remained unchanged, with no additions, disposals or impairments. The £110.9m of net book value of aircraft represents owned aircraft, engines and aircraft modifications, with one aircraft being acquired and another being sold and leased back during the year.

Net debt of £21.4m became net funds of £21.9m as free cash increased by £41.6m to £87.7m largely as the result of the cash inflow from our December 2010 IPO, and cash generated from operations. Borrowings remained stable at £83.7m. The finance raised at our IPO on 15 December 2010 has largely been retained as free cash which we expect to use to assist funding the Group's expansion into Europe and our contracted aircraft purchase of 35 E-series jets from Embraer announced in July 2010. Net funds at 31 March 2011 include restricted cash of £17.9m (£16.0m at 31 March 2010) which represents, predominantly, cash deposits held in favour of aircraft owners to secure operating lease arrangements and cash held with the Group's principal banker to facilitate guarantee arrangements with suppliers.

Net negative other working capital fell by £35.0m mainly due to the increase in the aircraft deposits (as noted above) and the value of financial instruments classed as current assets.

Shareholders' equity increased by £86.4m driven principally by the issue of new shares in December 2010 for £60.3m (net of share issue expenses) and the derivatives fair value increase of £15.7m. This does not include the impact of the defined benefit pension scheme surplus of £4.6m. The scheme is closed to future benefit accrual and the surplus has not been recognised as the assets cannot be recovered by the Group.

Net funds/(debt)

Following the raising of new capital on IPO in December 2010, offset by further pre-delivery payments of £13.8m in the year on Q400 and E175 contracted deliveries, we have been able to convert our net debt position of £21.4m at 31 March 2010 to a net funds position at March 2011 of £21.9m.

Covenants

The Group has certain financial performance covenants in relation to some of our aircraft financing agreements. These specify performance, depending on the contractual terms, against a series of tests, which are, generally, performed quarterly. Flybe has met all the terms of these covenants since the inception of the arrangements (see note 23 to the consolidated financial statements).

Going concern

Flybe's business activities, together with the factors likely to affect its future development, performance and position, are set out in the Chairman and Chief Executive Officer's statement on pages 12 to 17. The financial position of the Group, its cash flows and liquidity position, and events since the balance sheet date are described in the financial performance section of that statement on pages 12 and 13 and in the financial review on pages 19 to 24. In addition, note 35 covers Flybe's financial risk management objectives, details of its financial instruments and hedging activities and its exposures to credit risk and liquidity risk.

The Directors have considered the sensitivities presented by current economic conditions in the aviation sector in relation to passenger volumes and yields, fuel prices, foreign exchange, route selection and investment in new aircraft and will assess any actions they feel are necessary.

Flybe has free cash balances of £87.7m, has met all of its operating lease commitments and debt repayment obligations as they have fallen due and passed all its financial covenants.

The Directors have prepared a detailed trading budget and cash flow forecast which indicates that Flybe will be able to trade using operating cash flows for at least 12 months from the date of signing these accounts and will be able to meet its operating lease commitments and debt repayments as they become due.

The Directors have a reasonable expectation that Flybe has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

Significant contracts Shareholders

Flybe's main shareholder is Rosedale Aviation Holdings Limited ('Rosedale'), the corporate representative of the beneficiaries of the estate of the late Jack Walker, who was so influential in Flybe's development. Following new equity raised on IPO, Rosedale now holds 48.1% of the Company's shares, down from the previous 68.9%. Flybe and Rosedale have entered into a Relationship Agreement to regulate aspects of the continuing relationship between the Group and Rosedale. The Relationship Agreement seeks to ensure that Flybe is capable at all times of carrying on its business independently of Rosedale and that transactions and relationships in the future between the Company and Rosedale are at arm's length and on a normal commercial basis. The Relationship Agreement permits Rosedale to appoint one person to the Board if Rosedale holds in excess of 15% of Flybe's Ordinary Shares, and two people to the Board if it holds in excess of 30% of the Ordinary Shares.

Aircraft

Flybe has entered into a series of agreements to purchase aircraft, the most recent of which was the 19 July 2010 contract to purchase 35 Embraer E175 aircraft for delivery between June 2011 and October 2016. This contract also contains options to purchase a further 65 E-series aircraft (with delivery dates between September 2012 and March 2021) with purchase rights for a further 40 E-series aircraft. Flybe also had the option to purchase a further nine E195s all of which lapsed on 30 April 2011.

After the delivery of three aircraft between April and June 2011, Flybe has no further firm purchase commitments for Bombardier Q400 aircraft. However, our Bombardier contracts contain options to purchase a further 12 Q400 aircraft (with delivery dates between October 2012 and September 2013) which expire on 1 June 2012.

Financial review

Continued

Financing arrangements

Flybe has used a combination of lease arrangements (with a variety of lessors) and mortgage-secured lending (with a variety of lenders) to finance its aircraft and engines. All of these agreements contain conditions around maintaining the asset subject to the financing so as to ensure that certain minimum safety, performance and operational standards are met. In addition, one of the agreements covering three of the Group's aircraft contains covenants about Flybe's cash balances and net worth while a further agreement to support a loan in respect of one future aircraft delivery contains a covenant on cash balances and profit performance. All of these covenants have been satisfied since inception of the agreements.

Barclays Bank plc has provided a term loan facility for £1.8m, repayable over 7 years in equal quarterly instalments., secured by a charge over one of the hangars used by our MRO business.

Commercial arrangements

In October 2010, Flybe signed a codeshare agreement with Air France which started to operate from 31 October 2010 and allows each airline to sell seats in their own name and apply their own flight designation to services on certain specified routes. The agreement applies primarily to flights between various airports in France (mainly Paris Orly and Paris Charles de Gaulle) and certain airports serviced by Flybe within the UK (in particular Birmingham, Manchester and Southampton). The current agreement runs until the end of the IATA summer season 2011, after which it will be renewed for an indefinite period, unless terminated in accordance with the terms of the agreement. Either party may terminate the agreement on six months' notice so long as the effective termination date is on the last day of an IATA season.

Flybe and Loganair entered into a franchise agreement in December 2007 (effective from October 2008) under which Flybe granted Loganair a franchise along with a non-exclusive and non-assignable licence to use certain intellectual property rights of Flybe to enable Loganair to operate scheduled flights under the Flybe brand, for which Loganair pays a franchise fee. During the term of the agreement, Flybe is prohibited from commencing or operating any air services on any route on which Loganair operates under the Flybe brand or licensing any other person to do so. Either Flybe or Loganair may terminate the agreement on one year's prior written notice which may be given on or after 26 October 2011.

The Group has a number of arrangements in place that allow it to put in place fuel or foreign exchange derivative financial instruments (primarily hedges or swaps). These are designed to allow Flybe to manage its exposure to fluctuating prices and thereby provide certainty over its costs. All of these agreements follow the template established by the International Swaps and Derivatives Association.

Termination rights

Consistent with industry practice for contracting with airline suppliers, our main contracts contain clauses that either require written consent from our supplier prior to a change in control of the Group, or provide for contract termination in the event of a reasonable objection to that control.

Payment of creditors

The Group's policy is to settle terms of payment with suppliers when agreeing the terms of each transaction, ensure that suppliers are made aware of the terms of payment and abide by the terms of payment. Trade creditors of Flybe Group at 31 March 2011 were equivalent to 14 (2010: 24) days' purchases, based on the average daily amount invoiced by suppliers during the year. As the Company does not trade in its own right, there were no creditor days to report for either year.

Andrew Knuckey Chief Financial Officer

Risks and uncertainties

This section describes the principal risks and uncertainties which may affect Flybe's business, financial results and prospects.

Risk description	Potential impact	Mitigation
Safety and security
Failure to prevent a safety or security related incident or to respond adequately to a safety or security related event.	Adversely affect Flybe's reputation, financial results and operational performance.	Safe and secure operation is the key priority for all of Flybe's management and staff. It operates a strong safety management system (see page 30).
		Flybe has appropriate systems and procedures in place, including trained staff, to respond effectively to such incidents.
External risks
Macroeconomic environment
Flybe is exposed to a sustained deterioration in general economic conditions. Flybe is exposed to a reduction in UK domestic	Adverse pressure on revenue and load factors. Adverse effect on Flybe's growth prospects, financial condition and the value of its assets,	Flybe monitors route performance within its commercial team and adjusts flying patterns to customer demand.
air travel.	particularly, aircraft.	The December 2010 IPO has strengthened Flybe's balance sheet.
		Flybe's fleet planning is designed to provide it with the most fuel-efficient aircraft available under a mix of ownership and lease terms.
		The management team continues to seek to exploit opportunities to grow its business outside the UK domestic market.
Competition
Flybe operates in a highly competitive transport market.	Adverse effect on market share leading to reduced revenue.	Flybe has a strong position in the markets where it operates and extends the reach of its brand through franchising and alliances. Processes are in place to monitor and report on route by route performance and competitor activity and to react rapidly where necessary.
		Expansion plans outside the UK market are well advanced.
Regulation
Regulatory changes in the airline industry may have an adverse impact on an airline's costs, operational flexibility, marketing strategy,	Adverse impact on reputation, costs and market share coupled with decline in growth opportunities.	Management engages with governments through direct contact and membership of industry organisations.
business model and ability to expand. Flybe is exposed to various regulators across its network. This will increase as Flybe expands its operations in other countries.	Lack of adequate knowledge or misinterpretation of local regulations may result in fines or enforcement orders.	Specific regulatory issues arising from Flybe's market position and its business development are identified and addressed promptly.

Risks and uncertainties

Continued

Risk description	Potential impact	Mitigation
External risks continued
Duties and Taxes
Airlines may be adversely affected by increases in Air Passenger Duty in the UK and its equivalent in other countries.	Increased costs and reduced demand across the airline industry which may result in reduced profitability for Flybe.	Management monitors governments' proposals with regard to changes in planned approach to aviation taxation and engages
Value Added Tax may be imposed on domestic air travel.		with governments through direct contact and membership of industry organisations.
Duties may be introduced on jet fuel.
Environment
Airlines may be adversely affected by any future application of restrictions with regard to regulation of emissions trading and other environmental laws and regulations.	Reduced demand for aviation across the industry.	Flybe has completed the first phase of compliance with the new ETS regime. Flybe operates fuel-efficient aircraft for its
Flybe is exposed to negative environmental perception of the airline industry.		flying pattern and seeks to develop further fuel efficiencies through changes in its practices.
Implementing growth strategy
Flybe may not be successful in implementing its growth strategy, particularly its expansion into Europe.	Adverse impact on costs resulting in reduced profitability. Increased investment not supported by profit	The management team successfully integrated BA Connect into its operations after its acquisition in March 2007.
Costs will be incurred in developing new routes, and new routes proposed by Flybe may not be profitable.	generation.	The management team is experienced in identifying business opportunities and developing them profitably.
Reputation
Flybe is exposed to an event damaging its reputation or brand.	Reduced demand, market share and revenue any of which may adversely affect Flybe's financial condition.	Flybe has a strong culture of safety management and a positive business culture supported by a code of ethics and appropriate HR policies. Flybe has procedures in place to respond to events with the potential to cause damage to its reputation or brand.
Flybe is exposed to the effects of extraneous events, such as epidemics, natural occurrences or disasters (such as severe weather or ash cloud disruption).	Adversely affect Flybe's reputation, financial results or operational performance.	Well-developed contingency plans are in place to react to such scenarios and communicate effectively with passengers and other stakeholders.
IT Systems and the Internet
Flybe is heavily dependent on its information technology systems and the internet to operate its business.	Loss of systems or connectivity to the internet could lead to disruption and lost revenue with an adverse impact on Flybe's financial condition.	A disaster recovery plan is in place and includes moving certain operations to other sites. Flybe has robust security procedures in place
	Breaches in IT security, or fraud, could adversely affect Flybe's brand and reputation, and have an adverse impact on revenue.	which are tested and reviewed by independent third parties.

Risk description	Potential impact	Mitigation
People
Flybe is dependent on good industrial relations with a workforce that is, in part, unionised.	Adversely affect Flybe's reputation, financial results or operational performance.	Flybe has well-developed consultation and negotiation processes with its employees and its unions.
Flybe is exposed to shortages of key personnel.	Loss of key personnel could lead to a lack of expertise in the short term.	Flybe completes regular talent management and succession planning for key roles.
Supplier
Flybe is exposed to the failure or non performance of commercial and financial counterparties as well as requiring the services of key suppliers such as airports, air traffic control systems, and fuel supply companies.	Adversely affect Flybe's reputation, financial results or operational performance. A loss or adverse change in the contractual relationship with key suppliers could significantly increase its future operating costs.	Most suppliers (including some airports) can be replaced by an alternate. Contract negotiation teams are highly experienced and knowledgeable of the industry with a strong track record of developing value for Flybe.
Financial risks
Flybe is exposed to risks associated with fluctuations in fuel prices and foreign exchange rates.	Adverse movements in these areas can adversely affect both Flybe's profit and financial position.	A well-established hedging strategy is in place that is designed to provide certainty over Flybe's cost base – see pages 22 and 23.
Flybe is exposed to fluctuations in interest rates and the availability of suitable financing.	Adversely affect our financial results and our ability to negotiate favourable financing arrangements in the future.	An appropriate balance between fixed and floating interest rates for the financing of aircraft is sought.
		Cash is deposited in order to manage counter party risk and to develop appropriate returns.
Flybe holds significant cash balances as a form of risk management.	Lack of adequate liquid resources could result in business disruption.	Flybe's policy is to maintain appropriate levels of free cash which will be available to meet costs in the event that our normal activities are temporarily disrupted by, for example, severe weather, volcanic ash, extended industrial dispute or fleet grounding.
Flybe is reliant on the continuing performance of its financial counter-parties.	Flybe invests its surplus funds in money market funds or bank deposits and there is a risk of material loss in the event of non-performance by a financial counter-party.	Flybe's policy is to invest surplus funds only with financial counter-parties that meet certain credit rating criteria.

Corporate responsibility

Safety

Safety is at the forefront of the way Flybe operates. For the protection of customers, employees, company assets and the future, all are committed to the achievement of safety requirements and continuous improvement of its safety performance. This is central to Flybe's business and key to its success. There is nothing more important than safety.

Flybe, its management and staff are committed to a system for managing safety in order to ensure that it achieves all safety requirements, complies with all applicable legislative requirements and that:

• • everyone working for Flybe understands their safety responsibilities
• • a positive safety culture is encouraged and maintained
• • people are properly equipped to carry out their tasks safely (including sub-contractors)
• • risks to safety and health are identified and eliminated or minimised as far as reasonably practicable
• • safe systems of work are in place
• • Flybe promotes safety with other organisations it works with
• • plans are in place to mitigate the consequences of accidents and other emergencies
• • safety performance is monitored, audited and reviewed

The Flybe Safety and Security Review Committee ('SSRC'), chaired by Peter Smith, one of the independent Non-Executive Directors, meets quarterly and is charged with holding the operational executive management team to account for all safety and compliance matters, reporting directly to the Board. Peter has considerable aviation experience.

The Flybe Safety Management System ('SMS'), established in 2009, is mature and coordinates all safety activity across the Flybe operation. This allows safety data derived from both normal operations and safety events to be used in the review of operational procedures and training. Flybe encourages all personnel to report any safety issue, irrespective of the cause, in the knowledge that it operates a no-blame culture, with all incidents investigated objectively and thoroughly.

Additional oversight is demonstrated through Flybe's membership of IATA and it has held the International Operational Safety Audit ('IOSA') accreditation since October 2007.

The results of Flybe's safety policy and structure are evident from its clear ability to be able to operate safely through extreme weather and not only cope with the disruption caused by the Icelandic volcanic activity in 2010 but also help lead the initiatives and research into operationally safe levels of atmospheric particulate.

Flybe continues to actively participate in industry-wide initiatives to improve safety, having seats on committees and working groups within the CAA, European Aviation Safety Agency, EuroControl, NATS, United Kingdom Aviation Emergency Planning Group ('UKAEPG'), Confidential Human factors Incident Reporting Programme ('CHIRP') and the Royal Aeronautical Society ('RAeS'), maintaining its position and focus at the cutting edge of safety.

Health and safety

There is total commitment at Flybe to the health, safety and well-being of its customers and employees. A continuous programme of review and progression is driven by representative groups throughout the Company holding the executive team to account. The number of key managers receiving National Examination Board in Occupational Safety and Health ('NEBOSH') accreditation has increased though Flybe does not content itself merely with compliance.

Health and safety is incorporated into its SMS and overseen, ultimately, by the SSRC. Policies and procedures are drawn up with the full involvement of unions and Flybe's human resources team to ensure not only compliance but the safest achievable working environment.

AS9100 compliant

The establishment and maintenance of an effective quality function ensures not only an effective and efficient operation but also a safe one. For this reason, the Quality Manager reports directly to the Chief Operating Officer, Andrew Strong.

An established quality assurance team oversees all operational activity including the Air Operator's Certificate ('AOC'), Type Rating Training Organisation ('TRTO'), Part M, Part 145 for an aircraft maintenance organisation, Part 147 for an engineering licence type training organisation, Part 21G for a production organisation and Part 21J for a design organisation. However, Flybe's commitment to quality activity is not confined to quality assurance. All parts of the operation have been tasked with ensuring that activities, processes and procedures incorporate their own quality control. In this way, all departments take ownership of the effectiveness of the activities they undertake and ensure their output meets both the Company requirements for excellence and improves functional visibility.

Flybe also complies with the sector-specific quality standard, AS9100, which is based on the International Organisation for Standardisation's standard on quality, ISO 9001.

Values

Quality

Flybe has almost doubled the size of its workforce since 2007 but has maintained its commitment to certain core principles. These are expressed in its People Strategy or 'The Way We Do Business' that includes the following values of:

• • Passion (to succeed using two-way communications and an ability to challenge and be challenged)
• • Simplicity (with clarity of objectives and accountability for results)
• • Agility (through innovation and speed of action)
• • Reward (by recognising effort, rewarding results and developing its people to their full potential).

"High quality customer service, pride in our on-board product and the safety of our passengers is at the heart of everything Flybe does."

Rebecca Wilkinson

Cabin Crew Performance Manager, Manchester

Corporate responsibility

Continued

People

Flybe is only as good as its talented team, which delivers an excellent service to its loyal customers every day. The Company's goal is to have the right people in the right jobs and for Flybe to be an attractive workplace in which a secure and challenging career can be built on equality of opportunity.

It is proud to be one of the very few airlines that enables its employees to live where they work – locally, within the regions.

Employees

As at 31 March 2011, Flybe employed 2,949 employees across 14 regional UK bases. Nearly 15% of our employees worked part-time or flexibly to balance their lifestyle needs and now over 50% of its staff have more than five years' loyal service and an average attendance rate of nearly 97%. Despite the economic challenges since 2008, Flybe is proud to have retained its core skill base through manageable attrition - resulting in stable employee numbers during that period.

Talent development

Flybe's aim is to develop and promote talent internally and the recent completion of Flybe's 5,500m2 Training Academy building will significantly increase both the Group's capacity to provide training and the quality of such training for its own staff and those of third parties. This state-of-the-art facility has 26 classrooms, a simulator hall with capacity for four aircraft simulators, cabin crew simulator hulls for safety and refresher training, and an engineering apprentice workshop. Qualifications will include a flight deck Multi-Crew Pilot's Licence (under the first CAA-approved scheme for a UK airline), cabin crew and customer service NVQs and engineering aircraft type approvals. Flybe already has over 80 students engaged on the first three years of the diploma in engineering, which after four years will provide successful students with a foundation degree level qualification, a BTEC and diploma in engineering and a Part 66 engineering licence. Flybe also continues to operate its Mentored Airline Pilot Scheme that part-sponsors pilot training through the provision of an interest-free loan as well as maintaining its relationships with UK and European flying schools for potential pilots.

Line management

To engage a dispersed workforce, line management has been empowered to lead. To underpin this, all key managers have or will soon be completing the Flybe Leader initiative. This is a bespoke 12-month modular development programme that can progress to an Institute of Leadership and Management qualification or further to a Foundation Degree in Leadership and Management.

Flybe's Operating Board has also introduced an annual performance management system as well as a succession planning process as part of its continuing focus on retaining and developing key talent.

Benefits

Flybe aims to provide pay and benefits (including insured benefits) that, in the round, are affordable, competitive in its marketplace, performance-led and flexible. Employees have been able to participate in the Group's discretionary all-employee bonus scheme as well as the Group's approved Share Incentive Programme ('SIP') under which all eligible employees were awarded 100 free shares shortly after Flybe's IPO. Flybe has plans to enable its staff to share further in its future success through a Save As You Earn Scheme that it intends to introduce in the summer of 2011. Flybe operates a Group Personal Pension Plan (or equivalent in relevant territories) and almost 60% of employees have elected to participate and benefit from employer's contributions to their personal fund. During the year, Flybe extended its UK salary sacrifice schemes to include pensions and buying extra days off work in addition to its existing child-care vouchers and cycle-to-work programmes.

Employee communication

Flybe continues to focus on active two-way communications with its dispersed workforce through line management, regular Your Flybe email updates, as well as through its recognised trade union partners and Flybe's employee consultative body known as Open Channel. Open Channel meets quarterly, is chaired by an Executive Director and is attended by up to 25 elected representatives.

Equality and diversity

Equality of opportunity and valuing diversity are central to the regional activities of Flybe and it aims to ensure that all employment decisions are based on fairness and merit.

Applications for employment by an individual from any background, including disabled persons, are always fully considered, bearing in mind the aptitudes of the applicant concerned. In the event of members of staff becoming disabled, every effort is made to ensure that their employment with the Group continues and that appropriate training, career development and promotion of disabled persons should, as far as possible, be identical to that of other employees.

2,949 employees at 31 March 2011

Charitable and political donations

Cancer is a disease that touches everyone. One in three people in the UK will develop cancer at some time in their lives and more than 250,000 people are diagnosed with cancer every year in the UK – that's the equivalent of nine full Flybe aircraft every day of the year.

That is why Flybe is so proud to be the only airline partner of Cancer Research UK, the world's leading charity dedicated to cancer research. Flybe has supported the work of Cancer Research UK since October 2008 and has raised more than £300,000 to support the charity's life-saving work in trying to find a cure for cancer.

The response from Flybe staff has been tremendous over the last three years, with hundreds of individual and company-wide fundraising events taking place from Inverness to Jersey. At the heart of the relationship are the Flybe 'Charity Champions' who coordinate the fundraising efforts in each of Flybe's 14 bases. The Champs, as they are known, are permitted reasonable time off from their work to ensure that each and every one of Flybe's staff can play a part.

Nowhere better was their commitment shown than in the month-long on-board collection that the Company's Flight Deck and Cabin Crew undertook in June 2010. In a huge logistical operation, an announcement was made on every single one of that month's 12,861 flights, asking passengers to dig deep and donate to Cancer Research UK. The Charity Champs ensured that the monies were securely deposited and safely transported to a central collecting point with the phenomenal sum of £130,093 being raised for the charity.

Flybe did not make any political donations during 2010/11 but did sponsor the South Shields Lecture in January 2011 at a cost of £7,500. The Lecture is an annual event organised by the local MP, the Rt. Hon. David Miliband, and the guest speaker was travel writer, Bill Bryson.

Charity Champ

First Officer Matt Foley taking part in the Jersey fundraising cycle ride.

