FLYBE has sustained pre-tax losses of £40.7 million in what the airline has described as the "most challenging year" in its 10-year history.

The company cited a contracting domestic market, estimated to have shrunk by 21% since 2007, the price of fuel and a £70m bill for airline passenger duty (APD) as losses came in more than six times higher than in 2011/12.

Revenue for the year to March was said to be stable at £614.3m compared to the previous year.

Pre-tax profits came in at £23.2m on an adjusted basis, which takes into account £13m spent in restructuring costs and a loss of £4.7m on the revaluation of US dollar loans.

Flybe embarked a two-year recovery plan in January that will see it target £40m in cost savings this year, rising to £50m by 2014/15.

The plan has seen the company target a 21% reduction in its UK-based workforce over the period, with 580 out of the 2730 roles it employed in February set to be cut.

Around 490 jobs have already gone under phase one of the restructuring, with a further 80 going in the next two to three months.

Flybe noted that of that number, half had resigned or were made redundant, with the other half transferring to new employers while continuing to work for Flybe under outsourcing deals.

The airline said only 30 of the 280 redundancies made to date have been compulsory.

In Scotland, where Flybe has bases in Glasgow and Edinburgh, some 35 jobs have been cut, bringing the overall headcount down from 350 last year to 315.

The restructuring plan has also seen the firm take steps to improve its cash position.

In May it raised £20m by offloading its 25 Gatwick slots to easyJet, with cash flow also eased by the same amount by deferring the order of 16 new aircraft.

Flybe had been due to begin payments on the new aircraft in 2014 and 2015, but this has been postponed until 2017 to 2019.

The company said while the slots sale had helped its cash position it had also been driven by Gatwick, which it said was "pricing smaller aircraft out of the market" as it looks to drive business from bigger planes.

Flybe said it had become too expensive to operate from the London airport, noted that its charges for using the slots had increased by 110% in the last five years.

The sale sparked concerns that Scotland, particularly Inverness, will lose a vital link to London.

The three times daily service to Gatwick is seen as important to business travellers as it allows them to make a return journey to the capital within a working day travellers.

EasyJet, which is not due to take over the slots until Flybe ends its Gatwick operations on March 29, said it has not ruled out maintaining some of the routes to Inverness. It already operates its own service on the route, though it does not leave the Highland capital until 1.45pm.

A spokesman said in spite of the sale of the Gatwick slots Flybe was still a "major player in Scotland". He added: "Glasgow and Edinburgh are still hugely important bases to us."

Flybe's chief financial officer, Andrew Knuckey, said "the classic industry challenges", including the cost of fuel, the ongoing economic downturn had made it a "tough year" for the airline.

But he insisted the restructuring has made Flybe a "much leaner, much more effective and efficient business".

Mr Knuckey said: "70% of our of our group revenue is generated from UK domestic passengers, travelling UK to UK, and that market has dropped 20-odd per cent since 2007. So that's been tough.

"But the real icing on the cake that has created the underlying loss for us in the year of £23m is the fact that APD now comprises 18% of our UK departing ticket revenue.

"We paid £70m in air passenger duty last year and the reason it is such a hit for us is because 70% of our passengers are flying UK to UK, so for a return journey they are paying it twice.

"You pay £100 to us for a return flight in the UK and we have to pay £26 of that to the government."

Espirito Santo Investment Bank said it expects the trading environment for Flybe to remain weak, but expects the restructuring measures instigated by the airline to lead to a " sharp reduction in losses" in the year ahead.

Shares in Flybe closed up 0.25p at 41.5p.