Alistair Osborne in the Times, on how Virgin/ Branson have made fools of the government over Flybe bailout
Alistair Osborne, in the Times, writes about Flybe and the con that has been perpetrated, to get it given government finance. Flybe is 30% owned by Delta and Virgin Atlantic, with 30% owned by Stobart and 40% by New York hedge fund Cyrus Capital. Last February, the trio bought Flybe’s assets for just £2.8 million. Flybe has the contract to operate 4 daily flights from London to Newquay, partly paid for by Public Service Obligation (PSO) by government and Cornwall Council. This is paid in the belief that the flights are “essential” for “connectivity” but are not commercially viable. (Most passengers in fact are on leisure trips). Those Heathrow slots are very valuable to an airline, and could be used for flights that bring in more profit for the owners. A slot pair at Heathrow can fetch $75 million. Flybe has got the flights moved from Heathrow to Gatwick. Newquay-Gatwick offers far fewer international connections than Heathrow. The Heathrow slots will be used for other more profitable Flybe flights, feeding Virgin services. “And now Flybe’s owners have made fools of the rest of the nation by convincing ministers they need some sort of taxpayer bailout.”
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Flybe owners have made fools of us
18th January 2020
The Necker Island knight is the joint-owner of Virgin Atlantic, alongside the apparently cash-strapped Delta Air Lines: a business struggling along with a market value of $40 billion. The duo own 30% of Flybe: the regional carrier also 30% owned by Stobart and 40% by New York hedge fund Cyrus Capital. Last February, the trio bought Flybe’s assets for just £2.8 million, since when they claim to have injected £110 million, though nothing like that in cash.
Anyway, with Flybe came the contract to operate Heathrow’s only subsidised service: four flights a day to Newquay. It was operated under the “public service obligation” (POS) regime, where the taxpayer stumps up to help support a service deemed essential for regional connectivity but commercially unviable. Over the four-year contract, the taxpayer is said to be chipping in £3.4 million.
It’s proved a popular service. But not for Flybe’s owners. They swiftly worked out that the Newquay flights were a waste of four lucrative slot pairs at Heathrow: the UK’s top airport, where a single pair can fetch $75 million. So, since the autumn, they’ve been badgering Cornwall county council to change the POS contract. And, no, Sir Richard didn’t actually do the negotiating, leaving it to the likes of Flybe boss Mark Anderson. Even so, he’s got a result.
The council has caved in and agreed to alter the contract from Heathrow to Gatwick. In return, Flybe has apparently offered an extra flight from Newquay to Amsterdam plus higher frequencies to Manchester and Edinburgh. But it’s infuriated locals who wanted the council to fight Flybe’s plans. Newquay-Gatwick offers far fewer international connections than Heathrow. So, hardly a triumph for “levelling up”.
But why would Flybe’s owners care? Given the carrier’s profit-free performance, the most valuable thing it brought was nine pairs of unrestricted Heathrow slots. And now the owners will have four more, unconstrained by the POS contract. True, under the rules, there are limits on their use until they are “grandfathered” to Flybe: handed to it in perpetuity after three years, as long it uses them. But that wouldn’t stop Flybe swapping around its Heathrow slot portfolio, so it can operate more European flights feeding Virgin Atlantic services. It could also potentially sell the slots for cash.
In short, Flybe’s owners have pulled off a nice bit of aviation alchemy — turning subsidised Heathrow slots meant to be used for a public service into commercial ones with real market value. Indeed, industry experts reckon the stunt’s delivered slot pairs worth £15 million apiece. So, £60 million of value — just by doing over Cornwall county council. And now Flybe’s owners have made fools of the rest of the nation by convincing ministers they need some sort of taxpayer bailout. Someone should tell Boris Johnson where Sir Richard goes kite-surfing. Not Newquay, but Necker.
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Boeing set to stall
Might the Boeing 737 Max never fly again? Well, here’s the latest from Bank of America Merrill Lynch analysts over the plane involved in two fatal crashes: “We are increasingly fielding concerns from investors regarding the likelihood that the Boeing 737 Max never returns to service”.