As well as being a First Officer at Flybe's busy Jersey base, Mike Rudland has been an inspirational Charity Champ for the 60 airline staff on the island. Leading by example, Mike organised a sponsored cycle ride that took place in the Terminal Building of Jersey Airport in October 2010 where he and his colleagues, including Matt, cycled 730 miles, the equivalent to Geneva and back, representing Flybe's longest charter service from Jersey.

"Cancer is very close to my heart so I was very happy to volunteer to be a Flybe Charity Champ. The response from colleagues and friends has been tremendous and events like the sponsored cycle ride has meant we have raised more than £10,000 to date for Cancer Research UK in Jersey alone. I think it's fantastic that Flybe has adopted such a high-profile charity that has such an important objective."

Mike Rutland

Corporate responsibility

Continued

Environment

As well as having one of the most efficient fleets in the sky, new initiatives are being undertaken to reduce both noise and emissions at all possible stages of flight.

Flybe supports the view that human activity, including air travel, is contributing to global climate change. Although aviation accounts for just 1.6% of global CO2 emissions, Flybe is committed to being an industry leader in minimising its environmental impact wherever possible while continuing to provide vital air services to our passengers.

In this respect, Flybe's policy is to:

• • Commit to a system for managing its environmental impact in order to comply with all applicable current legislation and, where practical, seek to meet future legislative requirements ahead of relevant deadlines
• • Implement a training programme for staff to enhance environmental awareness, constantly informing and motivating colleagues, to enlist their support in improving Flybe's performance
• • Integrate the Company's environmental objectives into business decisions, where feasible, in a cost-efficient manner
• • Develop appropriate emergency response plans for major incidents in order to minimise their environmental impact
• • Encourage the adoption of similar principles by its suppliers

Waste and energy management has become a key focus area for Flybe. Recycling policies are already in place at all major premises and sustainability has become a key focus area for its procurement.

Management of buildings has incorporated, wherever possible, the latest environmentally-friendly techniques. Upon completion, the new Flybe Training Academy achieved 'Excellent' status under the BRE Environmental Assessment Method ('BREEAM'). The building became operational at the beginning of February 2011.

"Ensuring our passengers pass quickly through busy airports is a complex task but the experience and know-how at Flybe means we do it with the minimum of fuss."

Sally Leaney Customer Focus Regional Manager, Manchester

5,700kgs of CO2 saving from flight efficiency programme

Aircraft impact upon the environment in two key areas: locally to airports and over the course of a journey. In 2007, Flybe introduced an 'Ecolabel' rating for its aircraft which has been designed to provide customers with a range of information regarding the noise and carbon emissions for each flight. The label identifies the noise rating and also the emissions made during the normal take-off and landing cycle of a flight and also the carbon emissions for the total flight based on a range of distances.

Fuel usage and emissions

Each Bombardier Q400 aircraft produces 30% to 40% less emissions on routes where it has replaced similar capacity, older generation aircraft or 50-seat jets. This equates to 6,000-8,000 fewer tonnes of CO2 in the air every year for each Q400. Over the course of a year, Flybe's move to a fuel-efficient fleet amounts to saving 0.4 million tonnes of CO2 annually for its turboprop fleet alone.

While CO2 emissions are identified as the primary contributor to global warming, other pollutants are also harmful to the environment and have dedicated limitations regulated by the International Civil Aviation Organisation, ICAO. The Embraer E-series jets in Flybe's service produce certified emissions significantly lower than the more stringent CAEP/6 regulations set by ICAO's Committee on Aviation Environmental Protection.

Flybe has introduced flight efficiency measures to its Q400 operations that have resulted in a saving of approximately 5,700kgs of CO2 over the past nine months. These measures involve speed control to achieve on-time arrivals and fuel efficient climb, cruise and descent profiles adjusted for specific flight and weather conditions. Similar measures will be introduced to the Embraer fleets over the coming year and further CO2 savings are anticipated.

Noise

The Q400 is one of the quietest passenger aircraft in the world. Inside the Q400, the revolutionary Active Noise and Vibration Suppression ('ANVS') system significantly reduces noise and vibration, making it as quiet and comfortable as a jet. Outside, it is 10 decibels quieter than 70 to 80 seat jets (measured by Exterior Perceived Noise in Decibels or EPNdB).

Flybe's commitment to reducing the impact to local communities is demonstrated by its latest E-series order. Working closely with the manufacturer, Embraer, Flybe has developed a noise reduction kit that will be fitted to all of Flybe's E175 aircraft in order to reduce further the effect of noise on the local environment.

Emissions Trading Scheme ('ETS')

During 2010/11 Flybe has been preparing its emissions and tonne kilometre reports in order to comply with regulations governing aviation's entry into the European ETS, with verified reports submitted prior to the deadline. During 2013 Flybe will be required to surrender permits covering its CO2 emissions for 2012.

Flybe supports initiatives which provide for an international framework for governing aviation emissions so long as this is consistent with, and not supplementary to, the European ETS. It remains concerned about the imposition of specific aviation taxes, some of which purport to be linked to environmental objectives. Flybe has campaigned for some time for the reform of UK air passenger duty and for the per passenger tax to be replaced with a per plane tax which is linked to the emissions of the aircraft and their deployment. On 23 March 2011, the UK government announced a delay to any increase in aviation taxes until 2012 as well as its decision to retain the existing per passenger basis to the tax.

The amount of CO2 emitted by the Company is predominantly driven by its flying activities and, as fuel is a significant proportion of Flybe's operating expenditure, it is heavily incentivised to reduce fuel usage and hence its CO2 emissions. While step changes in lower CO2 emissions require both major advances in technologies associated with next generation aircraft and a substantial global investment in the production and supply of biofuels, there exist a number of opportunities for the Company to reduce its CO2 emissions in the medium term. For example, Flybe pilots are being trained in economic flying techniques that involve:

• •seeking direct routings between the departure airport and the arrival airport
• •flying at speeds that are economic for the engine's performance
• •planning descents into airports, with air traffic control assistance, that allow for the most fuel-efficient approach

Future developments

Flybe is exploring with mainstream fuel companies, specialist biofuel suppliers and its aircraft partners opportunities to use biofuel technology in its operations.

Flybe strongly supports the implementation of the Single European Sky policy and urges policy makers to speed up this important initiative. This will reduce wasteful emissions caused by the fragmented Air Traffic Management System that currently exists across Europe.

Board of Directors

The Board currently comprises the following persons:

Executive Directors

¹ Jim French, Chairman and Chief Executive Officer (aged 57)

Jim French began his aviation career in 1970 with Caledonian Airways Limited, before joining Air UK Limited in 1980. During his 10 years at Air UK Limited, he held senior roles in commercial, planning and marketing areas.

Jim first joined Flybe in 1990, becoming Commercial Director shortly after. He subsequently became Deputy Chief Executive and Chief Operating Officer. In June 2001, he was appointed Chief Executive Officer of Flybe and in 2002 developed the plan which transformed Flybe into Europe's largest regional airline. Jim was appointed Executive Chairman in March 2005. Uniquely, he has been voted Airline Executive of the Year twice, in 2002 and 2004, by Regional Airline World. Jim chairs Flybe's Nomination Committee. Jim was awarded a CBE in the 2009 Queen's Birthday Honours list for services to aviation.

² Mark Chown, Deputy Chairman (aged 53)

Mark Chown trained as a chartered accountant with Deloitte Haskins & Sells and spent 10 years in the venture capital industry, including six years with 3i plc. He has been involved with Flybe for 14 years and has worked closely with the Board throughout that time. Mark continues to act as a representative of Rosedale. He was appointed Deputy Chairman of Flybe in February 2005, with responsibility for the Group's corporate strategy. Mark is a member of the Nomination Committee.

³ Andrew Knuckey, Chief Financial Officer (aged 50)

Andrew Knuckey joined Flybe in 2005. He previously had a 24-year career with KPMG LLP, latterly as a partner in the audit and transaction services practice, and has held a number of other finance-related positions. At Flybe, Andrew played a key role in the completion of the BA Connect acquisition and was appointed Chief Financial Officer in April 2007.

⁴ Mike Rutter, Chief Commercial Officer (aged 47)

Mike Rutter joined ICI plc from university and, after five years, moved to Cape Industries plc (a subsidiary of Charter Plc). Upon leaving Cape Industries plc, Mike joined Maytag Corporation's European Appliance group, where he became Vice President of European Marketing and Sales. He joined Flybe in 2003 and was appointed Chief Commercial Officer in 2005. Mike has been responsible for the development of Flybe's brand, network and its ancillary revenue streams.

⁵ Andrew Strong, Chief Operating Officer (aged 38)

Andrew Strong joined Flybe in 1995 on a Flybe graduate scheme and proceeded to project manage fleet-type evaluation and aircraft introduction, at the same time as overseeing several key business development initiatives in the engineering wing of Flybe. Andrew was promoted to become Director of Flybe Aviation Services in 2003 and was appointed as Chief Operating Officer in 2005. Andrew sits on Flybe's Safety and Security Review Committee.

Independent Non-Executive Directors

⁶ Charlie Scott, Senior Independent Non-Executive Director (aged 62)

Charlie Scott was formerly chairman of William Hill plc from 2004 until 2010. He is a chartered accountant and was previously Chief Executive Officer at Saatchi & Saatchi plc and Chairman of Cordiant plc. Charlie has held other non-executive positions, including with airport group TBI plc. Charlie chairs Flybe's Audit Committee and sits on the Nomination and Remuneration Committees.

⁷ Alan Smith, Independent Non-Executive Director (aged 64)

Alan Smith is currently Chairman of Fisher Leisure Holdings Limited and Empire World Trade Limited. His career has included being Managing Director of Superdrug Stores plc, B&Q plc and The Victoria Wine Company Limited before working for the Boddingtons Group Limited as Group Managing Director. In 1996, Alan moved to Evans Halshaw Holdings plc as Group Chief Executive before becoming Chief Executive of Somerfield plc from 2000 until 2002. Alan sits on the Safety and Security Review, Audit and Remuneration Committees.

⁸ David Longbottom, Independent Non-Executive Director (aged 66)

David Longbottom is currently Pro-Chancellor and Chairman of the Board of Governors of London South Bank University. He is also currently Chairman of Horton International (UK) Limited and senior advisor to the Rose Partnership LLP, both executive search firms. David was formerly a senior independent director of Luminar Leisure plc and a Director of DSG International plc, and held a number of senior positions within the Dixons Group plc after joining in 1987 (including Group Human Resources Director). Previously, he worked with British Gas plc, Courtaulds plc and Lloyds of London. David chairs Flybe's Remuneration Committee and sits on the Nomination Committee.

⁹ Peter Smith, Independent Non-Executive Director (aged 66)

Peter Smith was previously Chief Executive of Menzies Aviation Group plc and a member of the main board of Menzies plc. Prior to this, he held senior positions in various UK and overseas airlines. He is currently a trustee of the Brooklands Museum. Peter chairs Flybe's Safety and Security Review Committee and sits on the Remuneration Committee.

Non-Executive Director

¹⁰ Anita Lovell, Non-Executive Director (aged 59)

Anita Lovell is a consultant to Hawksford International and Executive Director of the Walker Family Office. She has been a practising solicitor for over 30 years, is a former president of the Association of English Solicitors in Jersey and continues to represent the Channel Islands at the International Lawyers Network based in New York. As a trustee of the Walker Family Settlements and director of Rosedale, she has been involved with Flybe since 1999. Anita sits on the Remuneration Committee.

Company Secretary Chris Simpson (aged 53)

Chris Simpson qualified as a chartered accountant in Scotland before moving into the airline industry in 1985 where he has served as Finance Director and Company Secretary of several airlines. Between 2003 and 2007 Chris was Chief Financial Officer of Flybe, re-joining as Company Secretary in 2010.

Senior Management

The Board is supported in its day-to-day running of the Group by the Senior Management, who comprise (in addition to Chris Simpson):

Simon Charles, Director of Human Resources (aged 44)

Simon Charles joined Flybe as Director of Human Resources in January 2007 from RHM Plc where he was Group Director of Organisation and People Development and part of the management team involved in the initial public offering of shares in RHM plc. Simon is a Fellow of the CIPD and has spent over 20 years in human resources within significant companies, having been European Human Resources Director at Quaker Oats Limited and held management positions with PricewaterhouseCoopers, Pepsico Inc. and Unilever plc.

Mark Elkins, Director of Information Technology (aged 50)

Mark Elkins' early career was within finance in the life assurance industry, latterly as a management accountant for Laurentian Life, before moving into the I.T. arena with Merchant Investors Limited (then part of the Allianz group). Mark gained a breadth of experience across multiple sectors including roles with Diageo plc, Westland Helicopters Limited (then part of the British Aerospace group) and Anite Systems Limited before joining Flybe in 2000. He was appointed to the position of Director of Information Technology in June 2008.

Corporate governance

Flybe's shares were admitted to the Official List of the London Stock Exchange on 15 December 2010 (the 'IPO'). As a result, this is the Board's first Corporate Governance report to shareholders since the IPO. It describes the corporate governance framework of the Company and how it has developed during the year in preparation for, and following, the IPO.

Since the IPO, the corporate governance rules that applied to the Company are contained in The Combined Code on Corporate Governance issued by the Financial Reporting Council in June 2008 (the 'Code'). The Financial Services Authority's Listing Rules require the Company to set out how it has applied the main principles of the Code and to explain any non-compliance. For Flybe's financial year commencing on 1 April 2011, and subsequent financial years, the Directors intend to comply with, or explain any non-compliance with, the UK Corporate Governance Code issued by the Financial Reporting Council in June 2010.

Statement of compliance

The Board is committed to maintaining high standards of corporate governance and has fully considered the provisions of the Code. The Board considers that the Company is a "smaller company" for the purposes of the Code which defines this as a company which has been below the FTSE350 throughout the year immediately prior to the reporting year. Since the IPO, the Board considers that it and the Company have complied with the best practice provisions set out in Section 1 of the Code with the following exceptions:

• • The Code recommends that the roles of Chairman and Chief Executive should be separated and clearly defined. Jim French serves as both Chairman and Chief Executive Officer of the Group. Jim has a long history of valuable experience in the airline industry, having joined Flybe in 1990 rising to become the Company's Chief Executive Officer in June 2001 and Chairman in 2005. He is credited as one of the chief architects behind the Company's re-launch as Flybe and subsequent growth into Europe's largest regional airline. In his time with Flybe, Jim has accumulated a personal shareholding of 5.3% of the total issued share capital of the Company. As part of Flybe's preparations for the IPO, the matter of Jim French continuing to have a joint role as Chairman and Chief Executive Officer was fully debated with the Company's advisors and with potential investors. The conclusion of the debate was that continuing with the joint role is the most appropriate arrangement given the circumstances and Jim's extensive knowledge of, and experience with, the Company and the industry. This situation, along with the overall management and Board composition, will remain under review as the Company develops in future.
• • The Code recommends that a majority of members of the Nomination Committee should be independent Non-Executive Directors. Throughout the period the Company's Nomination Committee has comprised David Longbottom and Charlie Scott, both of whom are independent Non-Executive directors, together with Mark Chown and Jim French, both of whom are Executive Directors. The Board is satisfied that the members of the Nomination Committee are those who are best able to contribute to its objectives. This situation, along with the overall management and Board composition, will remain under review as the Company develops in future.

The following paragraphs explain how the Company has applied the principles of good governance and the code of best practice set out in the Code in preparation for and following the IPO.

The Board Role

The Board is responsible for the leadership and success of Flybe. It provides entrepreneurial leadership within a framework of effective controls which permits risk to be assessed and managed. The Board has the ultimate responsibility for setting the Company's overall strategy and long-term direction. The Board has approved a schedule of matters reserved for decision by it.

Matters requiring Board approval are generally the subject of a proposal by the Executive Directors submitted to the Board, together with supporting information, as part of the Board or Committee papers circulated prior to the relevant meeting. The implementation of matters such as significant acquisitions, or other material projects, sometimes includes the establishment of a sub-committee comprising at least one independent Non-Executive Director.

Composition

At 31 March 2011 the Board comprised ten Directors, five Executive Directors and five Non-Executive Directors:

Executive Director

Mark Chown Deputy Chairman

Jim French Chairman and Chief Executive Officer Andrew Knuckey Chief Financial Officer Andrew Strong Chief Operating Officer Mike Rutter Chief Commercial Officer

Non-Executive Director

Charlie Scott Senior Independent Non-Executive Director Alan Smith Independent Non-Executive Director David Longbottom Independent Non-Executive Director Peter Smith Independent Non-Executive Director Anita Lovell Non-Executive Director

David Brown, a Non-Executive Director, retired from the Board on 8 July 2010 and Anita Lovell was appointed as a Director on the same date.

David Longbottom, Charlie Scott, Alan Smith and Peter Smith have been identified as independent for the purposes of the Code. David Brown and Anita Lovell have relationships with Rosedale Aviation Holdings Limited, a company which, until December 2010, held a controlling interest in the Company's issued share capital. Consequently, they have not been identified as independent for the purposes of the Code.

The Board considers each of its Non-Executive Directors to be independent in character and judgement and no one individual, or group of individuals, dominates the Board's decision making. The Non-Executive Directors challenge in a constructive fashion, help the Executive Directors develop proposals on strategy, and bring strong independent judgement, knowledge and experience to the Board's deliberations. This situation, along with the overall management and Board composition, will remain under review as the Company develops in future.

Beneath the Board there is in place a clear and appropriate apportionment of responsibilities amongst the senior managers so that the business can be managed and monitored effectively. Senior managers report to the Operating Board which comprises the Executive Directors together with the Director of Human Resources and Director of Information Technology. The Operating Board reports to the Board.

Details of the Directors are provided on pages 36 and 37.

Operation of the Board and meeting attendance

During the year ended 31 March 2011 the Board met 16 times, including an off-site meeting solely to discuss strategy and meetings in connection with the flotation of the Company's shares on the London Stock Exchange. The Board normally meets 12 times each year and may also meet on an ad hoc basis to deal with urgent business, including the consideration and approval of transactions. The Board requires all Directors to devote sufficient time to their duties and to use their best endeavours to attend meetings. The table below details the Directors' attendance at the Board and Committee meetings (with the number of possible attendances shown in brackets) during the year ended 31 March 2011.

Year ended 31 March 2011	Board	Audit Committee	Safety and Security Review Committee	Nomination Committee	Remuneration Committee
Executive Director
Jim French	15 (16)	N/A	N/A	2 (2)	N/A
Mark Chown	15 (16)	N/A	N/A	2 (2)	N/A
Andrew Knuckey	14 (16)	N/A	N/A	N/A	N/A
Andrew Strong	15 (16)	N/A	4 (4)	N/A	N/A
Mike Rutter	15 (16)	N/A	N/A	N/A	N/A
Non-Executive Director
Charlie Scott	14 (16)	8 (8)	N/A	2 (2)	4 (5)
Alan Smith	16 (16)	7 (8)	4 (4)	N/A	1 (1)
David Longbottom	14 (16)	N/A	N/A	2 (2)	5 (5)
Peter Smith	16 (16)	N/A	4 (4)	N/A	1 (1)
Anita Lovell	13 (13)	N/A	N/A	N/A	2 (2)
David Brown	2 (4)	4 (4)	N/A	N/A	1 (1)

The Executive Directors of the Company may attend meetings of the Board Committees at the invitation of the Chairman of the respective Committees.

To enable the Board to function effectively, and to assist the Directors to discharge their responsibilities, a comprehensive set of papers is provided in advance of each Board and Committee meeting. These include regular business progress reports, budgets, financial statements, and shareholder information. The Company Secretary manages the provision of information to the Board in consultation with the Chairman.

All Directors have access to the advice and services of the Company Secretary who is responsible to the Chairman on matters of corporate governance, and provides the Board with regular updates on relevant legislation, regulations and governance best practice. The Directors may, at the Company's expense, take independent professional advice where necessary and appropriate to do so.

The Company's Articles of Association provide that, among other things and so far as permitted by law, the Company may indemnify its Directors against any liability and may purchase and maintain insurance against any liability.

Conflicts of interest

In accordance with the Companies Act 2006, the Company's Articles of Association permit the Board to consider and, if thought fit, to authorise actual or potential conflicts of interest which may arise and to impose such limits or conditions as it thinks fit. The Board has established a formal procedure whereby actual and potential conflicts of interest can be recorded by each Director and authorised by the Board. The decision to authorise a conflict can only be made by non-conflicted Directors (those who have no interest in the matter being considered) and in making such a decision the Directors must act in a way they consider in good faith will be most likely to promote the Company's success.

Board committees

In accordance with the principles laid down in the Code, the Board has established a committee structure to assist in the discharge of its responsibilities. Details of each of the Audit, Remuneration and Nomination Committees, and the members, roles and activities thereof are detailed below. In addition, the Board has also established a Safety and Security Review Committee. Each Committee reports to, and has terms of reference approved by, the Board which are available for review on Flybe's website at www.flybe.com or on request from the Company Secretary. The minutes of the meetings of the Committees, where appropriate, are circulated to, and reviewed by, the Board. Biographies of each Board member are set out on pages 36 and 37.

Audit Committee

The current members of the Audit Committee are Charlie Scott and Alan Smith, both of whom served throughout the year and are considered by the Board to be independent Non-Executive Directors. David Brown served on the Audit Committee until his retirement from the Board on 8 July 2010. Charlie Scott, a Chartered Accountant, has chaired the Audit Committee throughout the year and the Board considers that he has the appropriate recent and relevant experience to enable him to fulfil this role. The Code permits smaller companies to have an Audit Committee comprising a minimum of two independent Non-Executive Directors and the Board is satisfied that Flybe is a smaller company for this purpose. The Board is satisfied that the members of the Audit Committee are those who are best able to contribute to its objectives.

The Company Secretary acts as secretary to the Audit Committee.

The Audit Committee met on eight occasions during 2010/11. Details of the attendance at Audit Committee meetings are set out in the table above.

Corporate governance

continued

The Chairman and Chief Executive, the Chief Financial Officer, and representatives from the external auditor are invited to attend all meetings of the Audit Committee. The external auditor may also request a meeting with the Audit Committee without any member of management present if they consider it necessary.

Members of the Audit Committee can, where they judge it necessary to discharge their responsibilities, obtain independent professional advice at the Company's expense.

The duties of the Audit Committee include:

• • monitoring the integrity of the Group's Financial Statements and formal announcements relating to Flybe's performance and to review any significant financial reporting issues and/or judgements contained therein
• • keeping under review the consistency of, and any changes to, accounting policies, both on a year to year basis and across the Group, and challenging, where necessary, the Company's financial statements
• • considering management's response to any major external or internal audit recommendations
• • reviewing, and challenging where necessary, the operating and financial/business review and corporate governance statement insofar as is relates to audit matters or risk management
• • reviewing the effectiveness of the Group's internal controls and risk management processes
• • monitoring the effectiveness of the external audit process including the appointment, cost and independence of the external auditor – see Auditor Independence on page 42
• • ensuring that clear and effective channels are maintained for communication between the external auditor and the Group's financial and senior management

The Audit Committee undertakes its activities in line with an annual work plan designed to ensure that it meets its responsibilities under the terms of reference set by the Board. The Audit Committee agrees the scope of the external audit work and discusses the results of the full year audit and half year review with the external auditor, the Chief Financial Officer and the Chief Executive Officer. The ultimate responsibility for reviewing and approving the annual and other accounts remains with the Board. The Audit Committee has responsibility for recommending the appointment, re-appointment and removal of the external auditor to the Board who, in turn, will propose a resolution for consideration by the shareholders.

