Flybe survives for now – what happens next?
Reports came thick and fast that up to 2,000 jobs were in jeopardy and the company was even on the brink of bankruptcy which brought to mind the recent Thomas Cook collapse which involved thousands of passengers being repatriated from abroad.
Flybe was taken over in February 2019 by a consortium called Connect Airways, made up of Virgin Atlantic, Stobart Group and investment advisers Cyrus Capital and has a significant regional UK presence, flying connecting services from airports such as Belfast, Birmingham, Manchester, Southampton, Southend and Newquay.
The airline was due to rebrand as Virgin Connect later this year but analysts believe that the financial requirements have become more onerous and require an injection of even more capital to keep the business aloft.
A deal has been struck between the government and Flybe’s shareholders but precise details remain scant.
The proposed package ultimately looks like a short-term deferral of a £106m Air Passenger Duty (APD) bill that will be paid over a three month period rather than in one installment.
There was some early indication that the airline could seek an emergency government loan of £100m but any state loan would usually be seen illegal under EU competition rules although this might be a moot point after January 31st.
The famously inflexible EU commission approved loans made last September by the German government to save Condor, a subsidiary of the Thomas Cook Group while their sister airline in the UK collapsed.
Any aid would also have to be contingent on the owning consortium increasing their funding of the business too. The situation and response has drawn a furious response from rivals.
British Airways and Aer Lingus owners IAG said the deal was “a blatant misuse of public funds” while BA’s chief executive Willie Walsh said: “Virgin wants the taxpayer to pick up the tab for their mismanagement of the airline”.
After this statement was made, the Press Association reported that IAG had filed a complaint with the European Commission, claiming that the government’s decision to rescue Flybe breached state aid rules and gave the struggling airline an unfair advantage.
Josh Hardie, deputy director general of the CBI struck a more conciliatory tone saying: “The CBI is clear that it’s not the role of the government to bail out failing companies.
“But it’s right the Government examines what help it can provide, given the importance of regional connectivity to so many people’s jobs and livelihoods.
The argument surrounding APD is an acute one and in many ways similar to the complaints high-street retailers make around business rates.
Each flight taken from the UK attracts an APD of £13 so a return trip will see a fee of £26 paid. It’s also higher for longer flights and extras such as premium cabins. This generates up to £3.7bn for the Treasury but operators argue that it drives up their costs and restricts further connectivity and passenger growth as a result.
Apart from any assistance given to Flybe, the government has confirmed that they would be conducting a review into the APD ahead of the Budget on March 11th 2020.
Any plans to cut APD would attract increased pressure from the environmental lobby who would see it as sending the wrong signal to markets at the wrong time. Sam Frankhauser, director of the Grantham Research Institute on Climate Change at the London School of Economics said: “APD is applied as a green tax, based broadly on the principle that the polluter pays.
“Cutting or removing it would essentially reduce or eliminate the carbon price for flying.”
Chris Horner, Insolvency Director with Business Rescue Expert said: “The consortium only purchased Flybe last February last year for £2.2m or less than 1p per share so it’s not a total surprise that they’ve been unable to turn the business back into profit in around a year.
“It’s easier to understand the government’s response as similar to that of HMRC dealing with any debtor who can’t pay their tax bill on time.
“It’s effectively a Time to Pay agreement. The Treasury will receive its money – albeit later than requested.
“The alternative to this arrangement would be another airline out of business, 2,000 direct jobs lost, many more in local supply chains and supporting industries and £106m in lost revenue – the equivalent of 4,000 nurses, 18,000 hip operations or 100 MRI machines.
“The Government is already looking at making changes to airline insolvency procedure and while this situation will only increase the sense of urgency, we’d advise more haste and less speed.
“Keeping the fleet flying” and avoiding job losses is an understandable desire but an insolvent airline continuing to operate would raise a lot of issues – health and safety, financial and legal.
“A proposed plan for an airline insolvency insurance fund financed by passenger contributions via their tickets could be a balanced and sensible measure but as always, the final details are key.”
The Flybe situation shows yet again that there’s no “magic bullet” solution to ensure that everybody from staff to customers to shareholders are protected but reminds everybody that risk is always an element and has to be assessed and managed appropriately.
A free initial consultation with one of our team of expert advisors can help find strategies to secure your business and plot a possible flight path to recovery through 2020 and beyond.