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.
The duo own Virgin Atlantic: one of a trio of investors daft enough to have bought Flybe last year. The other two? Cyrus Capital, a hedge fund managing $4.4 billion of assets. And Stobart Group, a relative tiddler but still valued at £400 million. So, not obvious candidates for a government rescue — not least from a Tory regime that let Monarch and Thomas Cook go bust.
True, no one wanted to see Flybe go under, putting 2,400 jobs at risk. And there’s something to be said for BoJo’s pragmatism in saving an airline responsible for 38 per cent of domestic flights. It does play a part in “ensuring the UK regions remain connected”, as business secretary Andrea Leadsom put it. But the notion that Flybe’s owners were too cash-strapped to keep the carrier airborne is ridiculous.
They only bought Flybe last February, snaffling the assets out of the holding company for just £2.8 million. Yes, Virgin says they’ve since injected £130 million to keep it in the skies, which, if true, makes you wonder where the money’s gone. But it’s less than a year since they were banging on about providing “a strong foundation to secure the long-term future of Flybe”. How long term is 11 months?
And it’s not as if the world has changed. They knew all about Brexit, the weak pound and the tendency of credit card companies to hang on to payments from passengers in struggling airlines. They also knew about the £13 air passenger duty on one-way domestic flights. To boot, they’ve been too slow to cull a bloated carrier that’s still flying 68 aircraft.
So it says something for the negotiating powers of Flybe’s owners and its boss, Mark Anderson, that he’s convinced ministers to agree a £100 million-plus rescue package. It’s said to include allowing the carrier to defer paying APD and other taxes, plus a potential government loan. On top, ministers have pledged to consider cutting APD on domestic flights: a likely change in March’s budget.
What does that say for the government’s environmental credentials? As Greenpeace put it: “Cutting the cost of domestic flights while allowing train fares to rise is the exact opposite of what we need.” It will also boost British Airways-owner IAG: a poor cause for charity, given it’s valued at £13 billion. What precedent does it set, too, for other companies that come knocking?
Thankfully, the deal was conditional on Flybe’s owners injecting fresh equity — said to be between £20 million and £40 million. But, if the government is serious about regional connectivity, it’s not individual airlines that need saving but regions at risk of being cut off should they fail. Doesn’t the Flybe affair make the case for having more flights subsidised under the “public service obligations” regime, which helps to fund the Newquay-London service for example? Airlines would tender to run such flights for a fee. Better that than the awkward impression BoJo’s just given with Flybe: that he’s happy to bail out the likes of Sir Richard.
Why the government’s plan to rescue Flybe is doomed to fail
Ailing budget airline Flybe is in line for a rescue package from the government. But that alone won’t be enough to save it
By WILL BEDINGFIELD (Wired)
After taking a nosedive towards financial ruin, British regional airline Flybe has narrowly avoided a disaster, thanks to the UK government, which has confirmed a plan to save it.
The government’s rescue package includes a potential loan of around £100 million and a pledge to review taxes on domestic flights, as well as a headline-grabbing measure – a possible short-term deferral of the £106 million air passenger duty (APD) bill due from the beleaguered airline, a tax introduced in 1994 to pay for and highlight the environmental costs of air travel.
The initial response to the government’s action has been negative – both environmental groups and British Airways, who filed a complaint with the EU over a “blatant misuse of public funds” on Wednesday, have argued that Flybe should be left to fail.
What complicates these grievances is that many of Flybe’s 9.1 million passengers rely on the service for regional connections – two fifths of its flights are domestic. For instance, suggestions that these passengers’ needs could be met by alternative forms of transport, like high speed rail, fall short for island economies – such as the Isle of Man, Jersey and some Scottish islands. “That that’s a laudable ambition,” says Grant. “But how far away [from realisation] are these alternative modes of transport, and what would happen to these regional economies in the meantime?”
But while government intervention may temporarily correct Flybe’s course, it won’t fix underlying problems. APD was a major issue for the company because Flybe has to pay the tax twice, since a return flight within Britain incurs double charges. “APD has been a moan for airlines for a long time,” says James Brass, a partner at consultancy York Aviation. “Flybe’s exposure to domestic travel and the oddities around that and APD has been problematic, but equally they’ve got more serious problems.
“They really struggle to compete with low fare carriers, like Ryanair and EasyJet, simply because their cost per seat is higher.”
He argues that Flybe has also been a victim of circumstance: rising fuel prices, an economic slowdown brought on by Brexit and a depreciation of the pound against the dollar. After all, less than one per cent of Flybe’s revenues are in dollars, the currency with which most airlines pay their bills.
The focus on APD has actually been misleading, says John Grant, an analyst at digital flight information company OAG. “It is not the single most important factor, and it’s been a wonderful Trojan horse for [Flybe] to use to hide other failings and problems in the business.”
An obvious problem that Flybe suffers from is the lack of a hub airport. Its destinations are made up of an extremely fragmented network of low frequency flights. Only around two per cent of its flights operate out of London Heathrow each week, missing out on the connecting traffic of the UK major hubs, explains Grant.
“If someone said to you ‘Where’s British Airways based?’, they’ll tell you Heathrow. Or ‘Where is EasyJet based?’ It’s Luton and Gatwick,” he says. “Flybe flies to 26 airports in the UK and most of them have less than six flights a day. In terms of where the aircrafts are located, it’s so fragmented, so complex, that as a business you can’t manage it.”