Remuneration Committee

The current members of the Remuneration Committee are David Longbottom (Committee Chairman), Anita Lovell, Charlie Scott, Alan Smith and Peter Smith. David Longbottom and Charlie Scott served throughout the year. David Brown served on the Remuneration Committee until his retirement from the Board on 8 July 2010. Anita Lovell joined the Remuneration Committee on 7 October 2010; Alan Smith and Peter Smith joined it on 11 January 2011.

The Remuneration Committee currently comprises four independent Non-Executive Directors and Anita Lovell who is not considered independent by the Board.

The Remuneration Committee met on five occasions during the year. The attendance of the individual members at meetings is detailed in the table on page 39. The Remuneration Committee's purpose is to advise the Board and make recommendations to it about all elements of the remuneration packages of the Executive Directors and other members of senior management as it is designated to consider, including any major changes in employee benefit structures throughout the Group.

The Company Secretary acts as secretary of the Remuneration Committee. Flybe's compliance with the provisions of the Code relating to directors' remuneration is further explained on pages 46 to 51.

The Remuneration Committee meets at least twice each year and may request relevant Executive Directors and senior management to attend meetings by invitation. During the year under review, the Committee received material assistance and advice from the Chairman and Chief Executive Officer and the Director of Human Resources. No Director is involved in decisions relating to their personal remuneration package.

The Remuneration Committee and the Group also received advice from Kepler Associates, a firm of independent remuneration consultants, who have not provided any other services to the Group. The Committee has also been advised by Eversheds LLP, who are the Group's solicitors and who have advised the Group on other legal matters throughout the year (including on the flotation and on various corporate, regulatory, employment and commercial matters). Eversheds LLP provided advice on the legal aspects of the implementation and operation of Flybe's employee share schemes.

The duties of the Remuneration Committee include:

• • determining and agreeing with the Board the framework or broad policy for the remuneration of the Chairman and Chief Executive Officer, all other Executive Directors and any other members of the executive management that the Board delegates to it
• • determining within the terms of the agreed policy, individual remuneration packages including bonuses, incentive payments, share options, pension arrangements and any other benefits
• • determining the contractual terms on termination and individual termination payments, ensuring that the duty of the individual to mitigate loss is fully recognised
• • determining individual packages and arrangements, giving due regard to the comments and recommendations of the Code, the Listing Rules and associated guidance
• • advising on any major changes in employee benefit structures in the Group
• • recommending an annual report for the Board to put to shareholders on the Company's remuneration policies and practices compliant with relevant legal and regulatory provisions

The Remuneration Committee is authorised by the Board to:

• • seek any information it requires from any employee or officer of the Group in order to perform its duties
• • be responsible for establishing the selection criteria and then for selecting, appointing and setting the terms of reference for any remuneration for consultants providing advice to the remuneration committee, at the Company's expense
• • obtain, at the Company's expense, expert legal or other professional advice where necessary in the course of its activities

Nomination Committee

The current members of the Nomination Committee are Jim French (Committee Chairman), Mark Chown, David Longbottom and Charlie Scott all of whom served throughout the year. The attendance of the individual members at the two meetings of the Nomination Committee held during the year is detailed in the table on page 39.

The Combined Code recommends that the majority of members of the Nomination Committee should be independent Non-Executive Directors. Throughout the period the Nomination Committee has comprised David Longbottom and Charlie Scott both of whom are independent Non-Executive directors, together with Mark Chown and Jim French. The Board is satisfied that the members of the Nomination Committee are those who are best able to contribute to its objectives.

The Company Secretary acts as secretary of the Nomination Committee.

The duties of the Nomination Committee include:

• • regularly reviewing the structure, size and composition (including skills, knowledge and experience) of the Board and making recommendations to the Board with regard to any adjustments that are deemed necessary
• • keeping under review the leadership needs of the Company, both executive and non-executive, with a view to ensuring the ability of the Company to compete effectively in the marketplace
• • identifying and nominating candidates, for the approval of the Board, to fill board vacancies
• • preparing a description of the role and capabilities required for a particular appointment, having evaluated the balance of skills, knowledge and experience on the Board
• • giving full consideration to succession planning
• • reviewing the time requirements of non-executive directors

In addition, the function of the Nomination Committee includes providing a formal, rigorous and transparent procedure for the appointment of new Directors to the Board. During the year, and prior to the IPO, the Nomination Committee considered the appointment of a replacement for David Brown who retired from the Board having represented the interests of Rosedale for many years. The Nomination Committee recommended Anita Lovell to replace David Brown and in so doing gave due consideration to her knowledge and experience

of the Company gained over many years, and her professional experience as a lawyer. Neither an external search consultancy nor open advertising was used in this appointment. The Nomination Committee also had regard to the terms of a Relationship Agreement concluded between the Company and Rosedale which was concluded as part of the IPO process – see Significant Contracts on page 25. Anita Lovell has been a director of Rosedale since 1999 and continues to be a director at the date of this report.

Anita Lovell is a director of Preston Travel (CI) Limited, a customer of the Group. She is also a director of Downham Properties Limited and Edenfield Investments Limited both of which supplied services to the Group. Further details are provided in note 36 to the consolidated financial statements. The Group's trading with these companies is conducted entirely on arm's length terms and in the ordinary and normal course of business. Additionally, the Board considers that, in each case, the sums involved are de minimis. These potential conflicts of interest have been approved by the Board in accordance with both Board procedures and the procedures established under the Companies Act 2006. Anita Lovell has not been involved in any commercial negotiations between the Group and any of the supplier or customer companies.

The terms and conditions of appointment of all of the Non-Executive Directors are available for inspection at the Company's registered office during normal business hours, and at the AGM. Each letter of appointment specifies the anticipated level of time commitment including, where relevant, additional responsibilities derived from involvement in Board Committees. Details of other material commitments are disclosed to the Board and a register is maintained by the Company Secretary.

Safety and Security Review Committee

The current members of the Safety and Security Review Committee are Peter Smith (Committee Chairman), Alan Smith and Andrew Strong, all of whom served throughout the year. The Safety and Security Review Committee met on four occasions during the year. The attendance of the individual members at meetings of the Safety and Security Review Committee is detailed in the table on page 39.

The duties of the Safety and Security Review Committee include:

• • reviewing matters concerned with the safe and secure operation (both in the air and on the ground) of any aircraft operated by the Group
• • considering reports on incidents involving any aircraft operated by the Group and ensuring that appropriate remedial action is taken including, where appropriate, that recommendations are made to third parties
• • considering reports of significant incidents concerning safety at airports and in engineering facilities and ensure remedial action or appropriate recommendations are implemented
• • reviewing compliance with health and safety legislation
• • ensuring full attention is given to issues of security and advice received from relevant national agencies and authorities

Corporate governance

continued

Internal control

The Board has overall responsibility for maintaining, and reviewing the effectiveness of, Flybe's systems of internal control including internal financial control. The responsibility for establishing and operating detailed control procedures lies with the Chief Executive Officer supported by the Operating Board. However, the internal control systems are designed to manage, not eliminate, the risk of failure to achieve business objectives. By their nature, they can only provide reasonable but not absolute assurance against material mis-statement or loss.

The Audit Committee has conducted a review of the effectiveness of the system of financial control during the year and no material weaknesses or deficiencies were identified. These conclusions were referred to the Board for its approval.

Risk management

The principal risks and uncertainties facing the business are discussed on pages 27 to 29. The Board is accountable for risk and is responsible for oversight of the risk management process. Flybe has used the experience gained over many years to develop structures and processes to identify, evaluate, manage and report on the significant risks faced by the Group. These structures and processes, which are embedded within Flybe's operations, have been in place throughout the reporting period to which these statements apply and up to the date of their approval. The Board is satisfied that processes are in place to ensure that risks are adequately and appropriately addressed and corrective actions taken.

Internal controls are used to identify and manage risk. The Directors acknowledge their responsibility for establishing and maintaining the Group's system of internal control, and for reviewing its effectiveness. Although the system can provide only reasonable and not absolute assurance of material mis-statement or loss, the Group's system is designed to provide the Directors with reasonable assurance that any risks are identified on a timely basis and dealt with appropriately.

Monitoring reviews take place regularly within the departments and monthly reports are prepared for the Operating Board outlining events and mitigating actions taken.

The Operating Board has developed a Risk Register which it uses to monitor the principal risks and uncertainties which Flybe faces, their potential impact, the mitigations and controls currently in place, and recommendations, where possible, for risk reduction. The Audit Committee and the Board review the Risk Register twice every year and will do so more frequently if necessary. The Safety and Security Review Committee, chaired by an independent Non-Executive Director, meets quarterly, or more regularly where events require, to review Flybe's safety performance and this committee reports to the Board.

Internal audit

As noted above, the Audit Committee reviews the effectiveness of financial internal controls, policies and systems. Flybe currently does not have an internal audit function but believes that its creation would enhance the control environment within the Group and improve the value for money derived from the Group's expenditure. The Audit Committee reviewed this position in April 2011 and concurred with management's view that such a function should be set up in the near future with a remit and terms of reference that will be agreed by the Audit Committee. This recommendation has been accepted by the Board.

Auditor independence

The Audit Committee is responsible for ensuring that an appropriate relationship is maintained between the Group and the external auditor. The external auditor provides some non-audit services, primarily in the provision of taxation advice and advice on corporate transactions that may arise from time to time. In order to ensure that auditor objectivity and independence are safeguarded the following controls have been implemented:

• • A formal policy on the use of the auditor for non-audit work has been agreed by the Audit Committee. In summary, this ensures that, usually, such work is only awarded when, by virtue of the auditor's knowledge, skills or experience, the auditor is clearly to be preferred over alternative suppliers. Any fees charged by the Group's auditor in respect of non-audit services over a set cumulative value of, currently, more than £50,000 requires the prior approval of the Audit Committee. Under the policy, the external auditor is specifically excluded from providing any work that may impair their independence and from providing internal audit services to Flybe.
• • The Audit Committee receives and reviews each year an analysis of all non-audit work awarded to the auditor over the financial period. A breakdown of the fees paid to the Group's auditor during the year is set out in note 6 to the consolidated financial statements. A significant proportion of the non-audit services related to non-recurring work, primarily in respect of the Group's IPO during the year. The provision of non-audit services was considered to be appropriate, given the external auditor's depth of knowledge of the affairs and financial practices of Flybe and the fact that such work is normally performed by the external auditor for companies involved in such projects.
• • The Audit Committee receives each year a report from the external auditor as to any matters that the auditor considers bear on its independence and which need to be disclosed to the Audit Committee. The Audit Committee is satisfied that, notwithstanding non-audit work, Deloitte LLP have retained objectivity and independence during the year. The Audit Committee will continue to monitor its policy in this regard and accepts that non-audit work should be controlled to ensure that it does not compromise the independence of the auditor.

The Audit Committee will consider revising these requirements further during the course of 2011/12 in order to incorporate the requirements of the Auditing Practices Board ethical standard insofar as it addresses the provision of non-audit services and which is effective from 30 April 2011. This will incorporate the revised guidance to audit committees issued by the Financial Reporting Council in December 2010.

Induction and continuing development of Directors

All new directors receive a tailored induction on joining the Board, including meetings with senior management and advisers. The Chairman and Chief Executive Officer is responsible for reviewing the development needs of each individual Director. All the Non-Executive Directors have, during the course of the year, attended briefings and seminars relevant to their role, including updates on best practice in audit and remuneration issues and economic affairs in general, as well as bringing knowledge and information gathered from their other business interests.

Performance evaluation of Directors

The Board has established a formal process, led by the Chairman and Chief Executive Officer, for the annual evaluation of the performance of the Board, its appointed Committees and each Director, to ensure that they continue to act effectively and efficiently and to fulfil their respective duties, and to identify any training requirements.

A tailored questionnaire, taking into account developments over the year and including specific references to the objectives of the Board and its Committees, will be required to be completed by each Director. The responses will be analysed and the results will be subsequently discussed at meetings of the Committees and of the Board, as well as in individual discussions between the Chairman and Chief Executive Officer and each Director. Additionally, the Non-Executive Directors will hold a meeting without the Executive Directors present at which Executive Directors' performance will be discussed.

The Non-Executive Directors will meet without the Chairman and Chief Executive Officer present to discuss the results of the evaluation of the Chairman and Chief Executive Officer's performance, having taken into consideration the views of the Executive Directors, and the results of this meeting will be subsequently discussed between the Senior Independent Non-Executive Director and the Chairman and Chief Executive Officer.

Director re-election

Flybe's Articles of Association provide that directors will retire from office and be eligible for re-election if they were neither elected nor re-elected at either of the two preceding Annual General Meetings. In addition, such number of the Directors as would, when added to the number of Directors (if any) above, represent one third of the directors are required to retire from office and, if eligible, offer themselves for re-election.

Relations with shareholders

Communication with shareholders is given a high priority to assist investors' understanding of Flybe's business. The Chairman and Chief Executive Officer and the Chief Financial Officer are the principal representatives with investors, analysts, press and other interested parties and feedback is provided to the Board on a regular basis. The Chairman and Chief Executive Officer makes himself available for dialogue with the shareholders on strategy, corporate governance and Directors' remuneration. Presentations to analysts are simultaneously posted on Flybe's website at www.flybe.com. The Senior Independent Director is available to meet shareholders on request if they have concerns which contact through the normal channels of communication through the Chairman and Chief Executive Officer has failed to resolve, or for which such contact is inappropriate.

Constructive use of the AGM

The Annual General Meeting provides the Board with an opportunity to communicate with, and answer questions from, private and institutional shareholders and the majority of the Board will be available at the meeting to answer shareholders' questions. The Chairmen of the Safety and Security Review, Audit, Remuneration and Nomination Committees will be available at the Annual General Meeting to answer questions.

The Company's standard procedure is to ensure that the notice of AGM and related papers are sent to shareholders at least 20 working days before the meeting.

Shareholder information

Share capital

Details of the movement in authorised and issued share capital during the year are provided in note 27 to the consolidated financial statements. As at 31 March 2011, the Company's share capital comprised a single class of ordinary share of 1 pence each and the issued share capital of the Company was £751,529 comprising 75.2 million ordinary shares of 1 pence each.

The rights and obligations attaching to the Company's ordinary shares are set out in the Company's Articles of Association.

Restrictions on share transfers

There are no restrictions on transfers of shares other than:

• • where the Company has a lien on a partly-paid share unless to do so would prevent dealings in partly-paid shares from taking place on an open and proper basis
• • where the transfer is in favour of more than four joint transferees
• • where a transfer request is not accompanied by the relevant share certificate(s) and such other evidence as the Directors may reasonably require to show the right of the transferor to make the transfer
• • certain restrictions which may from time to time be imposed by laws or regulations such as those relating to insider dealing
• • pursuant to the Company's code for securities transactions whereby the Directors and designated employees require approval to deal in the Company's shares
• • in certain circumstances where the shareholder in question has been issued with a notice under s793 of the Companies Act 2006
• • where a proposed transferee of the Company's shares has failed to furnish the Directors with a declaration of nationality (together with such evidence as the Directors may require) as required by the Company's Articles of Association
• • the powers given to the Directors by the Company's Articles of Association to limit the ownership of the Company's shares by non-UK nationals or non-EEA nationals and powers to enforce this limitation including the right to force the sale of any affected shares

As at 29 June 2011, the Company is not aware of any arrangements between shareholders that may result in restrictions on the transfer of securities or voting rights.

Shares with special rights

There are no shares in the Company with special rights with regard to control of the Company.

Restrictions on voting rights

The notice of the AGM specifies deadlines for exercising voting rights and appointing a proxy or proxies to vote in relation to resolutions to be passed at the AGM. All proxy votes are counted and the numbers for, against or withheld in relation to each resolution are announced at the AGM and published on the Company's website after the meeting.

Employee share scheme

The trustee of the Flybe Share Incentive Plan (the 'Plan') will, on receipt of any offer, compromise arrangement or scheme which affects ordinary shares held in the Plan, invite participants to direct the trustee on the exercise of any voting rights attaching to the ordinary shares held by the trustee on their behalf and/or direct how the trustee shall act in relation to those ordinary shares. The trustee shall take no action in respect of those ordinary shares for which it has received no directions or ordinary shares which are unallocated. Generally, on a poll, the trustee shall vote in accordance with directions given by participants. In the absence of directions or on a show of hands the trustee shall not vote.

The trustee of the Flybe Employee Share Trust (the 'Trust'), which is used in connection with the Flybe Long-term Incentive Plan, has the power to vote or not vote at its discretion in respect of any shares in the Company held in the Trust.

Substantial interests

On 24 June 2011, the Company had been notified, in accordance with chapter 5 of the Disclosure and Transparency Rules, of the following voting rights as a shareholder of the Company.

Name of holder	Percentage of voting rights and issued share capital	Number of ordinary shares	Nature of holding
Rosedale Aviation
Holdings Limited	48.1%	36,146,250	Beneficial
International Consolidated
Airlines Group, S.A.	14.5%	10,925,847	Beneficial
Quantum Partners LP	5.8%	4,348,400	Beneficial
Jim French	5.3%	4,016,250	Beneficial

Financial calendar

First quarter results	17 August 2011
Annual general meeting	8 September 2011
Half year results 2011/12	11 November 2011
Third quarter results	February 2012
Full year results 2011/12	June 2012

The dates above are indicative and confirmation will be listed on our website at www.flybe.com and through an RNS announcement.

Registered office

Jack Walker House Exeter International Airport Exeter Devon EX5 2HL

Company registrar

Capita Registrars Limited The Registry 34 Beckenham Road Beckenham Kent BR3 4TU

Telephone: 0871 664 0300 (Calls cost 10 pence per minute plus network extras)

Outside of the UK: +44 20 8639 3399

Company number

1373432

Auditor

Deloitte LLP 3 Rivergate Temple Quay Bristol BS1 6GD

In the case of each of the persons who are Directors of the Company at the date when this report is approved:

• • so far as each of the Directors is aware, there is no relevant audit information of which the Company's auditor is unaware
• • each of the Directors has taken all the steps that they ought to have taken as a director to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information

This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006.

Deloitte LLP have expressed their willingness to continue in office as the Company's auditor and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting.

Approved by the Board of Directors and signed on behalf of the Board

Chris Simpson Company Secretary

Directors' remuneration

Introduction

This report, which has been approved by the Board, has been prepared in compliance with the Listing Rules, the Companies Act 2006 and Schedule 8 to the Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008. The Group has also followed the requirements of the Combined Code on Corporate Governance 2008 (the 'Code'). With effect from 1 April 2011, the Directors intend to comply with, or explain any non-compliance with, the UK Corporate Governance Code. This report will be put to Flybe's shareholders for approval at the forthcoming Annual General Meeting.

Unaudited information

The Remuneration Committee

The Remuneration Committee's purpose is to advise the Board and make recommendations to it about all elements of the remuneration packages of the Executive Directors and other members of senior management as it is designated to consider, including any major changes in employee benefit structures throughout the Group. The Committee has agreed terms of reference that are available on request from the Company Secretary who also acts as Secretary of the Remuneration Committee. The Group complied with the provisions of the Code relating to Directors' remuneration throughout the financial year.

The current members of the Remuneration Committee are:

David Longbottom	Chairman of the Committee and Independent
	Non-Executive Director
Charlie Scott	Independent Non-Executive Director
Alan Smith	Independent Non-Executive Director
Peter Smith	Independent Non-Executive Director
Anita Lovell	Non-Executive Director

David Longbottom and Charlie Scott served on the Remuneration Committee throughout the year; David Brown served until his retirement from the Board on 8 July 2010; Anita Lovell joined on 7 October 2010; Alan Smith and Peter Smith joined on 11 January 2011. The Code requires that a remuneration committee should comprise at least three independent Non-Executive Directors. The Remuneration Committee currently comprises four independent Non-Executive Directors and Anita Lovell who is not considered independent by the Board.

The Committee shall meet at least twice each year and may request relevant Executive Directors and senior management to attend meetings by invitation. During the year under review the Committee met on five occasions and received material assistance and advice from the Chairman and Chief Executive Officer and the Director of HR. No Director is involved in decisions relating to their personal remuneration package.

The Committee and the Group also received advice from Kepler Associates, a firm of independent remuneration consultants. Kepler Associates does not provide any other services to the Group. The Committee has also been advised by Eversheds LLP, who are the Group's solicitors and who have advised the Group on other legal matters throughout the year (including on the IPO and on various corporate, regulatory, employment and commercial matters). Eversheds LLP provided advice on the legal aspects of the implementation and operation of the Company's employee share schemes.

Remuneration policy

The Remuneration Committee and the Board believe that in order to attract, motivate and retain the best possible senior management team it is necessary to provide competitive, market-based, remuneration packages that are directly aligned with Group strategy, shareholder interests and that have a substantial proportion of performance-related elements to create sustained growth in shareholder value. In determining the structure and quantum of senior executive remuneration, the Committee also takes into account pay and employment conditions elsewhere in the Group.

Elements of remuneration

Element	2010/11 policy	2011/12 policy	Objective
Base salary (see page 48)	Set with reference to external market data for comparable positions at companies of similar sector and size to Flybe	No change	Reflect size and nature of role, individual experience and performance
Annual bonus (see page 48)	Normal maximum opportunity of 100% of salary for Executive Directors, based on Group profit	Normal maximum annual bonus of 100% of salary for Executive Directors, based on the achievement of Group profitability targets and on the achievement of personalised operational objectives	Incentivise and reward Executive Directors for the delivery of our business strategy by rewarding achievement of Group profit targets, wider business performance, the achievement of significant strategic milestones and an individual's contribution to the Group's success
	In exceptional circumstances, and only if a bonus is warranted by Flybe's profit performance, the Remuneration Committee may apply a multiplier of up to +/-50% to the bonus outcome to reflect under or over-achievement against strategic milestones and personal performance
Performance Share Plan (see page 48)	Conditional share awards of 100% of salary to Executive Directors, vesting on Flybe's EPS	No change	Incentivise senior executives to create long-term shareholder value
	performance and TSR rank against sector comparators		Align the interests of senior executives with those of shareholders
Pension (see page 49)	Company contributions of 15% of salary for Executive Directors	No change	Provide competitive retirement benefits
Shareholding guidelines (see page 49)	100% of salary for Executive Directors	No change	Support alignment with shareholders

Executive Director pay mix 2010/11

The following chart illustrates the proportions of the Executive Directors' remuneration packages comprising fixed (i.e. salary and pension) and variable elements of pay, assuming target annual bonus and expected values of long-term incentives are achieved:

Directors' remuneration

continued

Basic salary

Basic salaries are normally reviewed annually and any changes are effective from 1 April each year. Pay reviews reflect the Remuneration Committee's assessment of externally benchmarked market data for comparable positions at companies of similar size and sector to Flybe, as well as the individual Director's experience, performance and value to the business. Pay reviews will also consider the increasing size and complexity of the business, the general economy as well as remuneration levels that are being set across the rest of the Group.

Following the 2009/10 pay freeze applied to all staff including Executive Directors and senior management, a formal benchmarking exercise was undertaken by Kepler Associates in April 2010. The salaries for Executive Directors for the year to 31 March 2011 (effective 1 April 2010) are set out below and were increased on 1 April 2011 by 2% in line with general increases throughout the Group.

