The carrier reported a pre-tax loss of £19.9m in the year to 31 March, despite revenues rising 13.4% to £707.4m.
Flybe said it would start to reduce the size of its fleet after it saw slowing growth in consumer demand.
However, it insisted the current year was going well and efforts to turn a profit again were well underway.
Flybe has struggled in the past year with a series of costly mistakes, including running too many loss-making routes and failed joint ventures.
An aggressive expansion plan increased capacity on the airline by 12.3% to 12.7 million seats, but passenger numbers only rose 7.6% to 8.8 million.
Six Bombardier Q400 aircraft will be cut from the fleet next year.
But the City appeared pleased with the company's future plans to return to profit, with shares up 6% to 35p in early trading.
The company said in a statement: "Despite the substantial progress in reducing the size of legacy fleet orders in 2015/16, Flybe has still seen significant capacity growth in a market where we witnessed slower growth in consumer demand.
"New routes and increased frequencies were targeted to cover marginal costs in the early years of operation, but do not contribute significantly to overall profitability.
"The capacity growth therefore had a negative effect on profitability."
It added: "We will make Flybe a sustainable business that operates the best routes and at the best times to suit the needs of our customers."
Its focus will be on improving its UK routes in particular, and expanding relations with regional airports.
In addition to the over-capacity problems, a major IT upgrade hit profits by £4.8m last year and the company warned that an extra £6m would have to be spent cancelling costly contracts.

Officials laid wreaths at a memorial to victims of the Ustashe puppet regime, which incarcerated Jews, Serbs and others in brutal conditions.
However, the service at Jasenovac was boycotted by Jewish and Serb groups.
They say the new Croat government has not acted against renewed use of Ustashe salutes by nationalists.
In January, ultra-nationalists shouted pro-Nazi slogans at a rally attended by thousands of people, including Deputy Parliamentary Speaker Ivan Tepes.
Similar slogans were also chanted during a football match between Israel and Croatia in March, attended by Prime Minister Tihomir Oreskovic.
Croatia's Jewish community held a separate Holocaust commemoration a week ago.
Mr Oreskovic and President Kolinda Grabar-Kitarovic both voiced regret over the boycott.
Earlier this month they explicitly condemned the Ustashe regime's crimes for the first time during a visit by Nicholas Dean, the US State Department's special envoy for Holocaust issues.
Three-quarters of about 40,000 Croatian Jews were killed by the Ustashe and Jews now make up less than 1% of the population.

Wright picked up the injury against League Two leaders Northampton Town on Tuesday and was replaced by Chey Dunkley for the final 14 minutes.
"It looks like a grade one tear to his hamstring, which rules him out for around 10 days to start with," manager Michael Appleton told BBC Radio Oxford.
"It's a blow from a playing point of view and also because he's a leader."
Wright, 29, has made 30 appearances in all competitions for Oxford this season.
On Saturday they host fourth-placed Accrington, who are six points behind Appleton's side with two games in hand.
Regional airline Flybe has hit turbulence, running up a near £20m loss after previous expansion plans proved too ambitious.
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Croatia has held a memorial service for tens of thousands of people murdered by Nazi Germany's allies at the Jasenovac death camp.
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Oxford United captain Jake Wright is set to be out for three to four games with a hamstring tear.