The analysts think that “very unlikely” but are right that investors spent 2019 viewing Boeing “with a very optimistic lens”. Despite the Indonesian and Ethiopian crashes that killed 346 people and the $9 billion charges taken so far, Boeing shares rose 1 per cent last year. Nothing that’s emerged since, not least the staff exchanges about an aircraft “designed by clowns who are in turn supervised by monkeys” justifies that. And the $4.9 billion set aside to compensate airlines looks nowhere near enough. The bank puts the bill at $20 billion. At $325, Boeing shares are defying gravity.
alistair.osborne@thetimes.co.uk
https://www.thetimes.co.uk/article/flybe-owners-have-made-fools-of-us-ntzbmc5lh
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See earlier:
Scientists appalled at government’s support for high-carbon airline industry, and Matt Hancock ill-informed comments
A letter from a group of leading scientists, in the Independent, criticises the support of this government for the high-carbon emissions airline industry, and the grossly misleading statements made by Matt Hancock (Sec of State for Health) to justify this bailout. On 15 January, he gave his unqualified support for the airline industry on BBC Radio 5 live. He claimed that dealing with the climate emergency does not require any change in our demand for flying, and (mistakenly) thinks electric planes will be a future solution. He said aviation has been decarbonised, which is categorically wrong. Small improvements in aircraft fuel efficiency are far outstripped by the industry’s rate of growth. These positions are at odds with the scientific evidence and the need for deep and immediate reductions in the UK’s emissions. Matt Hancock clearly has no grasp of the huge technical challenges in decarbonising aviation. It is of concern that a Secretary of State can be so misinformed. Flying already constitutes 10% of the UK’s carbon emissions and is predicted to rise by 300% by 2050 unless urgent action is taken.
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Government considering UK APD cut to save loss-making airline Flybe – to boost profitability of domestic flights
Flybe is one of the main airlines that fly domestic routes in the UK – 38% of them. Currently air passengers pay £26 APD on a return domestic flight (and £13 on a return flight to a European airport). Flybe has been struggling for years, as many of its routes are not profitable. It said in October that it recognised, with growing awareness of the higher CO2 emissions from a flight that using the train or coach, (and “flight shame”) that some of the domestic routes should be scrapped. Now Flybe cannot pay its APD bill to the government – about £100 million over three years. So the government, which talked up the importance of regional connectivity before the election, is considering removing APD from all domestic flights. That would be entirely the opposite of what is needed, to tackle UK carbon emissions, and those from UK aviation in particular. Aviation is already subsidised by not paying VAT. The loss to the Treasury from cutting domestic APD would have to be made up by taxation from other sources. It is not as if all domestic flights are vital to the economy. Most are leisure passengers, making trips to visit places or people, friends or family.
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Why the government’s plan to use public money to bail out Flybe is wrong, and the airline is doomed to fail
There are many reasons (ignoring CO2) why spending public money to bail out Flybe is wrong. In the Times, Alistair Osborne criticises the plan to effectively pay Virgin Atlantic and Delta, that now own Flybe. They are rich companies, well able to fund Flybe, which they only bought a year ago. It is a blatant misuse of taxpayer money to pay companies like Virgin, and billionaire Branson. Flybe has a lot of its own problems, which is why it is in debt and cannot make money. These include that Flybe has too many planes, 68 aircraft still flying. An airline analyst said Flybe struggles to compete with low fare carriers, like Ryanair and EasyJet, as their cost per seat is higher. They have been a victim of circumstance: rising fuel prices, an economic slowdown brought on by Brexit and a depreciation of the pound against the dollar. Maybe also the increase in “flight shame” and more carbon awareness. Flybe does not have a hub airport base, which increases costs, and its network is fragmented low frequency routes. The focus on APD is misleading as the reason for its decline.
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Flybe saved after ministers agree a government loan + deferral of APD, and review of APD on domestic flights
The immediate future of Flybe was secured on 14th January evening, after ministers agreed a rescue deal with shareholders to keep the loss making regional airline flying. The package of measures includes a potential loan in the region of £100m and/or a possible short-term deferral of a £106m air passenger duty (APD) bill to the Treasury, to help it sort out its debts. Also a pledge to review APD on domestic flights before the March budget. Flybe’s owners Connect Airways – a consortium led by Virgin Atlantic – were persuaded to commit millions more to cover ongoing losses. The government is still in negotiations to finalise any loan to Flybe. The deal was condemned by IAG as “a blatant misuse of public funds” and Virgin “wanting the taxpayer to pick up the tab for their mismanagement of the airline”. Moves to cut APD on domestic flights are totally at odds with any serious attempt to cut CO2 emissions from aviation, as most UK domestic trips can be made on (lower CO2) rail routes. Air travel is already subsidised, by paying no VAT or fuel duty. Some routes deemed socially necessary could be subsidised under EU rules – Flybe’s Newquay to London route is already funded from taxpayers.