Executive Director	Salary last reviewed	2010/11 salary £
Jim French	1 April 2010	500,000
Andrew Knuckey	1 April 2010	250,000
Andrew Strong	1 April 2010	250,000
Mike Rutter	1 April 2010	250,000
Mark Chown*	1 April 2010	150,000

* Mr Chown's base salary reflects the part-time nature of his role.

Annual bonus

For the year to 31 March 2011, Executive Directors participated in the same annual bonus plan in which all other staff participate, which for the year under review was based on the achievement of pre-defined Group profit before tax ('PBT') targets. Executive Directors were eligible for a normal maximum bonus opportunity of 100% of salary, with 50% of salary payable for 'on-target' performance. In addition, PBT-based annual bonus awards were also eligible for a performance multiplier of +/-50%, to be applied in exceptional circumstances only and based on the Remuneration Committee's discretionary assessment of the Group's under- or over-achievement of strategic milestones and an individual's personal performance.

Based on the Group's PBT performance, it was determined that no bonus payments would be made to Executive Directors in respect of the year to 31 March 2011.

For the year to 31 March 2012, Executive Directors will continue to be eligible for a normal maximum annual bonus of 100% of salary. The annual bonus will continue to reinforce our business strategy by primarily incentivising the Executive Directors to secure a safe and sustainably profitable business, but will be amended to better reinforce the successful delivery of operational objectives. A meaningful proportion of the normal maximum annual bonus opportunity will be based on the achievement of Flybe's profitability targets, with the remainder based on performance against personalised operational objectives. Annual bonus awards will also continue to be eligible for a performance multiplier of +/-50%, to be applied in exceptional circumstances only and based on the Remuneration Committee's discretionary assessment of the Group's under- or over-achievement

of strategic milestones and an individual's personal performance. No bonus will be payable under the personalised operational objectives element if the threshold level of performance under Flybe's profitability element is not met.

Performance Share Plan

On IPO, the Group adopted the Flybe Group plc Performance Share Plan ('PSP'). The PSP provides for conditional awards of shares with a face value of not more than 150% of base salary to senior executives (including Executive Directors). It is currently the Remuneration Committee's intention that awards will not normally exceed 100% of salary. Conditional share awards will normally vest no earlier than the third anniversary of grant, and subject to the achievement of performance conditions set over three years.

The Remuneration Committee believes that it is important to provide share incentives to Executive Directors and senior management to align their long term interests with those of Flybe's Shareholders.

Awards worth 100% of salary to the Executive Directors were granted on 21 January 2011. These awards will normally vest on the third anniversary of grant and are subject to two corporate financial performance conditions. The extent to which awards vest will depend 70% on Flybe's earnings per share ('EPS') performance and 30% on Flybe's relative total shareholder return ('TSR').

The EPS element of these awards will vest on Flybe's EPS for the year ending 31 March 2013. This element will vest in full if Flybe's 2012/13 EPS at least equals 48p. 25% of this element will vest if Flybe's EPS is 35p, with straight-line vesting between these points. If Flybe's EPS is less than 35p, this element will lapse.

The TSR element of awards will vest on Flybe's TSR rank over the period from IPO to 31 March 2013 against 17 European airlines and other regional transport companies, listed below.

Airlines	Regional transport companies
Aer Lingus	Air Partner	Thomas Cook Group
Air France-KLM	Avis Europe	TUI Travel
Deutsche Lufthansa	Dart Group
easyJet	FirstGroup
International Consolidated	Go-Ahead Group
Airlines Group	Irish Continental Group
Ryanair Holdings	National Express Group
SAS	Stagecoach Group

This element will vest in full if Flybe's TSR ranks at least upper quartile against these comparators. 25% of this element will vest if Flybe ranks median, with straight-line vesting between these points. If Flybe's relative TSR is below median, this element of the award will lapse. In addition, for this element of an award to vest, the Remuneration Committee must be satisfied that there has been an improvement in Flybe's underlying financial performance.

To the extent that the performance targets are not met over the performance period, awards will lapse, i.e. there is no re-testing of the performance conditions. In the event of a change of control, vesting of PSP awards is not automatic and would depend on the extent to which the performance conditions had been met at the time and the period elapsed since the date of grant.

Selection of performance conditions

The Committee believes the combination of relative TSR and EPS helps balance relative and absolute performance, and internal with external perspectives. EPS is considered to be the best internal measure of Flybe's financial performance; it is highly visible internally, regularly monitored and reported, and reinforces bottom-line growth for shareholders.

All-employee share schemes

The Executive Directors are entitled to participate in the Group's approved Share Incentive Programme ('SIP'), under which all eligible employees were awarded 100 Ordinary shares on 24 January 2011 to recognise their substantial contribution in the lead-up to IPO. The Executive Directors will also be entitled to participate in any Save As You Earn ('SAYE') scheme that the Group may launch during the year to 31 March 2012.

Further details on share awards made during the year to 31 March 2011 can be found at page 51.

Dilution

The Group's share schemes can be funded through a combination of shares purchased in the market and new issue shares, as appropriate. Funding of awards through new issue shares is subject to an overall dilution limit of 10% of issued share capital in any 10 year period. Of this, 5% may be used in connection with the Group's discretionary share schemes. As of 31 March 2011, 280,000 (0.4%) shares have been issued and 937,146 (1.2%) shares will be issuable, pursuant to awards made in the period since Admission in connection with all share schemes and discretionary schemes, respectively. Awards that are made, but then lapse or are forfeited, are excluded from the calculations.

Shareholding guidelines

To provide long term alignment with Shareholders the Executive Directors are required to build up a Flybe shareholding of 100% of basic salary. Only shares acquired post-Admission will count towards this guideline. While there is no specific timeframe within which the shares must be acquired, sale rights of outstanding equity-based awards will be restricted to 50% of the post-tax gain until the share ownership guideline is fulfilled.

Pension contributions

Executive Directors are entitled to a company pension contribution of 15% of basic salary providing they make a personal contribution of not less than 4% into one of the Group's Personal Pension Plans ('GPPP'). The main GPPP is a defined contribution scheme open to all UK employees. From April 2011, should the combined employer and employee contribution exceed the new Pensions Annual Allowance of £50,000 then the Executive may elect to receive a non-bonusable cash supplement equal to the excess. Executive Directors may also voluntarily participate in the Group's approved pension salary sacrifice scheme, which is open to all UK employees who are in the GPPP. Mark Chown is not a member of the Group's pension schemes.

Other benefits

Benefits in kind for Executive Directors include the provision of a car allowance and fuel card, private medical insurance and life assurance. Mark Chown was not provided with any of these benefits in kind.

Executive Director service contracts

The Remuneration Committee's policy is to provide service contracts for Executive Directors with notice periods of 12 months or less. Jim French, Andrew Knuckey, Andrew Strong, Mike Rutter and Mark Chown have all entered into service agreements with the Group dated 9 December 2010 that are subject to 12 months' notice by either party.

Upon termination, Executive Directors are entitled to salary and benefits for the duration of their notice period. It is the Remuneration Committee's policy to seek to mitigate the need for such payments. Each Executive Director has post-termination provisions which (among others) restrict the Executive Director from competing with Flybe for the duration of their notice period.

External Non-Executive Directorships for Executive Directors

None of the Executive Directors currently has external Non-Executive Directorships although, at the discretion of the Board, they may be appointed as a Non-Executive Director at other companies. Before granting permission the Board will take into account inter alia the time commitment of the new role, the competitive status of the other company and the Listing Rules and the Code.

Non-Executive Directors ('NEDs')

All NEDs' services are provided for under the terms of a letter of appointment with the Group dated 9 December 2010, and are subject to six months' notice by either party. Details of the terms of the appointment of the current NEDs are as follows:

Date of	Expiry of current term
	31 March 2012*
	31 March 2012
	31 March 2012*
	31 March 2012
8 July 2010	7 July 2013
	appointment 1 April 2006 1 April 2006 1 April 2006 1 April 2006

* The Board intends to propose to shareholders that David Longbottom and Charlie Scott serve a third and final three year term (subject to approval at the relevant General Meeting) that will terminate on 31 March 2015, unless terminated earlier by, and at the discretion of, either party upon six months' written notice.

Directors' remuneration

continued

The remuneration of the NEDs is determined by the Board and reflects the skills and experience of the NEDs, the market practice adopted in similar sized organisations, the committees chaired and anticipated time commitments. The annual fees payable to the NEDs in the year to 31 March 2011 comprised the fees described below:

Non-Executive Director	Basic fee £	Audit/ Remuneration/ Safety Committee chairmanship fee £	Senior Independent Director fee £	Total £
Charlie Scott	38,000	8,000	15,000	61,000
Alan Smith	38,000	–	–	38,000
David Longbottom	38,000	8,000	–	46,000
Peter Smith	38,000	8,000	–	46,000
Anita Lovell	38,000	–	–	38,000

The NED basic fee will be increased by 2% to £38,760, in line with the general salary increase being awarded across the rest of the Group. NEDs are not eligible for bonuses or participation in share schemes and no pension contributions are made on their behalf.

Total shareholder return

The charts below show the value of a hypothetical £100 holding from the date Flybe's shares were priced immediately prior to IPO (being 10 December 2010) to 31 March 2011. TSR has been calculated in British pounds sterling, and is based on spot share prices and includes dividends reinvested on the relevant ex-dividend date.

The chart on the left illustrates the TSR performance of the Group against the FTSE SmallCap Index. The FTSE SmallCap Index was chosen as it is a recognised broad equity market index of which the Group has been a member since Admission in December 2010.

The second chart (below right) compares Flybe's TSR performance against that of both the median-performing company of the PSP TSR comparator group, as well as for just the airlines within that group (being the closest sector peers for Flybe):

Directors' interests in shares

Executive Directors and NEDs had the following beneficial interests in the issued share capital of 1p ordinary shares in Flybe:

Executive Director	31 March 2010**	31 March 2011
Jim French	4,016,250	4,016,250
Andrew Knuckey*	223,125	223,125
Andrew Strong*	224,875	224,875
Mike Rutter*	224,125	224,125
Mark Chown	–	–
Non-Executive Director
Charlie Scott	–	12,500***
Alan Smith	–	12,500***
David Longbottom	–	12,500***
Peter Smith	–	18,000***
Anita Lovell	–	–

* This interest is held beneficially. Legal title to the Ordinary Shares allocated to the individual is held by KB (C.I.) Nominees Limited as a nominee for the trustees of the Flybe Employees' Share Plan. ** These amounts are stated after a bonus issue of 24 new shares for each existing share which took

place on 25 November 2010 (see note 27 of the consolidated financial statements). *** On 16 June 2010 Charlie Scott, Alan Smith, David Longbottom and Peter Smith acquired the beneficial interest in 12,500 Ordinary Shares. Peter Smith also acquired a beneficial interest in 5,500 Ordinary shares on 14 December 2010.

Value of £100 invested at IPO

Value of £100 invested at IPO

PSP TSR comparator group (airlines only)

Audited information Directors' remuneration

Year ended 31 March 2011	Salary/Fee £	Bonus £	Pension £	Benefits £	Total 2010/11 £	Total 2009/10 £
Executive Director
Jim French*	500,000	–	75,000	14,548	589,548	758,418
Andrew Knuckey*	250,200	–	28,148	8,048	286,396	346,570
Andrew Strong*	250,350	–	28,164	7,838	286,352	327,637
Mike Rutter*	250,350	–	34,423	8,048	292,821	320,377
Mark Chown	112,346	–	–	–	112,346	110,760
Non-Executive Director
Charlie Scott	61,000	–	–	–	61,000	50,004
Alan Smith	38,000	–	–	–	38,000	30,000
David Longbottom	46,000	–	–	–	46,000	35,000
Peter Smith	46,000	–	–	–	46,000	35,000
Anita Lovell**	27,818	–	–	–	27,818	–
David Brown***	12,288	–	–	–	12,288	36,864
Totals					1,798,569	2,050,630

* Jim French, Andrew Knuckey, Andrew Strong and Mike Rutter participated in the Group's approved pension salary sacrifice scheme from 1 October 2010, the effects of which have not been taken into account

when reporting these Directors' base salaries and company pension contributions as reported above.

** Appointed 8 July 2010. *** Resigned 8 July 2010.

Executive Directors' share awards

The interests of the Executive Directors in the PSP and SIP are set out in the table below:

	Date of grant	Shares awarded at 31 March 2010	Number granted in year	Shares awarded at 31 March 2011	Notes
Jim French
PSP	21 January 2011	–	169,491	169,491	(a), (b)
SIP	24 January 2011	–	100	100	(c)
Andrew Knuckey
PSP	21 January 2011	–	84,745	84,745	(a), (b)
SIP	24 January 2011	–	100	100	(c)
Andrew Strong
PSP	21 January 2011	–	84,745	84,745	(a), (b)
SIP	24 January 2011	–	100	100	(c)
Mike Rutter
PSP	21 January 2011	–	84,745	84,745	(a), (b)
SIP	24 January 2011	–	100	100	(c)
Mark Chown
PSP	21 January 2011	–	50,847	50,847	(a), (b)
SIP	24 January 2011	–	100	100	(c)

(a) Awards made under the PSP are subject to the performance conditions set out on page 48. To the extent that the performance conditions are met at the end of the performance period, awards will vest on the third anniversary of grant.

(b) PSP awards granted on 21 January 2011 were calibrated using the Offer Price of 295p. The exercise price is £nil. (c) Awards made under the SIP are subject to no further performance conditions, but are subject to a 3-year holding period.

The closing mid-market price of the Group's shares on 31 March 2011 was 260p. Over the period from IPO to 31 March 2011, the price of the Group's

shares varied between 257p and 342p. The mid-market price of the Group's shares on 21 January 2011, being the date the PSP awards were made, was 325p. The mid-market price of the Group's shares on 24 January 2011, being the date the Share Incentive Plan awards were granted, was 320.5p.

On behalf of the Board

David Longbottom Remuneration Committee Chairman

Statement of Directors' responsibilities

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law, the Directors are required to prepare the group financial statements in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union and Article 4 of the IAS regulation and have also chosen to prepare the parent company financial statements under IFRSs as adopted by the European Union. Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, International Accounting Standard 1 requires that directors:

• • properly select and apply accounting policies;
• • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
• • provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and
• • make an assessment of the Company's ability to continue as a going concern.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement

We confirm that to the best of our knowledge:

• • the financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
• • the review of the business, which is incorporated into the Directors' report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

By order of the Board

Jim French CBE Andrew Knuckey Chairman and Chief Executive Officer Chief Financial Officer

29 June 2011 29 June 2011

Independent auditor's report to the members of Flybe Group plc

We have audited the financial statements of Flybe Group plc for the year ended 31 March 2011 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated and Parent Company Statements of Changes in Equity, the Consolidated and Parent Company Balance Sheets, the Consolidated and Parent Company Cash Flow Statements, and the related notes 1 to 44. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards ('IFRSs') as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditor

As explained more fully in the Statement of Directors' Responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group's and the parent company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all of the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies, we consider the implications for our report.

Opinion on financial statements

In our opinion:

• • the financial statements give a true and fair view of the state of the group's and of the parent company's affairs as at 31 March 2011 and of the group's profit for the year then ended;

• • the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;

• • the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and

• • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation.

Opinion on other matters prescribed by the Companies Act 2006

In our opinion:

• • the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
• • the information given in the Directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following:

Under the Companies Act 2006 we are required to report to you if, in our opinion:

• • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
• • the parent company financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns; or
• • certain disclosures of Directors' remuneration specified by law are not made; or
• • we have not received all the information and explanations we require for our audit.

Under the Listing Rules we are required to review:

• • the Directors' statement in relation to going concern;
• • the part of the Corporate Governance Statement relating to the company's compliance with the nine provisions of the June 2008 Combined Code specified for our review; and
• • certain elements of the report to shareholders by the Board on Directors' remuneration.

Stuart Woodward (Senior statutory auditor) for and on behalf of Deloitte LLP

Chartered Accountants and Statutory Auditor Bristol, United Kingdom

29 June 2011

Consolidated income statement

Year ended 31 March 2011

	Note	2011 £m	2010 £m
Ticket revenue		446.8	434.7
Ancillary revenue		98.9	86.0
Maintenance and other revenue		49.8	49.8
Revenue		595.5	570.5
Staff costs	8	(110.3)	(111.7)
Fuel		(92.5)	(86.6)
Net airport and en route charges		(113.6)	(111.3)
Ground operations		(89.0)	(83.7)
Maintenance		(32.0)	(29.0)
Depreciation and amortisation		(15.9)	(16.8)
Aircraft rental charges		(77.4)	(63.7)
Marketing and distribution costs		(24.5)	(24.1)
Other operating gains		2.5	2.5
Other operating expenses		(35.2)	(35.7)
Operating profit before Initial Public Offering ('IPO') expenses and unrealised gains and losses
on fuel and foreign exchange hedges	6	7.6	10.4
IPO expenses incurred	7	(1.7)	(1.1)
(Losses)/gains on fuel and foreign exchange hedges		(6.8)	18.3
Operating (loss)/profit		(0.9)	27.6
Investment income	9	0.3	0.2
Finance costs	10	(2.6)	(4.1)
Other gains and losses	11	(1.1)	0.9
(Loss)/profit before tax		(4.3)	24.6
Tax credit/(charge)	12	8.1	(2.4)
Profit for the year		3.8	22.2
Earnings per share:
Basic and diluted	13	£0.06	£0.42

Consolidated statement of comprehensive income

Year ended 31 March 2011

	2011 £m	2010 £m
Profit for the financial year	3.8	22.2
Gains arising during the year on cash flow hedges	22.6	–
Reclassification of gains on cash flow hedges included in profit	(1.4)	–
Deferred tax arising on cash flow hedges	(5.5)	–
Actuarial gain/(loss) on defined benefit pension scheme	6.1	(4.7)
Other comprehensive income/(expense) for the year	21.8	(4.7)
Total comprehensive income for the year	25.6	17.5

Consolidated statement of changes in equity

Year ended 31 March 2011

Balance at 31 March 2011	0.7	60.6	15.7	6.7	22.5	1.7	107.9
Share issue expenses	–	(5.7)	–	–	–	–	(5.7)
Share capital issued	0.7	65.3	–	–	–	–	66.0
payment transactions	–	–	–	–	–	0.5	0.5
Equity-settled share-based
Other comprehensive income for the year	–	–	15.7	–	–	6.1	21.8
Profit for the year	–	–	–	–	–	3.8	3.8
Balance at 31 March 2010	–	1.0	–	6.7	22.5	(8.7)	21.5
payment transactions	–	–	–	–	–	0.4	0.4
Equity-settled share-based
Other comprehensive income for the year	–	–	–	–	–	(4.7)	(4.7)
Profit for the year	–	–	–	–	–	22.2	22.2
Balance at 1 April 2009	–	1.0	–	6.7	22.5	(26.6)	3.6
	Share capital £m	Share premium £m	Hedging reserve £m	Other reserves £m	Capital redemption reserve £m	Retained earnings/ (deficit) £m	Total equity £m

Consolidated balance sheet

At 31 March 2011

	Note	2011 £m	2010 £m	2009 £m
Non-current assets
Intangible assets	14	10.4	10.4	11.1
Property, plant and equipment	15	136.3	129.9	133.8
Other non-current assets	16	32.4	32.1	26.0
Restricted cash	19	8.6	8.0	8.3
Deferred tax asset	25	9.9	7.1	8.6
Derivative financial instruments	24	0.1	–	5.6
		197.7	187.5	193.4
Current assets
Inventories	17	5.8	6.1	7.5
Trade and other receivables	18	88.8	71.7	92.5
Cash and cash equivalents	19	87.7	46.1	44.7
Restricted cash	19	9.3	8.0	3.6
Derivative financial instruments	24	24.4	10.1	20.2
Assets held for sale	20	0.4	0.6	1.6
		216.4	142.6	170.1
Total assets		414.1	330.1	363.5
Current liabilities
Trade and other payables	21	(80.4)	(88.3)	(82.9)
Deferred income	22	(64.2)	(64.4)	(52.8)
Borrowings	23	(16.9)	(9.7)	(33.1)
Provisions	26	(28.3)	(24.7)	(31.3)
Derivative financial instruments	24	(3.3)	(2.9)	(41.9)
		(193.1)	(190.0)	(242.0)
Non-current liabilities
Borrowings	23	(66.8)	(73.8)	(78.2)
Deferred tax liabilities	25	(11.6)	(11.4)	(10.5)
Provisions	26	(20.4)	(19.2)	(12.1)
Deferred income	22	(14.3)	(9.4)	(11.9)
Employee benefits	34	–	(4.8)	–
Derivative financial instruments	24	–	–	(5.2)
		(113.1)	(118.6)	(117.9)
Total liabilities		(306.2)	(308.6)	(359.9)
Net assets		107.9	21.5	3.6
Equity attributable to owners of the company Share capital	27	0.7	–	–
Share premium account	28	60.6	1.0	1.0
Hedging reserve		15.7	–	–
Other reserves		6.7	6.7	6.7
Capital redemption reserve		22.5	22.5	22.5
Retained earnings/(deficit)	29	1.7	(8.7)	(26.6)
Total equity		107.9	21.5	3.6

The financial statements of Flybe Group plc, registered number 1373432, were approved by the Board of Directors and authorised for issue on 29 June 2011.

Signed on behalf of the Board of Directors

Director Director

Jim French CBE Andrew Knuckey

Consolidated cash flow statement

Year ended 31 March 2011

	2011 £m	2010 £m
Cash flows from operating activities
Profit for the year	3.8	22.2
Adjustments for:
Unrealised losses/(gains) on fuel and foreign exchange hedges	6.8	(18.3)
Depreciation, amortisation and impairment	15.9	16.8
Investment income	(0.3)	(0.2)
Finance costs	2.6	4.1
Other losses/(gains)	1.1	(0.9)
Gain on sale of property, plant and equipment and assets held for sale	(0.4)	(0.5)
Equity-settled share-based payment expenses	0.5	0.4
Taxation	(8.1)	2.4
	21.9	26.0
Increase in restricted cash	(1.9)	(4.1)
(Increase)/decrease in trade and other receivables	(3.5)	(10.8)
Decrease in inventories	0.3	1.4
Decrease in trade and other payables	(2.8)	(1.2)
Decrease in assets held for sale	0.2	1.9
Increase in provisions and employee benefits	3.9	1.7
Tax (paid)/received	(3.8) –	(11.1) –
Net cash from operating activities	18.1	14.9
Cash flows from investing activities
Proceeds from sale of property, plant and equipment	21.7	78.3
(Increase)/decrease in pre-delivery deposits Interest received	(13.8) 0.3	25.3 0.2
Acquisition of property, plant and equipment	(42.5)	(90.5)
Capitalised development expenditure	(1.1)	(0.4)
Net cash from investing activities	(35.4)	12.9
Cash flows from financing activities
Proceeds from new loans	17.6	62.2
Proceeds on issue of shares	60.3	–
Interest paid	(2.6)	(4.1)
Repayment of borrowings	(16.4)	(84.5)
Net cash from financing activities	58.9	(26.4)
Net increase in cash and cash equivalents	41.6	1.4
Cash and cash equivalents at beginning of year	46.1	44.7
Cash and cash equivalents at end of year	87.7	46.1

Notes to the consolidated financial statements

Year ended 31 March 2011

1. General information

Flybe Group plc is a company incorporated in the United Kingdom under the Companies Act 2006. The address of the registered office is given on page 44. The nature of the UK group's operations and its principal activities are set out in the business review of pages 12 to 35.

