Phonics is the way they teach reading - teach the sound of the letter - so 'ah' rather than 'ay', said 'ah ah ah ah' whilst pretending to have ants running all over your arm. Significant ones to be careful with are things like m which is 'mmmmmm' not 'muh'. The idea is they can then blend these letters to read more quickly, and it also should help their spelling as they use their phonics knowledge to start writing independently. ORT is Oxford Reading Tree aka Magic Key.
The phonics is all very well - dd could read using phonics before starting school, and is a very good speller (she is 4, and in last term at reception). I can see with her the phonics working really well, alongside the keywords (there are 45 keywords they should know by the end of Reception - things like 'are' 'you' 'the' which can't be done phonically.
Ds1 is an excellent reader - he is 6, in Y2, reading things like Horrid Henry, Swallows and Amazons. He learnt almost entirely by keyword (which is the P&J approach) - and still prefers to use sight words than phonics. He does use phonics for spelling, but actually is a very good speller, especially with difficult 'non-phonic' words like night/fight etc. This is because he reads lots, and I think he memorises the look of the words, rather than the rule. Interestingly he reads music in the same way - he doesn't say 'that is an A, here is an A on the piano, it's that note' he says 'something that looks like that on the music is this note on the piano or the violin'.
So they all thrive differently, which is why I think a variety of systems should be used. I think you should be careful about what you call the letters though, as if you call them 'ay bee cee' it could cause problems, equally 'mm, nnn' etc not 'muh' 'nuh'.