Flybe: clear skies, or turbulence ahead?
Monday 20th January 2020
Troubles were mounting at Exeter-based regional airline Flybe at the start of this year, as it emerged in the business press that the carrier was in ‘crisis talks’ regarding the state of its finances. It comes just under a year after the airline’s operating assets were sold to Connect Airways – a consortium formed by Virgin Atlantic, Stobart Aviation and Cyrus Capital Partners – in February 2019.
Despite a significant injection of capital into Flybe by its new owners, the airline continued to suffer from financial difficulties – including a growing backlog of UK air passenger duty (APD) owed to HM Revenue and Customs.
In January 2020, it was announced that an agreement had been reached between the British Government and Flybe’s owners. Despite the specific terms remaining unclear in many respects, The Guardian reported that they included the potential for a loan to Flybe from HM Treasury and a short-term deferral of payments towards Flybe’s aforementioned APD liability. Additionally, there was a promise from the Government to review the overall APD regime by March 2020 – in time for the Chancellor’s spring budget.
Supporters of the move argue that preventing the collapse of Flybe was crucial to the long-term performance of regional economies across the UK. As a leading provider of UK regional flights, the loss of Flybe would have also been to the detriment of regional connectivity across the UK. There were reports that Belfast City Airport in Northern Ireland might be forced to close if Flybe operations there came to an end. The Observer acknowledges that – in the face of such a prospect – the UK Government had to be pragmatic.
Nevertheless, the agreement does have its critics. Perhaps the most vocal of these in the past few days have been Flybe’s competitor airlines. With the news of the Government’s deal with Flybe, International Consolidated Airlines Group (the parent company of British Airways) filed a complaint with the European Union and its CEO Willie Walsh described the deal as a "blatant misuse of public cash".
Separately, environmentally-concerned critics have contended that the Government’s promise to review the APD system are at odds with any meaningful plans to reduce the UK’s carbon emissions. They argue that cutting the number of short-haul regional flights made, rather than making them cheaper, will be key to achieving the UK’s ‘net zero’ greenhouse gas emissions target by the year 2050.
Ryanair CEO Michael O’Leary demanded that the deal’s APD arrangement be offered to other airlines. Mr O’Leary claimed that the Government would be violating state aid and competition laws if it did not do so – and he added that Flybe’s business model would not be viable after “this government bailout” ends. Mr O’Leary said that, as with the collapse of Thomas Cook Airlines last year, other UK airlines would be ready to fill the gap left by Flybe.
Yet The Observer argues that whilst O’Leary’s Thomas Cook analogy might apply to Flybe’s more profitable routes, the same would not be the case for those less profitable routes in regions which stand to lose the most in a potential Flybe collapse.
The Financial Times’ Editorial Board, however, suggest that the Government should not have offered APD “tax cuts”, but rather taken a more individualised approach to subsidising unprofitable air routes where no realistic alternative (such as rail) exists. It noted that “public service obligations” subsidies would be compatible with EU state aid requirements and that Flybe’s Newquay, Cornwall to London Heathrow route already receives subsidy support.
Nonetheless, with a vision of real interconnectivity across regions of the UK being a key component of the campaign on which the current UK Government was elected in December 2019, The Financial Times’ Editorial Board acknowledges that the Government’s actions were “politically expedient”.
Only Flybe’s performance (or any potential regulatory backlash) over the coming months will prove the naysayers right or wrong.