These financial statements are presented in pounds sterling because that is the currency of the primary economic environment in which the Group operates.

2. Adoption of new and revised standards

The financial statements for the year ended 31 March 2011 are the Group's first consolidated financial statements prepared under IFRS, with a transition date of 1 April 2009. Consequently, the comparative figures for 2010 have been restated in accordance with the accounting policies set out below. IFRS 1 allows certain exemptions from retrospective application of IFRS in the opening balance sheet at 1 April 2009. Where these have been used, they are explained in the relevant policy below.

The effect of adopting IFRS on the opening and comparative balance sheet is disclosed in note 37.

At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):

Amendments to IAS 12 (December 2010)	Deferred tax – Recovery of underlying assets
IFRS 9 (November 2009)	Financial Instruments – Classification and Measurement
Amendments to IFRS 7 (October 2010)	Financial Instruments – Disclosures
Amendments to IFRS 1 (January 2010)	Limited exemption from comparative IFRS 7 disclosures for first time adopters
Amendments to IAS 24 (November 2009)	Related party disclosures
Amendments to IFRIC 14 (November 2009)	Prepayments of a minimum funding requirement
IFRIC 19 (November 2009)	Extinguishing financial liabilities with equity instruments
IFRS 10 (May 2011)	Consolidation
IFRS 11 (May 2011)	Joint ventures
IFRS 12 (May 2011)	Disclosure of interests in other entities
IFRS 13 (May 2011)	Fair value measurement
Amendments to IAS 1 (June 2011)	Presentation of Financial Statements
Amendments to IAS 19 (June 2011)	Post-employment benefits

The directors do not expect that the adoption of these Standards and Interpretations in future periods will have a material impact on the financial statements of the Group.

3. Accounting policies Basis of accounting

The financial statements are prepared in accordance with International Financial Reporting Standards ('IFRSs'). The financial statements have also been prepared in accordance with IFRSs adopted by the European Union and therefore the Group financial statements comply with Article 4 of the EU IAS Regulation.

The financial statements have been prepared on the historical cost basis, except for certain financial instruments that are recorded at fair value. The principal accounting policies adopted, which have been applied consistently in the current and the prior financial year, are outlined below.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 March each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.

The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

Going concern

The directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Further detail is contained in the Business Review on page 25.

Business combinations

The cost of a business combination is measured as the aggregate of the fair values at the date of exchange of assets given and liabilities incurred or assumed in exchange for control. The assets and liabilities and contingent liabilities of the acquired entity are measured at their fair values at the date of acquisition. When the initial accounting for a business combination is determined provisionally, any adjustments to the provisional values to reflect new information about facts or circumstances which existed at the acquisition date are made within 12 months of the acquisition date.

Where the cost of a business combination exceeds the net fair value of the acquired assets, liabilities and contingent liabilities, goodwill is recognised as an asset and initially measured at cost. Where the net fair value of the acquired assets, liabilities and contingent liabilities exceeds the cost of a business combination, the identification of acquired assets, liabilities and contingent liabilities is reassessed before recognising the excess immediately in the income statement.

Revenue and revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales-related taxes and comprises:

Ticket revenue

Scheduled and charter passenger ticket sales, net of passenger taxes and discounts, are recorded in a 'forward sales' account and are included in creditors, within deferred income, until recognised as revenue when transportation occurs. This also includes revenues derived from flights operated by the Group's codeshare partners.

For flights purchased by members of the 'Frequent Flyer Programme', an element of revenue representing the sales value of flights which these customers may take in future at no cost is deferred and recognised when the related free flights have been taken. The amount of deferral is based on the fair value of an equivalent flight.

Unused tickets are recognised as revenue when the right to travel expires and the Group's obligation to refund ceases, which is determined by the terms and conditions of these tickets.

Ancillary revenue

Ancillary revenues, comprising principally baggage carriage, advanced seat assignment, commissions, change fees and credit card fees due to the Group, are recognised as revenue on the date the right to receive consideration occurs. In respect of credit card fees and hotel and insurance commission, this occurs when each flight is booked and paid for. For the remaining ancillary revenue, this occurs on the date of transportation, as this is when the service is generally provided.

Commission received from the issue of Flybe branded credit cards by a third party provider is deferred to the extent that it relates to free flights which the Group is required to offer as part of the transaction. Commission received in excess of the sales value of free flights granted to card-holders is recognised immediately as revenue. Revenue associated with free flights is recognised when the related flights are taken.

Aircraft maintenance and other revenue

These represent the amounts derived from the provision of goods and services to customers during the year, including aircraft maintenance, overhauls and the associated rotable and consumable parts. The amount of profit attributable to the stage of completion of an engine and maintenance overhaul contract is recognised when the outcome of the contract can be foreseen with reasonable certainty. Revenue for such contracts is stated at the cost appropriate to the stage of completion plus attributable profits, less amounts recognised in previous years. Provision is made for any losses as soon as they are foreseen.

Other revenues, such as for cargo and wet-leasing, are recognised in the period when the services are provided.

Interest revenue

Interest income is recognised when it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount on initial recognition.

Operating (loss)/profit

Operating (loss)/profit is stated as (loss)/profit before tax, investment income, finance costs and other gains and losses.

Foreign currencies

Transactions arising, other than in the functional currency, are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are re-translated using the rate of exchange ruling at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated at foreign exchange rates ruling at the dates the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not translated.

Exchange differences are recognised in the income statement in the period in which they arise.

Property, plant and equipment

Property, plant, and equipment are stated at their cost, less accumulated depreciation and impairment losses. Aircraft and engines and other associated equipment are classified as aircraft. All other equipment is classified as plant and equipment.

An element of the cost of a new aircraft is attributed on acquisition to prepaid maintenance of its engines and airframe and is amortised over a period from one to five years from the date of purchase to the date of the next scheduled maintenance event for the component. Subsequent costs, such as long-term scheduled maintenance and major overhaul of aircraft, are capitalised and amortised over the length of period benefiting from these costs. All other costs relating to maintenance are charged to the income statement as incurred.

Interest costs incurred on borrowings that specifically fund progress payments on assets under construction, principally aircraft, are capitalised up to the date of completion and included as part of the asset.

Advance payments and option payments made in respect of aircraft purchase commitments and options to acquire aircraft where the balance is expected to be funded by lease financing are recorded at cost in current or non-current aircraft deposits. On acquisition of the related aircraft, these payments are included as part of the cost of aircraft and are depreciated from that date.

Notes to the consolidated financial statements

Continued

3. Accounting policies continued Property, plant and equipment continued

Depreciation is provided by the Group to write off the cost less the estimated residual value of tangible fixed assets by equal instalments over their estimated useful economic lives as follows:

Freehold land	Nil
Freehold and short leasehold buildings	2% to 10% per annum
	or lease term where shorter
Plant, equipment and motor vehicles	10% to 50% per annum
Aircraft	7% to 20% per annum
Maintenance assets	25% to 50% per annum

Estimated residual values are reviewed annually at each period end, with reference to current market conditions. Where estimated residual values are found to have changed significantly, this is accounted for prospectively as a change in estimate and depreciation charges over the remaining useful life of the asset is adjusted to take account of the revised estimate at residual value.

Non-current assets held for sale

Where assets are available for sale in their current condition, and their disposal is highly probable (there is a committed plan to sell the asset and management has initiated the process to locate a buyer), they are reclassified as held for sale. Assets held for sale are measured at the lower of their carrying value and the fair value less costs to sell.

Depreciation on fixed or intangible assets ceases at the point of their reclassification to assets held for sale.

Intangible assets

Computer software

Expenditure on development activities is capitalised if the product or process is technically and commercially feasible and the Group intends to, and has the technical ability and sufficient resources to, complete development and if the Group can measure reliably the expenditure attributable to the intangible asset during its development. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in the income statement as an expense as incurred.

Computer software is carried at cost less accumulated amortisation. It is amortised on a straight-line basis over its useful economic life of five years.

Landing rights

Intangible assets acquired are recognised to the extent it is probable that expected future benefits will flow to the Group and the associated costs can be measured reliably. Landing rights acquired either as part of a business combination or separately are capitalised at fair value at that date and are not amortised where those rights are considered to be indefinite. Landing rights are considered to have an indefinite life only when they will remain available for use for the foreseeable future provided minimum utilisation requirements are met. The carrying value of these rights is subject to impairment testing annually or when events or changes in circumstances indicate that carrying values may not be recoverable.

Disposals of property, plant, equipment and intangible assets

The gain or loss on disposal of property, plant, equipment and intangible assets after deducting any costs associated with selling, disposing of or retiring the relevant asset are recognised in the income statement and reported under other operating gains or losses.

Impairment of tangible and intangible assets excluding goodwill

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any).

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

Government grants

Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received. Once such assurance exists, government grants are either recognised in the income statement or, where related to property, plant, and equipment, are treated as deferred income and released to the income statement over the expected useful lives of the assets concerned.

Inventories

Inventories are stated at the lower of cost or net realisable value as follows:

Aircraft consumables

These comprise aircraft parts which are non-repairable and nonrenewable. These are valued at the lower of cost or net realisable value for each separately identified batch purchased.

Work in progress

The carrying value of engine overhaul and maintenance work in progress for third parties is based upon direct cost together with attributable overheads. Materials issued from stores are valued as detailed above under 'aircraft consumables'. Other direct materials are valued at actual cost. Labour and attributable overhead rates are based upon normal levels of activity. When it is probable that maintenance contract costs will exceed maintenance contract revenue, the expected loss is recognised as an expense immediately.

Aircraft deposits

Aircraft deposits represent deposits made with aircraft manufacturers for future delivery of aircraft or deposits made with aircraft financiers or operating lessors to provide security for future maintenance work or lease payments.

Financial instruments

Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the relevant instrument.

Classification of financial instruments issued by the Group

Financial instruments issued by the Group are treated as equity only to the extent that they meet the following two conditions:

• • they include no contractual obligations upon the Group to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Group; and
• • where the instrument will or may be settled in the Company's own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the Company's own equity instruments or is a derivative that will be settled by the Company exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments.

To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the Company's own shares, the amounts presented in these financial statements for called up share capital and share premium account exclude amounts in relation to those shares.

Finance payments associated with financial liabilities are dealt with as part of finance expenses. Finance payments associated with financial instruments that are classified in equity are treated as distributions and are recorded directly in equity.

Hedge accounting

The Group designates certain hedges of foreign exchange and fuel price risks on firm commitments as cash flow hedges.

At the inception of the hedge relationship, in order to qualify for hedge accounting, the entity documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item.

Movements in the hedging reserve are detailed in the statement of changes in equity.

Cash flow hedges

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the income statement, and is included in the 'other gains and losses' line item.

Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to the income statement in the periods when the hedged item is recognised in the income statement, in the same line of the income statement as the recognised hedged item. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously accumulated in equity are transferred from equity and included in the initial measurement of the cost of the non-financial asset or non-financial liability.

Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. Any gain or loss recognised in other comprehensive income at that time is accumulated in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognised immediately in the income statement.

Financial assets

All financial assets are recognised and derecognised on a trade date where the purchase or sale of a financial asset is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned. Initially they are measured at fair value, plus transaction costs, except for those financial assets classified as at fair value through profit or loss ('FVTPL') or at fair value designated and effective as hedges, which are initially measured at fair value.

Financial assets are classified into the following specified categories: financial assets at FVTPL, financial assets that are designated and effective as hedging instruments and 'loans and receivables'. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. The Group holds no 'available for sale' or 'held to maturity' financial assets.

Financial assets at FVTPL

Financial assets are classified as at FVTPL when the financial asset is either held for trading or is designated as at FVTPL. A fuel or foreign exchange hedging instrument is classified as held for trading if it is a derivative that is not designated and effective as a hedging instrument. A fuel or foreign exchange hedging instrument may be designated as at FVTPL upon initial recognition if the instrument forms part of a group of financial assets or financial liabilities, or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group's documented risk management strategy, and information about the grouping is provided internally on that basis.

Financial assets at FVTPL are stated at fair value, with any gains or losses arising on re-measurement recognised in the income statement. The net gain or loss recognised in the income statement incorporates any dividend or interest earned on the financial asset and is included in the 'unrealised gains and losses on fuel and foreign exchange hedges' line item or 'other gains and losses' line item in the income statement depending upon the nature of the instrument. Fair value is determined in the manner described in note 35.

Notes to the consolidated financial statements

Continued

3. Accounting policies continued

Financial assets continued

Loans and receivables

Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as 'loans and receivables'. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.

Impairment of financial assets

Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.

Derecognition of financial assets

The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay.

Derivative financial instruments

The Group is exposed to market risks relating to fluctuations in commodity prices, interest rates and currency exchange rates. The objective of financial risk management is to minimise the impact of commodity prices, interest rate and foreign exchange fluctuations on the Group's earnings, cash flows and equity.

Derivative financial instruments are stated at fair value. Recognition of any resultant gain or loss depends on whether hedge accounting is in place for the particular item and on the nature of the item being hedged. When the hedge is not effective, as defined by IFRS, any gains and losses arising on changes to fair values are recognised immediately in the income statement. For the year ended 31 March 2010, hedge accounting under IFRS was not in place. For instruments entered into from 1 April 2010, the Group's policy is to designate them, where appropriate, as cash flow hedges that comply with the requirements under IFRS for hedge accounting.

The fair value of forward foreign exchange contracts and jet fuel contracts is their quoted market price at the balance sheet date, being the present value of the forward quoted price.

Cash and cash equivalents

Cash, for the purposes of the cash flow statement, comprises cash in hand and deposits repayable on demand, less overdrafts payable on demand.

Cash equivalents are current asset investments which are readily convertible into known amounts of cash at or close to their carrying values or traded in an active market, without curtailing or disrupting the business.

Restricted cash

Restricted cash represents funds held by the Group in bank accounts which cannot be withdrawn until certain conditions have been fulfilled. The aggregate restricted funds balance is disclosed by way of a note to these financial statements and is classified as a current or non-current asset based on the estimated remaining length of the restriction.

Financial liabilities and equity

Debt and equity instruments are classified as either financial liabilities or equity instruments according to the substance of the contractual arrangements.

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs.

Financial liabilities

Financial liabilities are recognised as either financial liabilities at FVTPL, financial liabilities that are designated and effective as hedging instruments or other financial liabilities.

Financial liabilities at FVTPL

Financial liabilities are classified as at FVTPL when the financial liability is either held for trading or it is designated as at FVTPL. A fuel or foreign exchange hedging instrument is classified as held for trading if it is a derivative that is not designated and effective as a hedging instrument. A fuel or foreign exchange hedging instrument may be designated as at FVTPL upon initial recognition if the instrument forms part of a group of financial assets or financial liabilities, or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group's documented risk management strategy, and information about the grouping is provided internally on that basis.

Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on re-measurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability and is included in the 'unrealised gains and losses on fuel hedges' line item or 'other gains and losses' line item in the income statement. Fair value is determined in the manner described below.

Other financial liabilities

Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.

Derecognition of financial liabilities

The Group derecognises financial liabilities when, and only when, the Group's obligations are discharged, cancelled or they expire.

Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

Leased aircraft maintenance provisions

The Group incurs liabilities for maintenance costs in respect of aircraft leased under operating leases during the term of the lease. These arise from the contractual obligations relating to the condition of the aircraft when it is returned to the lessor. To discharge these obligations, the Group will either need to compensate the lessor for the element of the life of the component or maintenance interval used, or carry out the maintenance check before return of the aircraft to the lessor.

The provisions recorded and charged to the income statement are dependent on the life of the component or maintenance interval used and the individual terms of the lease:

• • No charge is recorded during the initial period of lease agreements where no compensation or maintenance is required prior to hand-back.
• • After a component or maintenance interval passes its half-life (or another measure depending on the individual lease) and compensation would be due to the lessor in accordance with the terms of the lease, a provision and matching income statement charge is recorded equal to the amount of compensation that would be required based on the hours or cycles flown at the balance sheet date.
• • After a component or maintenance interval has passed the trigger point such that the Group is contractually obliged to carry out the specified work, a full provision for the cost of work is recorded. To the extent that this provision represents an increase to the half-life compensation provision already recorded a maintenance asset is recorded within property, plant and equipment. The asset is depreciated over the expected period to the next half-life compensation point, or the end of the lease, whichever is sooner.

Where maintenance is provided under 'power by the hour' contracts and maintenance paid to maintenance providers to cover the cost of the work is deemed to be irrecoverable, these payments are expensed as incurred and maintenance provisions are reduced to reflect the fact that the Group has already paid for the related maintenance work. Maintenance deposits which are refundable are recorded as other receivables.

Estimates are required to establish the likely utilisation of the aircraft, the expected cost of a maintenance check at the time it is expected to occur, the condition of an aircraft and the lifespan of life-limited parts. The bases of all estimates are reviewed once each year and also when information becomes available that is capable of causing a material change to an estimate, such as renegotiation of end of lease return conditions, increased or decreased utilisation, or unanticipated changes in the cost of heavy maintenance services.

Leases

Operating leases

Rental charges on operating leases are charged to the income statement on a straight-line basis over the life of the lease. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis over the life of the respective asset.

Sale and leaseback

The Group enters into sale and leaseback transactions whereby it sells aircraft, or rights to acquire aircraft, to a third party. Flybe subsequently leases the aircraft back, by way of operating lease. Any profit on the disposal, where the price that the aircraft is sold for is not considered to be fair value, is deferred and amortised over the lease term of the asset.

Finance leases

Where the Group enters into a lease which entails taking substantially all the risk and rewards or ownership of an asset, the lease is treated as a 'finance lease'. The asset is recorded in the balance sheet as property, plant, and equipment, and is depreciated over the estimated useful life to the Group. The asset is recorded at the lower of its fair value, less accumulated depreciation, and the present value of the minimum lease payments at the inception of the finance lease. Future instalments under such leases, net of finance charges, are included as obligations under finance leases. Rental payments are apportioned between the finance element, which is charged to the income statement, and the capital element, which reduces the outstanding obligation for future instalments. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the costs of those assets, until such time as the assets are substantially ready for their intended use or sale.

Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

All other borrowing costs are recognised in the income statement in the period in which they are incurred.

Notes to the consolidated financial statements

Continued

3. Accounting policies continued Taxation

Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences arise from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

Employee benefit costs

The Group operates defined contribution and defined benefit pension schemes.

For the defined contribution schemes, the assets of the schemes are held separately from those of the Group in independently administered funds. The amount charged to the income statement represents the contributions payable to the schemes in respect of the accounting period.

The Group's net obligation in respect of defined benefit pension plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any plan assets (at bid price) is deducted. The liability discount rate is the yield at the balance sheet date on AA credit-rated bonds that have maturity dates approximating to the terms of the Group's obligations. The calculation is performed by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Group, the recognised asset is limited to the net total of any unrecognised past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan.

When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognised as an expense in the income statement on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in the income statement.

All actuarial gains and losses are recognised outside of profit in other comprehensive income in the period when they occur. The actuarial valuations are obtained at least triennially and are updated at each balance sheet date. The net surplus or deficit arising on the Group's defined benefit schemes is shown within non-current assets or liabilities on the balance sheet. The deferred tax impact of any such amount is disclosed separately within deferred tax.

The expected cost of compensated holidays is recognised at the time that the related service is provided.

Share-based payments

Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. The fair value excludes the effect of non-market-based vesting conditions. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in note 33.

The fair value determined at the grant date of the equity-settled sharebased payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of equity instruments that will eventually vest. At each balance sheet date, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non market-based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to equity reserves.

4. Critical accounting judgements and key sources of estimation uncertainty Critical accounting judgements and key sources

of estimation uncertainty

In the application of the Group's accounting policies, which are described in note 3, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Critical judgements in applying the Group's accounting policies

The following are the critical judgements, apart from those involving estimations (which are dealt with separately below), that the Directors have made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in financial statements:

Carrying value of aircraft

The Group had a net book value of approximately £110.9m for aircraft as at 31 March 2011. Changes to the Group's estimation of useful lives, residual values and potential for impairment would have a material effect on the valuation of the Group's assets and on its operating (loss)/profit.

Useful lives and residual values are reviewed at the end of each reporting period. Estimates of useful lives of aircraft are based on judgements as to expected usage of the aircraft, timing of maintenance events, the Group's route and fleet plans and on changes within the wider aviation industry. Estimates of residual value are based on current market values of aircraft in the same expected age and condition expected at the end of the asset's useful life to the Group.

The carrying value of aircraft, property, equipment and other tangible assets is reviewed for impairment at least annually and when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that would indicate a potential impairment of aircraft would include a significant reduction in market values based on appraisers' data for the aircraft type, a significant change in the physical condition of the aircraft and a reduction in forecast cash flows arising from operating the asset. Carrying value is assessed based on the appraised data and forecast cash flows.

Aircraft maintenance

On acquisition of an aircraft, a proportion of the cost of the aircraft is allocated to engines and other material components with different useful lives to the airframe. Judgement is required to determine the amount of cost to allocate based on the estimated cost of overhauling the component, and the time between maintenance events. This judgement affects the amounts recognised as a depreciation expense given the different useful lives of the components.

For aircraft held under operating leases, the Group has a commitment to return the aircraft in a specific maintenance condition at the end of the lease term. Estimating the provision for maintenance costs requires judgement as to the cost and timing of future maintenance events. This estimate is based on planned usage of the aircraft, contractual obligations under lease agreements, industry experience, manufacturers' guidance and regulations. Any change in these assumptions could potentially result in a significant change to the maintenance provisions and costs in future periods.

Recognition of deferred tax assets

The Group recognises deferred tax assets and liabilities based on the temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Deferred tax assets are reviewed regularly to assess potential realisation and the portions of such assets that the Directors believe will not be ultimately realised are not recorded. In performing this review, Flybe makes estimates and assumptions regarding projected future taxable income, the expected timing of the reversals of existing temporary differences and the implementation of tax planning strategies. A change in these assumptions could cause an increase or decrease in the amount recognised resulting in an increase or decrease in the effective tax rate, which could materially impact the results of operations. At 31 March 2011, the Directors recorded £2.8m of previously unrecorded assets due to a change in the Group's future estimated profitability attributable to the Directors' expectation of the Group's future performance.

Key sources of estimation uncertainty

The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Employee benefits

The Directors have determined that the surplus of assets over projected liabilities within the defined benefit pension scheme should not be recognised on the basis that there is insufficient certainty that this surplus will be recoverable by the Group when the scheme has eventually settled all of its obligations.

Accounting for pensions and other post–retirement benefits involves judgement about uncertain events including, but not limited to, discount rates, life expectancy, future pay inflation, expected rate of return on plan assets and expected health care cost trend rates. Determination of the projected benefit obligations for the Group's defined benefit schemes and post-retirement plans are important to the recorded amount of benefit expense in the income statement and valuation of the balance sheet. Details of the assumptions used are included in note 34. Any change in these assumptions could potentially result in a significant change to the pension assets, commitments and pension costs in future periods.

Notes to the consolidated financial statements

Continued

5. Business and geographical segments

Operating segments are reported in a manner which is consistent with internal reporting provided to the chief operating decision maker responsible for resource allocation and when assessing performance of operating segments has been identified by the Operating Board:

• Airline The Airline business segment comprises the Group's main scheduled passenger operations and revenues ancillary to the provision of those services. The Airline business provides services between European airports.
• Aviation Services The Aviation Services segment comprises the Group's provision of goods and services to customers during the period, including aircraft maintenance, overhauls and the associated rotable and consumable parts. Training and other non-Airline related activities are also included due to their relatively small impact on the segment's results.

Segment revenues and results

The segment result is profit before tax, IPO expenses, unrealised gains and losses on fuel and foreign exchange and reversal of negative goodwill amortisation. Historically, the segment financial information used has been based on UK GAAP and, as a consequence of this, the profit measure excludes amortisation of negative goodwill (for the year to 31 March 2010 only), with unrealised gains and losses on fuel and foreign exchange and IPO expenses being dealt with separately outside of the segment results for both years. Neither of these items is expected to feature in the year to 31 March 2012 and they both affect the segment result only. In future years, segment information will be based on adjusted IFRS numbers.

Transfer prices between business segments are set on an arm's length basis.

	2011 £m	2010 £m
Segment revenues:
Airline	571.5	542.3
Aviation Services	39.7	45.2
Inter-segment sales	(15.7)	(17.0)
Group revenues (excluding investment income)	595.5	570.5
Segment results:
Airline segment result (including finance costs of £3.4m in 2011 and £3.0m in 2010)	5.7	6.2
Aviation Services segment result	(1.5)	1.6
Total segment results	4.2	7.8
Reconciliation to IFRS:
Reversal of negative goodwill amortisation	–	(0.4)
	4.2	7.4
Other items not allocated:
Unrealised (losses)/gains on fuel and foreign exchange hedges	(6.8)	18.3
IPO expenses	(1.7)	(1.1)
(Loss)/profit before tax	(4.3)	24.6

For the purposes of monitoring segment performance and allocation resources between segments the Operating Board monitors the tangible, intangible and financial assets attributable to each segment. All assets are allocated to reportable segments with the exception of revalued open fuel and foreign exchange derivatives and tax assets and liabilities. Assets used jointly by reportable segments are allocated on the basis of the revenues earned by individual reportable segments.

	2011 £m	2010 £m	2009 £m
Segment assets:
Airline	296.1	252.0	282.6
Aviation Services	83.5	61.0	46.3
Total segment assets	379.6	313.0	328.9
Unallocated assets	34.5	17.1	34.6
Consolidated total assets	414.1	330.1	363.5
Segment liabilities:
Airline	(219.7)	(231.2)	(257.4)
Aviation Services	(71.3)	(64.0)	(46.1)
Total segment liabilities	(291.0)	(295.2)	(303.5)
Unallocated liabilities	(15.2)	(13.4)	(56.4)
Consolidated total liabilities	(306.2)	(308.6)	(359.9)
Other segment information
		2011 £m	2010 £m
Depreciation and amortisation:
Airline		15.0	15.8
Aviation Services		0.9	1.0
		15.9	16.8
Investment income:
Airline		0.3	0.2
Additions to non-current assets:
Airline		15.5	80.5

Geographical information

The Group's revenue from external customers by geographical location is detailed below:

	2011 £m	2010 £m
Revenue from external customers:
United Kingdom	521.8	483.4
Rest of Europe	73.7	87.1
Consolidated revenue	595.5	570.5

Aviation Services 28.1 10.5

No non-current assets were based outside of the United Kingdom for any of the periods presented.

Information about major customers

None of the Group's customers exceeded 10% of its revenues.

43.6 91.0

Notes to the consolidated financial statements

Continued

6. Operating (loss)/profit

	2011 £m	2010 £m
This has been arrived at after charging/(crediting):
Depreciation of property, plant and equipment	14.9	15.7
Amortisation of intangible assets	1.0	1.1
Profit on the disposal of property, plant and equipment	(0.4)	(0.2)
Operating leases:
Land and buildings	3.2	3.4
Plant and machinery	0.2	0.2
Aircraft	79.8	68.1
Foreign exchange losses/(gains)	2.6	(1.0)
	2011 £m	2010 £m
Auditor's remuneration
The analysis of auditor's remuneration is as follows:
Fees payable to the Company's auditor and its associates for the audit of the Company's annual financial statements	–	–
Non-statutory audit of interim financial statements	0.2	0.2
Audit of the financial statements of subsidiaries pursuant to legislation	0.2	0.2
Total audit fees	0.4	0.4
Fees payable to the Company's auditor and its associates in respect of:
Tax services	0.2	0.1
Expenses in connection with the IPO and other strategic projects	0.8	0.4
All other services	0.1	0.1
Total non-audit fees	1.1	0.6

Fees payable to Deloitte LLP and their associates for non-audit services to the Company are not required to be disclosed because the financial statements are required to disclose such fees on a consolidated basis.

7. IPO expenses

During the current and previous financial year, the Group incurred costs associated with listing on the London Stock Exchange. These costs are sufficiently unusual in nature to be presented separately on the face of the income statement. Costs specifically in respect of raising new equity have been deducted from share premium. Costs that relate equally to the listing process and raising new equity have been split between the income statement and the share premium account (see note 28).

8. Staff costs

The average monthly number of employees (including Executive Directors) was:

	2011 No.	2010 No.
Flight and maintenance	1,447	1,431
Technical support services	809	828
Administration	530	539
	2,786	2,798

The Group's aggregate payroll costs in respect of those persons were as follows:
	£m	£m
Wages and salaries	91.3	91.7
Social security costs	9.8	10.1
Other pension costs (see note 34)	5.9	5.5
Share-based payments (see note 33)	0.5	0.4
Amounts payable to temporary staff	2.8	4.0
	110.3	111.7

In addition to the above, an actuarial gain of £6.1m (2010: actuarial loss of £4.7m) was recognised in the consolidated statement of comprehensive income in respect of defined benefit pension schemes.

9. Investment income

	2011 £m	2010 £m
Interest on bank deposits	0.3	0.2

10. Finance costs

	2011	2010
	£m	£m
Interest expense on bank loans	2.6	4.2
Less: interest capitalised into qualifying assets	–	(0.1)
	2.6	4.1

11. Other gains and losses

	2011 £m	2010 £m
Gains arising on retranslation of foreign currency loans and deposits	1.0	1.0
Amounts arising on pension scheme (see note 34)	(2.1)	(0.1)
	(1.1)	0.9

12. Tax on (loss)/profit on ordinary activities

	2011 £m	2010 £m
Current tax
United Kingdom corporation tax:
Current tax on income for the year at 28% (2010: 28%)	–	–
Total current tax	–	–
Deferred tax

Origination of temporary differences	(7.1)	(5.3)
Reversal of tax losses recognised	(1.0)	7.7
	(8.1)	2.4
Total (credit)/charge for the year	(8.1)	2.4

The difference between the total tax shown above and the amount calculated by applying the standard rate of United Kingdom corporation tax to the (loss)/profit before tax is as follows: ^{2011 2010}

	£m	£m
(Loss)/profit on ordinary activities before tax	(4.3)	24.6
Tax on (loss)/profit on ordinary activities before tax at 28% (2010: 28%)	(1.2)	6.9
Factors affecting (credit)/charge for the year
Items outside the scope of UK taxation	(1.0)	(1.8)
Effect of tax losses	(1.2)	(2.7)
Capital allowances in excess of depreciation	(4.7)	–
Total tax (credit)/charge for the year	(8.1)	2.4

The reduction in the corporation tax rate to 26%, from 6 April 2011 is not anticipated to materially affect the tax charge.

Notes to the consolidated financial statements

Continued

13. Earnings per share

The calculation of the basic, diluted, adjusted basic and adjusted diluted earnings per share is based on the following data:

	2011 £m	2010 £m
Earnings
Earnings for the purposes of unadjusted earnings per share being net profit attributable to owners of the Group	3.8	22.2
Add back/(deduct):
IPO expenses incurred	1.7	1.1
Unrealised losses/(gains) on fuel and foreign exchange hedges	6.8	(18.3)
Effect of tax on the above adjustments	(2.4)	4.8
Earnings for the purposes of adjusted earnings per share	9.9	9.8
	No.	No.
Weighted average number of ordinary shares for the purposes of basic earnings per share	59,109,256	52,500,000
Effect of diluted potential ordinary shares:
Share options	177,159	–
Weighted average number of ordinary shares for the purposes of diluted earnings per share	59,286,415	52,500,000
Earnings per ordinary share – basic and diluted	£0.06	£0.42
Adjusted earnings per share – basic and diluted	£0.17	£0.19

Number of shares in issue for both periods has been adjusted to reflect the bonus issue of 24 new shares for each existing share on 25 November 2010 (see note 27) in order to provide a meaningful comparative.

14. Intangible fixed assets

	Landing rights	Computer software	Total
	£m	£m	£m
Cost
At 31 March 2009	8.5	6.8	15.3
Additions	–	0.4	0.4
At 31 March 2010	8.5	7.2	15.7
Additions	–	1.0	1.0
At 31 March 2011	8.5	8.2	16.7
Amortisation
At 31 March 2009	–	4.2	4.2
Amortisation for the year	–	1.1	1.1
At 31 March 2010	–	5.3	5.3
Amortisation for the year	–	1.0	1.0
At 31 March 2011	–	6.3	6.3
Net book value
At 31 March 2009	8.5	2.6	11.1
At 31 March 2010	8.5	1.9	10.4
At 31 March 2011	8.5	1.9	10.4

Landing rights are not amortised as they are considered to have an indefinite life. These assets have been impairment tested at each balance sheet date with reference to discounted cash flows arising for each route associated with these landing rights.

15. Property, plant and equipment

	Assets under	Land and	Plant, equipment
	construction £m	buildings £m	and motor vehicles £m	Aircraft £m	Total £m
Cost
At 31 March 2009	–	11.7	12.7	163.8	188.2
Additions	3.2	–	1.3	86.1	90.6
Disposals	–	(0.2)	(1.4)	(82.2)	(83.8)
Transfers to assets held for sale	–	–	–	(1.6)	(1.6)
At 31 March 2010	3.2	11.5	12.6	166.1	193.4
Additions	9.8	0.1	1.1	31.6	42.6
Disposals	–	–	–	(21.3)	(21.3)
Transfers to land and buildings	(13.0)	13.0	–	–	–
At 31 March 2011	–	24.6	13.7	176.4	214.7
Accumulated depreciation and impairment
At 31 March 2009	–	2.9	7.5	44.0	54.4
Depreciation charge for the year	–	0.5	1.6	13.6	15.7
Disposals	–	(0.2)	(1.3)	(4.2)	(5.7)
Transfers to assets held for sale	–	–	–	(0.9)	(0.9)
At 31 March 2010	–	3.2	7.8	52.5	63.5
Depreciation charge for the year	–	0.5	1.4	13.0	14.9
At 31 March 2011	–	3.7	9.2	65.5	78.4
Net book value
At 31 March 2009	–	8.8	5.2	119.8	133.8
At 31 March 2010	3.2	8.3	4.8	113.6	129.9
At 31 March 2011	–	20.9	4.5	110.9	136.3

The transfer between assets under construction and land and buildings represents the costs associated with the Flybe Training Academy building that was completed in February 2011.

16. Other non-current assets

	2011 £m	2010 £m	2009 £m
Aircraft deposits	8.6	7.5	5.3
Aircraft operating lease prepayments	13.8	16.3	18.3
Other receivables	10.0	8.3	2.4
	32.4	32.1	26.0

17. Inventories

	2011 £m	2010 £m	2009 £m
Work in progress	0.9	1.1	1.1
Goods for resale	0.8	0.7	1.0
Aircraft consumables	4.1	4.3	5.4
	5.8	6.1	7.5

Notes to the consolidated financial statements

Continued

18. Trade and other receivables

	2011 £m	2010 £m	2009 £m
Amounts receivable	32.8	30.2	33.1
Allowance for doubtful debts	(0.1)	(0.7)	–
Trade receivables, net	32.7	29.5	33.1
Amounts recoverable on contracts	1.3	1.3	1.4
Other receivables	26.1	22.2	14.8
Aircraft deposits	12.1	0.7	25.9
Prepayments	16.6	18.0	17.3
	88.8	71.7	92.5

Trade receivables disclosed above are classified as loans and receivables and are therefore measured at amortised cost.

Trade receivables disclosed above include amounts (see below for aged analysis) which are past due at the reporting date but against which the Group has not recognised an allowance for doubtful receivables because there has not been a significant change in credit quality and the amounts (which include interest accrued after the receivable is overdue) continue to be considered recoverable.

The allowance for doubtful debts arises from trade customers in liquidation or with significantly overdue debts. The impairment gain recognised in the year to 31 March 2011 was £0.6m (2009/10: £0.7m loss; 2008/09: £nil).

Ageing of trade receivables that are not provided for:

	2011 £m	2010 £m	2009 £m
Not yet due	25.5	24.5	29.0
30 to 60 days overdue	3.5	1.3	1.8
60 to 90 days overdue	1.6	1.5	1.0
90+ days	2.1	2.2	1.3
	32.7	29.5	33.1

19. Cash, cash equivalents and restricted cash

	2011	2010	2009
	£m	£m	£m
Cash and cash equivalents	87.7	46.1	44.7
Current restricted cash	9.3	8.0	3.6
Non-current restricted cash	8.6	8.0	8.3
	105.6	62.1	56.6
Restricted cash comprises:
Aircraft operating lease deposits	7.2	6.0	6.3
Aircraft maintenance deposits	2.0	2.0	3.0
Other (see note 30)	8.7	8.0	2.6
	17.9	16.0	11.9

Cash and cash equivalents comprise cash and short-term bank deposits with an original maturity of three months or less. The carrying amount of cash, cash equivalents and restricted cash is approximately equal to their fair value.

20. Assets held for sale

At 31 March 2009, it was determined that the carrying value of the owned BAe146 aircraft within the fleet and associated rotables held by the Group would be recovered principally through a sale transaction rather than through continuing use. Consequently those assets, with a fair value of £1.6m at 31 March 2009, were reclassified, from property, plant and equipment to assets held for sale. These assets were fully disposed of by 31 March 2010 and generated a gain on disposal of £0.3m.

At 31 March 2010, it was determined that the carrying value of the owned Embraer 145 rotables held by the Group, would be recovered through a sale transaction as the aircraft type was withdrawn from the fleet during the year. Consequently those assets, with a fair value of £0.6m at 31 March 2010, were reclassified from property, plant and equipment to assets held for sale.

At 31 March 2011, no further reclassifications were made and the net book value of Embraer 145 rotables has reduced to £0.4m as a result of disposals during the year.

21. Trade and other payables

	2011 £m	2010 £m	2009 £m
Trade payables	20.1	28.3	28.4
Accrued expenses	34.1	34.8	24.2
Other payables	26.2	25.2	30.3
	80.4	88.3	82.9

The average credit period taken for trade purchases is 14 days (2010: 24 days; 2009: 21 days). The carrying amount of trade payables approximates their fair value. The Group manages credit terms with its suppliers in a way to ensure payments are made to them on commercially acceptable terms.

22. Deferred income

	2011 £m	2010 £m	2009 £m
Current	64.2	64.4	52.8
Non-current	14.3	9.4	11.9
	78.5	73.8	64.7

Deferred income includes government grants totalling £7.1m (2010 and 2009: £nil) for capital financial support towards the capital costs of the Flybe Training Academy building, a national training centre for the airline industry. Of this, £0.1m will be released within one year and £7.0m will be released after more than one year.

Government grants were provided by the South West of England Regional Development Agency and the Learning Skills Council (and its successor) and are subject to various conditions. These institutions may be entitled to clawback all or part of the grant up to 31 December 2020 if the Group ceases to operate the building as a training centre providing education and training to internal and external delegates.

Notes to the consolidated financial statements

Continued

23. Borrowings

This note provides information about the contractual terms of the Group's interest bearing loans and borrowings. For more information about the Group's exposure to interest rate and foreign currency risk, as well as the repayment profiles, see note 35.

Secured bank loans

	2011 £m	2010 £m	2009 £m
Amount due for settlement within 12 months	16.9	9.7	33.1
Amount due for settlement after 12 months	66.8	73.8	78.2
	83.7	83.5	111.3

Terms
	2011		2010		2009
	Interest rate %	Amount £m	Interest rate %	Amount £m	Interest rate %	Amount £m
Floating rate sterling loans	2.6	41.6	3.6	43.3	5.4	58.0
Floating rate US dollar loans	3.6	29.6	3.1	27.2	4.8	37.6
Fixed rate sterling loans	7.0	11.6	7.0	13.0	7.0	14.4
Fixed rate US dollar loans	6.1	0.9	–	–	4.9	1.3
		83.7		83.5		111.3

The interest rate above relates to the weighted average for the year or period. Floating rates are based upon LIBOR with margins of between 1.0% and 3.8%. The loans are repayable over a period to 31 January 2023. All loans are secured on specific aircraft assets or land and buildings. As at 31 March 2011, one of the loans, with £6.4m outstanding, contained financial covenants which had been complied with.

At 31 March 2011, the Group had £7.7m (2010: £8.2m; 2009: £1.0m) of unused borrowing facilities in the form of guarantees and a £3.8m unused overdraft facility (2010 and 2009: £3.8m).

24. Derivative financial instruments

	2011 £m	2010 £m	2009 £m
Non-current assets
Forward foreign currency contracts/options	–	–	5.6
Derivative instruments classified as fair value through profit or loss	–	–	5.6
Forward foreign currency contracts/options	0.1	–	–
Derivative instruments that are designated and effective as hedging instruments carried at fair value	0.1	–	–
Total derivative financial assets held as non-current assets	0.1	–	5.6
Current assets
Forward foreign currency contracts/options	–	7.5	19.8
Fuel contracts/options	–	2.6	0.4
Derivative instruments classified as fair value through profit or loss	–	10.1	20.2
Forward foreign currency contracts/options	0.7	–	–
Fuel contracts/options	23.7	–	–
Derivative instruments that are designated and effective as hedging instruments carried at fair value	24.4	–	–
Total derivative financial assets held as current assets	24.4	10.1	20.2
Current liabilities
Fuel contracts/options	–	(2.9)	(41.9)
Derivative instruments classified as fair value through profit or loss	–	(2.9)	(41.9)
Forward foreign currency contracts/options	(3.3)	–	–
Derivative instruments that are designated and effective as hedging instruments carried at fair value	(3.3)	–	–
Total derivative financial assets held as current liabilities	(3.3)	(2.9)	(41.9)
Non-current liabilities
Fuel contracts/options	–	–	(5.2)
Derivative instruments classified as fair value through profit or loss	–	–	(5.2)

Further details of derivative financial instruments are provided in note 35.

25. Deferred tax

The following movements in the major deferred tax liabilities and (assets) were recorded by the Group during the current and prior reporting period.

	Property, plant and equipment £m	Intangible assets £m	Employee benefits £m	Financial instruments £m	Tax losses £m	Total £m
At 31 March 2009	9.3	1.2	(0.3)	(0.1)	(8.2)	1.9
Charge/(credit) to income statement	(8.8)	–	0.3	3.2	7.7	2.4
At 31 March 2010	0.5	1.2	–	3.1	(0.5)	4.3
Credit to income statement	(4.0)	–	–	(2.8)	(1.0)	(7.8)
Charge to equity	–	–	–	5.5	–	5.5
Effect of rate change	–	(0.1)	–	(0.2)	–	(0.3)
At 31 March 2011	(3.5)	1.1	–	5.6	(1.5)	1.7

Deferred tax assets and liabilities are attributable to the following:

	Assets			Liabilities
	2011 £m	2010 £m	2009 £m	2011 £m	2010 £m	2009 £m
Property, plant and equipment	8.5	6.6	–	(5.0)	(7.1)	(9.3)
Intangible assets	–	–	–	(1.1)	(1.2)	(1.2)
Employee benefits	–	–	0.3	–	–	–
Financial instruments	–	–	0.1	(5.6)	(3.1)	–
Tax value of loss carry forwards	1.4	0.5	8.2	0.1	–	–
Tax assets/(liabilities)	9.9	7.1	8.6	(11.6)	(11.4)	(10.5)

Where carried-forward losses or unclaimed capital allowances are available, they are recognised to the extent that it is probable sufficient taxable profits will be available to allow all or part of the asset to be recovered. At each balance sheet date, the Group recognised deferred tax assets primarily on previously unrecognised losses or unutilised capital allowances. The recognition of an asset, as well as the composition of that asset, was a result of management's judgement that it was probable that it would realise such deferred tax assets in future periods, when taking into consideration the availability of feasible tax planning strategies and estimates of future taxable income in which these operating losses and other tax attributes exist.

The Group has significant deferred assets due to the accumulation of accelerated capital allowances in prior periods. The realisation of these assets is not assured and is dependent on the generation of sufficient taxable income in the future. The Directors have exercised judgement in determining the extent of the realisation of these losses based upon estimates of future taxable income. Where there is an expectation that on the balance of probabilities there will not be sufficient taxable profits to utilise these assets they have not been recognised. If actual events differ from the Directors' estimates, or to the extent that these estimates are adjusted in the future, any recognition in a future of previously generated assets would have a material impact on the Group's effective tax rates.

The Group has not recognised a deferred tax asset in relation to the following:

	2011 £m	2010 £m	2009 £m
Capital allowances	18.9	53.4	51.6
Unused tax losses available for offset in future	4.9	4.9	6.1
Other timing differences	0.4	–	7.6
	24.2	58.3	65.3

No deferred tax asset has been recognised in respect of these items as it is not considered probable that there will be future taxable profits available. These unutilised deferred tax assets may be carried forward indefinitely.

During the period the Group has reflected the change in the enacted tax rate from 28% to 26%, which is effective from 1 April 2011. The Government has also indicated that it intends to enact future reductions in the main tax rate of 1% each year down to 23% by 1 April 2014. The future 1% main tax rate reductions are not expected to have a material impact on the financial statements.

Notes to the consolidated financial statements

Continued

26. Provisions

	2011 £m	2010 £m	2009 £m
Leased aircraft maintenance provision	48.7	43.8	41.6
BA Connect onerous lease provision	–	0.1	1.8
	48.7	43.9	43.4
	£m	£m	£m
Current	28.3	24.7	31.3
Non-current	20.4	19.2	12.1
	48.7	43.9	43.4

Aircraft maintenance provisions are made in respect of contractual obligations to maintain aircraft under operating lease contracts. The amount and timing of the maintenance costs are dependent on future usage of the relevant aircraft. Typically this will be utilised within two years.

The onerous lease provision relates to the costs of leased aircraft acquired with the BA Connect business that was acquired in 2007 that were assessed as being above the market rate for the respective aircraft.

The Group's provisions are as follows:

	Leased aircraft maintenance £m	BA Connect onerous lease provision £m	Total £m
At 31 March 2009	41.6	1.8	43.4
Additional provision in the year	22.9	–	22.9
Utilised during the year	(20.7)	(1.7)	(22.4)
At 31 March 2010	43.8	0.1	43.9
Additional provision in the year	26.4	–	26.4
Utilisation of provision	(21.5)	(0.1)	(21.6)
At 31 March 2011	48.7	–	48.7

The additional provision in the year is within maintenance charges shown in the consolidated income statement.

27. Share capital

	2011 £000	2010 £000	2009 £000
Authorised
2,301,500,000 ordinary shares of 1p each (2010 and 2009: 654,150)	23,015	7	7
Nil 'A' ordinary shares of 1p each (2010 and 2009: 1,445,850)	–	14	14
Nil cumulative redeemable preference shares (2010 and 2009: 99,000,000)	–	990	990
Nil redeemable preference shares (2010 and 2009: 2,150,000,000)	–	21,500	21,500
Issued and fully paid
75,152,881 ordinary shares of 1p each (2010 and 2009: 654,150)	752	7	7
Nil 'A' ordinary shares of 1p each (2010 and 2009: 1,445,850)	–	14	14

On 25 November 2010, 34,700,400 'A' ordinary shares of 1 pence each and 15,699,600 ordinary shares were issued to the Shareholders at par by way of a bonus issue of 24 new shares for each existing share.

On 6 December 2010, 36,146,250 authorised and issued 'A' ordinary shares of 1 pence each were reclassified as 36,146,250 ordinary shares of 1 pence each. The 99,000,000 authorised but unissued cumulative redeemable preference shares of 1 pence each were reclassified as unissued ordinary shares of 1 pence each. Also 2,150,000,000 authorised but unissued redeemable preference shares of 1 pence each were reclassified as 2,150,000,000 unissued ordinary shares of 1 pence each.

On 15 December 2010, 22,372,881 ordinary shares of 1 pence each were issued for cash consideration of £66.0m on the Company's listing on the London Stock Exchange.

On 24 January 2011, 280,000 ordinary shares of 1 pence each were issued for cash consideration of £2,800 to satisfy the Group's obligations under the All Employees Share Scheme.

28. Share premium account

	£m
Balance at 31 March 2009 and 31 March 2010	1.0
Bonus share issue	(0.5)
Premium arising on IPO	65.8
Expenses of issue of equity shares	(5.7)
Balance at 31 March 2011	60.6

29. Retained earnings/(deficit)

	£m
Balance at 31 March 2009	(26.6)
Net profit for the year	22.2
Actuarial loss on defined benefit pension scheme	(4.7)
Credit to equity for equity-settled share-based payments	0.4
Balance at 31 March 2010	(8.7)
Net profit for the year	3.8
Actuarial gain on defined benefit pension scheme	6.1
Credit to equity for equity-settled share-based payments	0.5
Balance at 31 March 2011	1.7

30. Contingencies

The Group has entered into arrangements to guarantee the Group's credit card arrangements and has placed bonds in favour of various handling agents, fuel suppliers and customs offices:

	2011 £m	2010 £m	2009 £m
Credit card arrangements	14.0	14.0	14.0
Bonds	8.2	7.8	10.0
Total	22.2	21.8	24.0
Cash deposited to secure the above arrangements	8.7	8.0	2.6

In order to secure some of the arrangements highlighted above, the Group deposited amounts with its bankers that are classified as part of other restricted cash (note 19).

31. Operating lease arrangements

At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non cancellable operating leases, which fall due as follows:

		Property and equipment			Aircraft
	2011 £m	2010 £m	2009 £m	2011 £m	2010 £m	2009 £m
Less than one year	3.2	3.7	2.9	79.3	71.2	61.6
Between one and two years	2.0	1.7	2.0	77.7	70.2	59.8
Between two and five years	3.1	2.9	3.1	211.2	199.8	174.8
More than five years	12.3	4.8	5.1	188.5	226.1	206.8
	20.6	13.1	13.1	556.7	567.3	503.0

Notes to the consolidated financial statements

Continued

32. Capital commitments

The Group has, over time, contractually committed to the acquisition of aircraft with a total list price before escalations and discounts as follows:

	2011	2010	2009
	£m	£m	£m
Aircraft	858.0	65.9	191.8

It is intended that these aircraft will be financed partly though cash flow and partly through external financing and leasing arrangements. The number of aircraft covered by these arrangements is as follows:

	No.	No.	No.
Bombardier Q400	3	4	11
Embraer E-Series	35	–	–
Total	38	4	11

The Group is also contractually committed to spend £nil as at 31 March 2011 (2010: £7.7m; 2009: £nil) on the construction of a new building for Flybe's Training Academy.

33. Share-based payments

Pre-admission Share Scheme

The Employees' Trust had a share distribution scheme open to qualifying employees whereby such employees could acquire beneficial interests in a given number of shares in Flybe Group plc which were held by the Employee Trust. The employees had an option to sell their shares in the event of a flotation or trade sale. Shares were forfeited if the employee left the Group before a flotation or trade sale.

During December 2010, the Group raised capital by way of an IPO and as a result ownership of these share awards was transferred to the employee. The shares awarded were accounted for as equity-settled.

This table sets out share awards and their exercise price prior to the bonus issue of 24 new shares for each existing share on 25 November 2010 (see note 27):

		2011		2010
	Number of share options	Weighted average exercise price (£)	Number of share options	Weighted average exercise price (£)
Outstanding at beginning of period	94,860	–	98,292	–
Forfeited during the period	(3,150)	–	(3,432)	–
Exercised during the period	(91,710)	–	–	–
Outstanding at the end of the period	–	–	94,860	–
Exercisable at the end of the period	–	–	–	–

The fair value of services received in return for the beneficial interest in shares granted was measured by reference to the fair value of the beneficial interest in the share granted. No share awards were capable of being exercised prior to 31 March 2010 and all share awards were exercised as a result of the IPO in December 2010.

The total expense recognised in the income statement to reflect the fair value of the awards given in the year to 31 March 2011 was £0.4m (2010: £0.4m).

33. Share-based payments continued Performance Share Plan ('PSP')

The Company has a share option scheme under which all employees of the Group may be granted awards. Options are exercisable at nil consideration. The vesting period is three years. If the options remain unexercised after a period of five years from the date of grant the options expire. Options are forfeited if the employee leaves the Group before the options vest.

The vesting of these options are subject to the performance of Flybe over a three-year period. 70% of the award will be subject to a target based on the Company's earnings per share at the end of the performance period and 30% of the award will be subject to Flybe's total shareholder return relative to a comparator group. The comparator group comprises a number of European airlines and other regional transport companies, as set out in the directors' remuneration report.

		2011
		Weighted average
	Number of	exercise price
	share options	(£)
Granted during and outstanding at the end of the period	937,146	£nil
Exercisable at the end of the period	–	–

On 21 January 2011, 937,146 shares were awarded. The share price on the date of the award was £3.25. No shares were forfeited or exercised during the year. The options outstanding at 31 March 2011 had a weighted average exercise price of £nil and will be available for exercise in 2.1 years and will expire after 4.1 years.

The aggregate of the estimated fair values of the options granted during the year is £1.5m. The inputs into the Monte Carlo valuation are as follows:

	2011
Weighted average share price	£3.25
Weighted average exercise price	£nil
Expected volatility	46%
Risk-free rate of interest	1.3%
Expected dividend yields	n/a
Forfeiture	5%

The Group recognised expenses of £0.1m in relation to this PSP scheme in the year to 31 March 2011.

Share Incentive Plan ('SIP')

The SIP is open to all UK employees with at least 12 months service as at 15 December 2010. The 100 'free' shares were allocated to all eligible employees and are held in the SIP trust for a period of three years. If during the three-year holding period an individual ceases to be an employee or otherwise attempts to withdraw their 'free' shares from the SIP, the shares shall be forfeited.

On 24 January 2011, 280,000 ordinary shares were issued by the Company for this purpose. The calculation of the charge is based on the market value at the date of allocation of £3.25 and under the assumption that 75% of shares issued will be redeemed in three years.

34. Employee benefits

Defined contribution schemes

The Group operates defined contribution retirement schemes for all qualifying employees in the United Kingdom. The assets of the schemes are held separately from those of the Group in funds under the control of Trustees.

The total cost charge to income of £5.9m (2010: £5.5m) represents contributions payable to these schemes by the Group at rates specified in the rules of the plans.

Defined benefit schemes

The defined benefit scheme operated by the Group was acquired on 5 March 2007 as part of the acquisition of BA Connect. The scheme was closed to contributions during that year and its members now contribute to the Group's defined contribution scheme. No asset is recognised in respect of the net surplus because the Group does not have sufficient certainty that any asset will eventually be realised.

Notes to the consolidated financial statements

Continued

34. Employee benefits continued

The most recent actuarial valuations of plan assets and the present value of the defined benefit obligation were carried out at 31 March 2010. The present value of the defined benefit obligation, the related current service cost and past service cost were measured using the projected unit credit method.

	Valuation at
	2011 %	2010 %	2009 %
Key assumptions used:
Discount rate	5.6	5.7	6.4
Expected return on scheme assets	6.1	6.3	6.6
Expected rate of salary increases	n/a	n/a	n/a
Future pension increases	3.6/2.4	3.6/2.5	3.25/2.5
Inflation	3.5	3.6	3.25

The post-retirement mortality rate assumed at 31 March 2011 was based on the Small Area Population Statistics ('SAPS') tables with a minus one year age rating and the Continuous Mortality Investigation ('CMI') 2009 1% long-term rate projections (2010 and 2009 the mortality rate was based on PA92 tables with long cohort projection).

As required by the Scheme Rules, the Scheme valuation applies the statutory basis of revaluation under the prevailing revaluation order contained in legislation. The current revaluation order uses the September 2010 Consumer Prices Index ('CPI') rather than the Retail Prices index ('RPI'). The effect of this change in the statutory basis of revaluation has not been quantified and may be material.

The sensitivities regarding the principal assumptions used to measure the scheme liabilities are set out below:

		2011 £m	2010 £m	2009 £m
Assumption	Change in assumption
Discount rate	Increase by 0.1%	(2.5)	(2.5)	(2.0)
Rate of inflation	Increase by 0.1%	1.7	2.0	1.5

The amount included in the balance sheet arising from the Group's obligations in respect of its defined retirement benefit schemes is as follows:

	2011 £m	2010 £m	2009 £m
Present value of defined benefit obligations	(110.5)	(116.7)	(91.7)
Fair value of scheme assets	115.1	111.9	95.0
Net surplus/(deficit)	4.6	(4.8)	3.3
Unrecognised actuarial gains	(4.6)	–	(3.3)
Recognised liability for defined benefit obligations	–	(4.8)	–

Amounts recognised in income in respect of these defined benefit schemes are as follows:

	2011 £m	2010 £m
Expected return on pension scheme assets	(4.5)	(5.7)
Interest on defined benefit pension plan obligation	6.6	5.8
Total	2.1	0.1

The expense is recognised in the following line items in the consolidated income statement:

	2011 £m	2010 £m
Other gains and losses (note 11)	2.1	0.1

Cumulative actuarial gains and losses reported in the consolidated statement of comprehensive income are:

	2011 £m	2010 £m
Opening cumulative value	(1.6)	3.1
Recognised in the year	6.1	(4.7)
Closing cumulative value	4.5	(1.6)

34. Employee benefits continued

Movements in the present value of defined benefit obligations were as follows:

	2011 £m	2010 £m
At 1 April	116.7	91.7
Interest cost	6.6	5.8
Benefits paid	(3.0)	(3.3)
Actuarial (gains)/losses	(9.8)	22.5
At 31 March	110.5	116.7

The triennial valuation as at 31 March 2010 reported a net surplus on the actuarial basis of £2.5m. A tax charge of £1.9m in relation to the Isle of Man portion of the scheme was paid and reported as part of other gains and losses. This was partially offset by a £0.8m contribution that was paid into the plan by the former owner of the business to which the scheme relates, which was recorded within other operating gains.

Movements in fair value of scheme assets were as follows:

	2011 £m	2010 £m
At 1 April	111.9	95.0
Expected return on plan assets	4.5	5.7
Employer contributions	0.8	–
Actuarial gains	0.9	14.5
Benefits paid	(3.0)	(3.3)
At 31 March	115.1	111.9

The analysis of the scheme assets and the return on those assets at the balance sheet date were as follows:

	2011 £m	2010 £m	2009 £m
Fair value of assets
Equities	43.0	42.9	26.9
Bonds and gilts	71.6	68.5	68.0
Cash	0.5	0.5	0.1
	115.1	111.9	95.0
Actual return on scheme assets	3.9%	5.1%	6.6%

In conjunction with the trustees, the Group has recently conducted an asset-liability review for its defined benefit pension scheme. The results of this review are used to assist the trustees and the Group to determine the optimal long-term asset allocation with regard to the structure of the liabilities of the scheme. They are also used to assist the trustees in managing the volatility in the underlying investment performance and risk of a significant increase in the defined benefit deficit by providing information used to determine the scheme's investment strategy.

The five-year history of experience adjustments is as follows:

	2011 £m	2010 £m	2009 £m	2008 £m	2007 £m
Present value of defined benefit obligations	(110.5)	(116.7)	(91.7)	(101.2)	(109.8)
Fair value of scheme assets	115.1	111.9	95.0	105.2	106.5
Adjustment to reflect unrecognised asset	(4.6)	–	(3.3)	(4.0)	–
Deficit in the scheme	–	(4.8)	–	–	(3.3)
Experience adjustments on scheme liabilities	9.8	(22.5)	(12.8)	(13.4)	–
Percentage on scheme liabilities	8.9%	19.3%	14.0%	13.2%	–
Experience adjustments on scheme assets	0.9	14.5	(13.4)	(7.7)	1.4
Percentage of scheme assets	0.8%	13.0%	14.1%	7.3%	1.3%

The estimated amounts of contributions expected to be paid to the scheme during the current financial year is £nil.

Notes to the consolidated financial statements

Continued

35. Financial instruments

Significant accounting policies

Details of significant accounting policies and methods adopted, including the criteria for recognition, the basis for measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 3 to the financial statements.

Categories of financial instruments

	2011		2010		2009
	Carrying value £m	Fair value £m	Carrying value £m	Fair value £m	Carrying value £m	Fair value £m
Financial assets
Cash, cash equivalents and restricted cash	105.6	105.6	62.1	62.1	56.6	56.6
Loans and receivables:
Trade and other receivables	72.8	72.8	66.3	66.3	55.3	55.3
Derivative instruments at fair value through profit and loss	–	–	10.1	10.1	25.8	25.8
Derivative instruments in designated hedge accounting relationships	24.5	24.5	–	–	–	–
Financial liabilities
Liabilities held at amortised cost:
Trade and other payables	(27.3)	(27.3)	(38.2)	(38.2)	(40.4)	(40.4)
Debt	(83.7)	(94.5)	(83.5)	(100.1)	(111.3)	(142.2)
Derivative instruments at fair value through profit and loss	–	–	(2.9)	(2.9)	(47.1)	(47.1)
Derivative instruments in designated hedge
accounting relationships	(3.3)	(3.3)	–	–	–	–

Valuation techniques and assumptions applied for the purposes of measuring fair value

The fair values of financial assets and financial liabilities are determined as follows:

• • The fair values of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices.
• • The fair values of other financial assets and financial liabilities (excluding derivative instruments) are determined with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions and dealer quotes for similar instruments.
• • The fair values of derivative instruments are calculated using quoted prices. Where such prices are not available, a discounted cash flow analysis is performed using the applicable yield curve for the duration of the instruments for non-optional derivatives, and option pricing models for optional derivatives. Foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching maturities of the contracts. Interest rate swaps are measured at the present value of future cash flows estimated and discounted based on the applicable yield curves derived from quoted interest rates.

35. Financial instruments continued

Financial instruments recorded at fair value at 31 March 2011

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable:

• • Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;
• • Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
• • Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

	Level 1 £m	Level 2 £m	Level 3 £m
Foreign exchange derivatives	–	(2.6)	–
Fuel derivatives	–	23.8	–
At 31 March 2011	–	21.2	–
Foreign exchange derivatives	–	7.5	–
Fuel derivatives	–	(0.3)	–
At 31 March 2010	–	7.2	–
Foreign exchange derivatives	–	25.4	–
Fuel derivatives	–	(46.7)	–
At 31 March 2009	–	(21.3)	–

Financial risk management objectives

The Group is exposed to financial risks in respect of:

• • liquidity and management of working capital
• • foreign currency
• • interest rates
• • liquidity
• • credit risk
• • fuel price

A description of each risk, together with the policy for managing risk is given below. To manage these risks, the Group uses various derivative financial instruments, including foreign currency forward contracts and commodity contracts. These derivative financial instruments are generally held to maturity and are not actively traded. The Group enters into these arrangements with the goal of hedging its operational and balance sheet, income statements and cash flow risk. However, the Group's exposure to commodity price and currency exchange fluctuations cannot be neutralised completely.

Liquidity and working capital risk management

The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt, which includes the borrowings (note 23), cash and cash equivalents (note 19) and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in the consolidated statement of changes in equity and notes 27 to 29.

Notes to the consolidated financial statements

Continued

35. Financial instruments continued

Gearing ratio

The Group's board reviews the capital structure on a regular basis. As part of this review, the board considered the cost of capital and the risks associated with each class of capital. The gearing ratio at the year end is as follows:

	2011 £m	2010 £m	2009 £m
Debt	(83.7)	(83.5)	(111.3)
Cash, cash equivalents and restricted cash	105.6	62.1	56.6
Net funds/(debt)	21.9	(21.4)	(54.7)
Equity	107.9	21.5	3.6
Net debt to equity ratio	Not meaningful	100%	1,519%

Debt is defined as long-term and short-term borrowings as detailed in note 23. Equity includes all capital and reserves of the Group attributable to equity holders of the parent.

Liquidity risk management

The Directors believe that the Group has adequate cash holdings to meet its short-term creditors as they fall due. The Group also arranges to borrow funds in order to finance purchase of aircraft and engines. The following table, which does not take into account the discounting of cash flows and includes forecast interest payments, shows the contractual maturity of the Group's non-derivative financial instruments:

	Weighted average effective interest rate %	Within 1 year £m	Over 1-2 years £m	2-5 years £m	Over 5 years £m	Total £m
2011
Financial assets:
Cash, cash equivalents and restricted cash
(variable interest rates)	0.5	97.4	1.1	2.6	4.5	105.6
Loans and receivables	–	56.6	9.9	–	6.3	72.8
Financial liabilities:
Trade and other payables	–	(27.3)	–	–	–	(27.3)
Borrowings:
Variable interest rates	3.0	(16.2)	(7.3)	(32.0)	(24.6)	(80.1)
Fixed interest rates	7.0	(1.4)	(12.0)	(0.5)	(0.5)	(14.4)
2010
Financial assets:
Cash, cash equivalents and restricted cash
(variable interest rates)	0.8	54.1	1.0	3.5	3.5	62.1
Loans and receivables	–	50.5	8.3	–	7.5	66.3
Financial liabilities:
Trade and other payables	–	(38.2)	–	–	–	(38.2)
Borrowings:
Variable interest rates	3.5	(8.6)	(11.3)	(22.1)	(42.5)	(84.5)
Fixed interest rates	7.1	(1.5)	(1.4)	(12.7)	–	(15.6)
2009
Financial assets:
Cash, cash equivalents and restricted cash
(variable interest rates)	1.5	48.3	–	3.5	4.8	56.6
Loans and receivables	–	47.6	2.4	–	5.3	55.3
Financial liabilities:
Trade and other payables	–	(40.4)	–	–	–	(40.4)
Borrowings:
Variable interest rates	5.2	(33.2)	(6.3)	(22.5)	(60.2)	(122.2)
Fixed interest rates	6.9	(1.6)	(1.8)	(15.6)	(1.0)	(20.0)

All financial assets and financial liabilities are non-interest bearing unless otherwise stated.

35. Financial instruments continued

The following table, which is based on market pricing in place at the end of each reporting period, shows the maturity of the Group's derivative financial instruments.

	Within 1 year £m	1-2 years £m	Total £m
2011
Net settled derivatives:
Fuel derivatives	23.7	–	23.7
Gross settled derivatives:
Foreign currency payments	(2.6)	0.1	(2.5)
	21.1	0.1	21.2
2010
Net settled derivatives:
Fuel derivatives	(0.3)	–	(0.3)
Gross settled derivatives:
Foreign currency payments	7.5	–	7.5
	7.2	–	7.2
2009
Net settled derivatives:
Fuel derivatives	(41.5)	(5.2)	(46.7)
Gross settled derivatives:
Foreign currency payments	19.8	5.6	25.4
	(21.7)	0.4	(21.3)

Foreign currency risk management

The Group undertakes certain transactions denominated in foreign currencies, primarily the leasing and purchase of aircraft, spare parts and fuel in US dollars. In addition, certain sales and airport costs are incurred in Euros. Hence, significant exposures to exchange rate fluctuations arise to US dollars.

Exchange rate exposures are managed within approved parameters by entering into a series of forward foreign exchange contracts. Foreign exchange forward contracts are used in conjunction with fuel derivatives to mitigate fuel procurement price risk. In addition, foreign exchange forward contracts are matched to planned purchases of aircraft, spare parts and lease costs. It is the policy of the Group to enter into forward foreign exchange contracts to cover specific US dollar payments to cover up to 90% of the exposure generated.

The Group does not enter into significant Euro forward foreign exchange contracts as the Euro payment exposure is largely, though not entirely, offset by Euro revenue receipts. At 31 March 2011, the Group had entered into six short-term contracts to purchase a total of €6m. These contracts mature by September 2011 and the fair value at 31 March 2011 was not materially different from their value at inception.

All Group companies have a pound sterling functional currency and mainly use only US dollars foreign exchange derivative instruments. The following table summarises the Group's derivative financial instruments that are used to mitigate the exposures described above:

	Average exchange rate	Foreign currency \$m	Contract value £m	Fair value of asset/(liability) £m
At 31 March 2011	\$1.5733	289.7	184.1	(2.9)
At 31 March 2010	\$1.6997	105.0	61.8	7.5
At 31 March 2009	\$1.9498	109.9	56.4	25.4

It is estimated that a general strengthening/weakening of Sterling against the US Dollar and the Euro would improve/(worsen) both the Group's result before tax and increase its equity by approximately:

	2011	2010
Percentage increase	1%	1%
US Dollar (£m)	1.5	1.2
Euro (£m)	0.1	0.1

Notes to the consolidated financial statements

Continued

35. Financial instruments continued

The carrying value of the Group's foreign currency denominated non-derivative monetary assets and liabilities at the balance sheet date is as follows:

	2011 £m	2010 £m	2009 £m
Assets
Euro:
Cash and cash equivalents	3.1	0.7	2.2
Trade receivables	5.0	4.7	3.2
US Dollar:
Cash and cash equivalents	–	24.0	1.0
Restricted cash	9.1	8.0	9.3
Trade receivables	10.4	8.3	5.8
	27.6	45.7	21.5
Liabilities
Euro:
Trade and other payables	(10.2)	(9.9)	(11.3)
US Dollar:
Trade and other payables	(7.4)	(11.7)	(10.2)
Debt	(30.5)	(27.2)	(38.9)
	(48.1)	(48.8)	(60.4)

Cash flow hedge effectiveness

The Group designates certain hedges of foreign exchange and fuel price risks on firm commitments as cash flow hedges. At 31 March 2011, the Group has identified 50 contracts for foreign exchange purchases and 21 contracts for fuel purchases which have been designated as cash flow hedges. For these hedges the changes in the fair value of the financial instrument were compared to market movement in the underlying hedged item and were found to be an effective offset. As a result an increase in the fair value of these financial derivative instruments of £21.2m was taken to equity through the hedging reserve.

Interest rate risk management

The Group is exposed to interest rate risk as the Group borrows funds in order to finance the purchase of aircraft and engines at both fixed and floating interest rates. The risk is managed by the Group maintaining an appropriate mix that varies from time-to-time between fixed and floating rate borrowings based on current year conditions and debt levels.

The Group's exposure to interest rates in financial assets and financial liabilities is detailed in the liquidity risk management section of this note.

It is estimated that a general increase/decrease in interest rates would (worsen)/improve the Group's result before tax and (decrease)/increase its equity by approximately:

	2011	2010
Percentage increase	1%	1%
Impact on loss/profit before tax and equity (£m)	(0.2)	(0.1)

35. Financial instruments continued

Credit risk management

Disclosures in respect of credit risk management for trade and other receivables are provided in note 18.

In respect of financial assets other than trade and other receivables, the Group uses well regarded financial institutions to provide the services required and deposits surplus cash with a variety of institutions in order to minimise its exposure to the possibility of the counter-party defaulting. Similarly, the Group has counter-party relationships in respect of derivative financial institutions with at least two institutions other than the Group's bankers.

The table below shows the Group's major counterparties at the balance sheet date using the Standard and Poor's credit rating symbols and its aggregate exposure to those counter-parties.

			2011	2010	2009
Counterparty	Location	Rating	£m	£m	£m
Barclays Bank plc	United Kingdom	AA –	42.3	38.8	43.9
Standard Life plc	United Kingdom	A –	19.9	10.0	14.7
Blackrock Inc	Republic of Ireland	A+	19.9	10.0	14.4
Lloyds Banking Group plc	United Kingdom	A	25.1	4.9	6.2
Morgan Stanley & Co. plc	United Kingdom	A+	13.4	3.5	1.9
			120.6	67.2	81.1

The maximum exposure to credit risk is all financial assets plus any financial guarantees.

Fuel price risk management

The Group purchases fuel on the open market from recognised fuel suppliers in order to operate its fleet of aircraft and this constitutes a substantial portion of the Group's activities (approximately 15.6% and 15.2% of revenues in the years ended 31 March 2011 and 2010 respectively). The Group engages in fuel price hedging and foreign exchange transactions from time to time to meet its policy of entering into forward fuel price exchange contracts and other related financial instruments to cover generally at least 60% of its anticipated requirements for fuel over a 12 month period.

Aviation fuel is a significant variable cost which has had a material impact on the Group's results during the period under review. A variety of external factors, such as changes in supply and demand for oil and oil-related products and the increasing role of speculators and funds in the futures markets, have played their part in making aviation fuel prices highly volatile. It is fuel price volatility which is the main driver of variances in the Group's overall fuel costs.

The Group operates a policy during normal trading conditions of managing this volatility by entering into derivative contracts representing a portion (between 60% and 90%) of its aviation fuel requirements up to 12 months forward. In the unusual trading conditions experienced since February 2011, when the price of jet fuel increased from \$885 per tonne in January 2011 to \$1,117 per tonne in April 2011, this policy was temporarily suspended. New contracts were not entered into during this period since it was considered to be a short-term spike in oil prices. In May 2011, trading recommenced as the oil price per tonne stabilised. The intention of this programme is to provide a significant element of certainty over its fuel costs for any forthcoming IATA season.

The actual amount covered by such contracts, amounted to 67.5% of the following year's budgeted fuel consumption as at 31 March 2011 (2010: 78.7%). The amount of fuel actually consumed was 2.8% less than anticipated for the year ended 31 March 2011 (2010: 4.9% less than anticipated).

The following table details the fair values of forward fuel price contracts outstanding at each balance sheet date:

	2011 £m	2010 £m	2009 £m
Fair value of contracts to buy fuel expiring
In less than 3 months	8.6	(2.5)	(5.5)
Between 3 and 6 months	8.6	0.5	(2.4)
Between 6 and 12 months	6.5	1.7	(33.6)
After more than 12 months	–	–	(5.2)
	23.7	(0.3)	(46.7)

Notes to the consolidated financial statements

Continued

35. Financial instruments continued

The highs and lows recorded in each period for jet fuel prices were as follows:

	2011		2010
	Price per tonne US\$			Price per tonne
		Date	US\$	Date
High	1,061	31 March	726	31 March
Low	647	25 May	450	1 April

The Group uses fuel derivatives to mitigate those exposures. It is estimated that an increase in the market price of aviation fuel would increase/ decrease both the Group's loss/profit before tax and decrease its equity by approximately:

	2011	2010
Percentage increase in cost of fuel	10%	1%
Impact on loss/profit before tax and equity (£m)	(1.6)	(0.5)

36. Related parties

At 31 March 2011, the Group is 48.1% owned by Rosedale Aviation Holdings Limited, incorporated in Jersey.

Group companies entered into the following transactions with related parties which are not members of the Group:

		Sales of services
	2011 £m	2010 £m	2009 £m
Preston Travel (CI) Limited	1.2	1.4	1.5
		Amounts owed by related parties
	2011 £m	2010 £m	2009 £m

Preston Travel (CI) Limited 0.1 0.1 0.1

The Group provided services to Preston Travel (CI) Limited which, together with Rosedale, is a subsidiary of Rosedale (J.W.) Investments Limited.

		Purchases of services
	2011 £m	2010 £m	2009 £m
Edenfield Investments Limited	0.3	0.2	0.2
Downham Properties Limited	0.2	0.1	0.1

No amounts were owed to related parties at years ended 2011, 2010 or 2009.

The transactions with Edenfield Investments Limited and Downham Properties Limited are disclosed although there is no holding or subsidiary company relationship between these two companies and Rosedale Aviation Holdings Limited. These two companies are owned and controlled by the EJ Walker 1964 settlement, established by the former wife of the late Mr Jack Walker; this trust is separate for tax purposes from the Jack Walker Settlement which controls Rosedale Aviation Holdings Limited. The Group also purchased property services from Edenfield Investments Limited and from Downham Properties Limited.

36. Related parties continued

Transactions with key management personnel

Directors of the Company and their immediate relatives control approximately 6.3% of the voting shares of the Company (2010: 7.95%).

The remuneration of the Directors, who are the key management personnel of the Group, is set out below. Further information about the remuneration of individual Directors is provided in the audited part of the Directors' Remuneration Report and form part of these audited financial statements.

	2011	2010	2009
	£m	£m	£m
Key management emoluments	1.6	1.8	1.4
Company contributions to personal pension schemes	0.2	0.1	0.1

A subsidiary of the Group has made the following loans to Directors, prior to their appointment as Directors, to enable them to acquire a beneficial interest in shares in Flybe Group plc:

	2011	2010	2009
	£000	£000	£000
Mike Rutter	63	63	63
Andrew Knuckey	20	20	20

These transactions have been approved by the members of the Company.

In addition, the following Directors had received loans from the Group's immediate parent company, Rosedale Aviation Holdings Limited, to enable them to acquire an interest in shares in Flybe Group plc:

	2011 £000	2010 £000	2009 £000
Andrew Knuckey	134	134	134
Andrew Strong	36	36	36
David Longbottom	9	9	–
Charlie Scott	9	9	–
Alan Smith	9	9	–
Peter Smith	9	9	–

The loans made by the Group and Rosedale Aviation Holdings Limited total £289,000 at 31 March 2011 (2010: £289,000; 2009: £253,000), bear no interest and are repayable out of the proceeds receivable by each Director from a subsequent sale of his respective ordinary shares and at the discretion of Rosedale Aviation Holdings Limited.

There are no other transactions or balances with key management.

Notes to the consolidated financial statements

Continued

37. Reconciliation of IFRS comparatives from previously reported UK GAAP financial statements

For the year ended 31 March 2010, the Group prepared its consolidated financial statements under UK GAAP. These financial statements comprise the Group's first report prepared in accordance with IFRS.

The accounting policies set out in note 3 have been applied consistently in preparing the financial statements for each of the two years ended 31 March 2011 and in preparing the opening balance sheet at 1 April 2009. In preparing the opening balance sheet, the Group has adjusted amounts previously reported in the UK GAAP financial statements.

An explanation of how the transition from UK GAAP to IFRS has affected the Group's financial position, financial performance and cash flows is set out in the following tables and accompanying notes.

	As reported under UK GAAP £m	Reclassifications (Note i) £m	Accounting policy changes £m	Note	As reported under IFRS £m
Consolidated income statement
At 31 March 2010
Revenue	570.5	–	–		570.5
Operating profit before net financing costs	8.7	–	18.9	ii	27.6
Net financing costs	(3.0)	–	–		(3.0)
Profit before tax	5.7	–	18.9		24.6
Taxation	1.0	–	(3.4)	iii	(2.4)
Profit for the period	6.7	–	15.5		22.2
Consolidated balance sheets
At 31 March 2010
Non-current assets	172.7	7.4	7.4		187.5
Current assets	139.9	(7.4)	10.1		142.6
Current liabilities	(205.4)	19.2	(3.8)		(190.0)
Non-current liabilities	(88.3)	(19.2)	(11.1)		(118.6)
Equity	18.9	–	2.6	iv	21.5
At 31 March 2009
Non-current assets	172.1	6.7	14.6		193.4
Current assets	156.6	(6.7)	20.2		170.1
Current liabilities	(221.3)	12.1	(32.8)		(242.0)
Non-current liabilities	(90.9)	(12.1)	(14.9)		(117.9)
Equity	16.5	–	(12.9)	iv	3.6
Consolidated cash flow statement
Year ended 31 March 2010
Net cash from operating activities	42.7	(2.5)	–	v	40.2
Interest received	0.2	–	–		0.2
Purchase of property, plant and equipment	(90.9)	0.4	–		(90.5)
Capitalised development expenditure	–	(0.4)	–		(0.4)
Proceeds on disposal of property, plant and equipment	80.1	(1.8)	–		78.3
Proceeds from new loans	62.2	–	–		62.2
Interest paid	(2.2)	(1.9)	–		(4.1)
Repayment of borrowings	(86.6)	2.1	–		(84.5)
Net increase in cash and cash equivalents	5.5	(4.1)	–		1.4

Note i Reclassification The reclassifications are to align balances with the appropriate headings as defined under IFRS: Balance sheet Assets held for sale (0.6) (1.6) Long-term restricted cash 8.0 8.3 7.4 6.7 Long-term element of maintenance provision 19.2 12.1 Cash flow statement Increase in restricted cash (4.1) Note ii Operating profit before net financing costs Negative goodwill (a) (0.4) Holiday pay (b) 0.6 Depreciation of property, plant and equipment (c) 0.4 Hedging gains and losses (d) 18.3 18.9 Note iii Taxation Deferred tax (e) 3.4 Note iv Equity Derivative financial instruments (d) 6.8 Deferred tax (e) (4.1) Holiday pay (b) (0.4) (1.1) Other adjustments 0.3 0.4 2.6 Note v Net cash from operating activities Increase in restricted cash (f) (4.1) Presentation of assets held for sale (g) 1.9 Other adjustments (0.3)		Note	2010 £m	2009 £m
(11.5) (0.7) (12.9)

37. Reconciliation of IFRS comparatives from previously reported UK GAAP financial statements continued

(a) The amortisation in respect of goodwill in the year to 31 March 2010 has been reversed under IFRS, as under IFRS total negative goodwill of £42.1m was credited directly to the income statement in 2007,

the year of acquisition. (b) Under IFRS an accrual is required for holiday pay at the balance sheet date. Changes in this accrual are reflected in the income statement.

(c) Depreciation of property, plant and equipment has been reduced in the IFRS figures as the requirements for measuring residual value of assets mean that the values should be adjusted to the latest market price each year. (d) IAS 39 requires all derivatives to be recognised at fair value in the balance sheet. Consequently, the fair value of foreign currency forward contracts and commodity contracts has been recognised at fair value in the balance sheet. Under UK GAAP the fair value of derivatives was not recognised in the balance sheet and accordingly changes were not recognised in the income statement or equity.

(e) Under UK GAAP, deferred tax was provided on certain timing differences that had originated but not reversed at the balance sheet date. Under IFRS, deferred tax is provided on temporary differences based upon future recovery or settlement of assets and liabilities recognised in the balance sheet.

(f) Under IFRS, restricted cash represents funds held in bank accounts that cannot be withdrawn until certain conditions have been fulfilled. Under UK GAAP these balances are shown under cash and cash equivalents. (g) Under IFRS, assets held for sale have been reclassified from property, plant and equipment to their own balance sheet category and presented as part of working capital.

(2.5)

Company balance sheet

	Note	2011 £m	2010 £m	2009 £m
Non-current assets
Investment in subsidiaries	39	33.2	33.2	33.2
Current assets
Other receivables	40	57.2	–	0.1
Total assets		57.2	33.2	33.3
Current liabilities
Trade and other payables	41	(0.1)	(0.9)	(1.4)
Total liabilities		(0.1)	(0.9)	(1.4)
Net assets		90.3	32.3	31.9
Equity attributable to members of the Company
Called up share capital	42	0.7	–	–
Share premium account	42	60.6	1.0	1.0
Merger reserve	42	6.7	6.7	6.7
Capital redemption reserve	42	22.5	22.5	22.5
Profit and loss account		(0.2)	2.1	1.7
Total equity		90.3	32.3	31.9

The financial statements of Flybe Group plc, registered number 1373432, were approved by the Board of Directors and authorised for issue on 29 June 2011.

Signed on behalf of the Board of Directors

Director Director

Jim French CBE Andrew Knuckey

Company statement of changes in equity

Year ended 31 March 2011

	Share capital £m	Share premium £m	Merger reserve £m	Capital redemption reserve £m	Retained earnings/ (deficit) £m	Total equity £m
Balance at 31 March 2009	–	1.0	6.7	22.5	1.7	31.9
Equity-settled share-based payment transactions	–	–	–	–	0.4	0.4
Balance at 31 March 2010	–	1.0	6.7	22.5	2.1	32.3
Total comprehensive income for the year	–	–	–	–	(2.8)	(2.8)
Issue of new shares	0.7	65.3	–	–	–	66.0
Share issue expenses	–	(5.7)	–	–	–	(5.7)
Equity-settled share-based payment transactions	–	–	–	–	0.5	0.5
Balance at 31 March 2011	0.7	60.6	6.7	22.5	(0.2)	90.3

Company cash flow statement

Year ended 31 March 2011

	2011 £m	2010 £m
Operating loss	(2.8)	–
Credit to equity for share-based payments	0.5	0.4
(Increase)/decrease in debtors	(57.2)	0.1
Decrease in creditors	(0.8)	(0.5)
Net cash from operating activities	(60.3)	–
Financing activities
New equity raised	60.3	–
Net cash raised in financing activities	60.3	–
Net increase/(decrease) in cash and cash equivalents	–	–
Cash and cash equivalents at beginning and end of year	–	–

Notes to the Company financial statements

38. Significant accounting policies

The separate financial statements of the Company are presented as required by the Companies Act 2006. As permitted by the Act, the separate financial statements have been prepared in accordance with International Financial Reporting Standards adopted by the European Union.

The financial statements have been prepared on the historical cost basis. The principal accounting policies are the same as those set out in note 3 to the consolidated financial statements except as noted below.

In accordance with section 408 of the Companies Act 2006, the Company is exempt from the requirement to present its own income statement. The Company's loss for the year was £2.8m (2010: £nil).

39. Subsidiaries

Details of the Company's subsidiaries at 31 March 2011 are as follows:

		Proportion of	Proportion of
	Place of incorporation	ownership interest	voting power held
	and operation	%	%
Flybe Limited	Great Britain	100	100
Walker Aviation Leasing (UK) Limited	Great Britain	100	100
British Regional Air Lines Group Limited	Great Britain	100	100
British Regional Airlines Limited	Great Britain	100	100
Flybe Leasing Limited	Great Britain	100	100
Flybe (IoM) Limited	Isle of Man	100	100
Jersey European Airways Limited*	Jersey	100	100
JEA Engineering (UK) Limited	Great Britain	100	100
Guide Leasing Limited	Great Britain	100	100
Westcountry Aircraft Servicing Limited	Great Britain	100	100
Deutsche European Limited	Great Britain	100	100
BEA.com Limited	Great Britain	100	100
British European Air Limited	Great Britain	100	100
British European Limited	Great Britain	100	100
Irish European Limited	Great Britain	100	100
British European Airlines Limited	Great Britain	100	100
British European.com Limited	Great Britain	100	100
Flybe.com Limited	Great Britain	100	100
Jersey European Airways (UK) Limited	Great Britain	100	100
Flybe Holdings Limited	Great Britain	100	100
Walker Aviation Limited	Great Britain	100	100

* In liquidation.

The investments in subsidiaries are all stated at cost.

40. Other receivables

Amounts due from Group undertakings

Amounts due from Group undertakings are £57.2m (2010: £nil). The carrying amount of trade and other receivables approximates to their fair value.

41. Trade and other payables

Accruals

Accruals of £0.1m (2010: £0.1m) principally comprise amounts outstanding for trade purchases and ongoing costs.

Amounts owed to Group undertakings

Amounts owed to Group undertakings are £nil (2010: £0.8m). The carrying amount of trade and other payables approximates to their fair value.

42. Share capital, share premium account and other reserves

The movements on these items are disclosed in notes 27 and 28 in the consolidated financial statements.

43. Related parties

The Company has provided cross guarantee arrangements to its operating subsidiaries in the following areas:

• • suppliers of fuel and other services to the principal operating company
• • operating lease and loan repayments for aircraft used in the business
• • derivative instruments used to secure fuel and foreign exchange purchases

Based on expectations at the end of the reporting period, the Company considers that it is more likely than not that no amount will be payable under these arrangements.

The maximum amount that the Company could be forced to settle under the above arrangements is £683.3m (2010: £685.7m).

44. Reconciliation of IFRS comparatives from previously reported uk gaap financial statements

In 2010, the Company produced its parent company balance sheet in accordance with UK GAAP. In line with the transition of the consolidated results to IFRS, the parent company balance sheet is also now presented in accordance with IFRS.

There are no material differences between UK GAAP and IFRS for the balance sheet and profit for the year ended 31 March 2010 and for the opening balance sheet presented at 31 March 2009.

Five-year summary

	2007 £m	2008 £m	2009 £m	2010 £m	2011 £m
Financial measures
Revenue	367.5	535.9	573.1	570.5	595.5
EBITDA	(0.4)	29.0	11.2	27.2	23.5
EBITDAR	41.4	79.4	72.2	90.9	100.9
Operating profit/(loss) before tax	5.1	16.2	(25.8)	27.6	(0.9)
(Loss)/profit before tax	(16.2)	13.3	(33.7)	24.6	(4.3)
(Loss)/earnings per share (basic)	£(0.38)	£0.30	£(0.53)	£0.42	£0.06
Aircraft (at net book value)	167.3	136.7	119.8	113.5	110.9
Net funds/(debt)	5.8	(70.6)	(54.7)	(21.4)	21.9
Operating cash flow	30.4	(2.7)	19.0	14.9	18.1
	2007	2008	2009	2010	2011
Operating measures
Average number of operating aircraft	71.0	72.8	68.4	67.5	68.3
Scheduled sectors flown	90,000	144,000	140,400	135,100	138,200
Seats flown	7,798,300	10,748,400	11,137,200	11,304,400	11,620,600
Sold passengers	5,205,500	6,974,300	7,281,400	7,178,000	7,166,200
Passenger yield	£62.52	£72.61	£73.74	£72.55	£76.15
Load factor	66.8%	64.9%	65.4%	63.5%	61.7%

All figures are reported under IFRS except for those for the year to 31 March 2007 which are presented under UK GAAP. IFRS financial statements for the years to March 2008 and 2009 can be found in the Global Offer Prospectus issued in December 2010. A copy of this document can be found on the Investor Relations pages of the Group's website: www.flybe.com.

Earnings per share has been restated for each year to take account of the share bonus issue that occurred in December 2010.

Glossary

advanced seat assignment

a product offered by the Group allowing passengers to pre-select their seats on an aircraft for an additional charge

Air Operator's Certificate

an air operator's certificate issued by the UK Civil Aviation Authority

ancillary yield

total ancillary revenue per passenger

CAA

the UK Civil Aviation Authority

codeshare

an arrangement whereby multiple airlines sell seats on the same flights and multiple flight designators and flight numbers are used for the same flight

domestic

passengers from one UK airport (including the Channel Islands and the Isle of Man) to another UK airport (including the Channel Islands and the Isle of Man)

eco-labelling scheme

a scheme, introduced by Flybe, concerning the measurement of aircraft performance in respect of noise and greenhouse gas emissions, during operation

effective exchange rate

the cost of currency for a period implicit through the weighted average cost of (i) currency acquired through forward contracts, and (ii) currency bought in the spot markets

ETS

Emissions Trading Scheme

European business cities market

the market for air travel from regional UK airports to Amsterdam, Barcelona, Berlin, Brussels, Copenhagen, Dusseldorf, Frankfurt, Lisbon, Luxembourg, Madrid, Milan, Munich, Oslo, Paris, Rome, Stockholm, Stuttgart, Vienna and Zakinthos

IATA

International Air Transport Association

IPO

the admission, through an Initial Public Offering, of the Company's shares to the Official List of the London Stock Exchange on 15 December 2010

line maintenance

minor or scheduled maintenance carried out on an aircraft that is in service to ensure that the aircraft is fit for its next flight (including defect rectification, daily checks, visual inspections, minor repairs and modifications which do not require extensive disassembly)

load factor

the number of seats sold divided by seat capacity (and 'flown' load factor, the number of seats flown divided by seat capacity)

MRO

maintenance, repairs and overhaul

passenger

a person with an issued ticket where the ticket has charged a fare and/or a passenger surcharge and tax (if applicable)

purchase rights

the right to purchase additional aircraft under the same terms and conditions as for firm and option aircraft. Such rights to be exercised within a finite time

regional aircraft

turboprop aircraft and regional jets

regional airline

an airline that flies predominantly regional aircraft regional UK

an airport or destination in the UK (including the Channel Islands) but excluding London

Rosedale

Rosedale Aviation Holdings Limited

route

a scheduled service flown by an airline other than any franchise route

scheduled sectors flown

the total number of aircraft flights per annum, excluding positioning, charter, and training flights

the average number of seats per aircraft multiplied by the number of scheduled sectors flown

seat capacity

sector

a flight between an originating airport and a destination airport, typically with no intervening stops

sector length

the distance, typically in kilometres, of a flown sector

slot

an authorisation to arrive at or depart from a stand at a particular airport at a specific time on a particular day

summer season

the last Saturday in March until the last Saturday in October in any particular year

ticket yield

the total ticket revenue per passenger (after the deduction of government taxes and levies)

UK domestic routes

routes where both the departure and destination airports are within the United Kingdom, the Isle of Man or the Channel Islands

wet lease

a leasing agreement whereby an aircraft (together with its operating crew), maintenance, support and insurance are provided from one party to another, otherwise known as an ACMI agreement

winter season

the first Sunday following the last Saturday in October to the Friday before the last Saturday in March in any particular year

yield

total ticket revenue per passenger (after the deduction of government taxes and levies)

Acknowledgments

Flybe would like to thank all those who participated in producing this report, particularly the members of staff for their contributions.

This report is available on our website: http://www.flybe.com/corporate/investors/

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