Comment: What did the government agree with Flybe?

Ian Taylor examines a less-than-transparent agreement

The government stirred a hornets’ nest with its agreement to rescue Flybe from imminent collapse last week.

Rival airline bosses cried ‘foul’ and they have a point.

A Downing Street spokesperson insisted: “There has been no state aid for Flybe.”  Yet the government’s action was in stark contrast to the stance it took in relation to Thomas Cook last September.

It’s not often a company appears on the brink of collapse one day and is rescued by a Conservative government the next.

News that the carrier was close to collapse broke late on Sunday January 12, but Cabinet members confirmed talks began on a rescue when they were informed the airline was considering administration on January 11.

There was no inkling of a fatal problem at the carrier the week before, despite Flybe announcing redundancies at its Exeter headquarters. The carrier insisted these were part of its planned restructuring.

Industry sources said they heard nothing in advance, when normally rumours of card acquirers withholding payments and creditors demanding payment do the rounds before public confirmation that a company is in trouble.

‘You won’t find the detail’

The crisis came despite Flybe being rescued from failure less than a year ago when it was acquired by the Connect Airways consortium of Virgin Atlantic, US investor Cyrus Capital and Stobart Group.

The consortium paid just £2.8 million for the airline’s assets and £2.2 million to Flybe shareholders but pledged to invest £100 million to turn around the carrier, which has lost money continually since a public listing in 2010.

Stobart owns 30% of Connect Airways, Virgin Atlantic 30% and Cyrus Capital 40%.

Details of the agreement reached on Tuesday of last week with the Treasury, Department for Business (BEIS), Department for Transport (DfT) and HM Revenue and Customs (HMRC) were not spelled out.

Department spokespeople were unwilling to give details and one source told Travel Weekly: “There isn’t anywhere you’ll find the detail.”

However, the government did issue a statement confirming a review of Air Passenger Duty (APD) in the March budget.

This will involve APD on domestic flights and not as reported by some media outlets a pledge “to review APD for all UK carriers”.

Domestic flights currently carry a double APD burden with the £13 tax levied on both legs of a return flight.

The Treasury said the review would aim “to ensure regional connectivity is strengthened while meeting the UK’s climate change commitments”.

Connect Airways chief executive Mark Anderson, who took over running Flybe in June and plans to rebrand the carrier as Virgin Connect this spring, also confirmed HMRC had agreed to defer payment of some of Flybe’s outstanding APD bill.

This was widely reported to be a deferment of the £106 million bill for last year.

However, Anderson rebutted this in a message to staff, saying the deferment was of less than £10 million and “will only last a couple of months before all taxes are paid in full”.

Such ‘time to pay’ arrangements of tax bills with businesses are not unusual.

The DfT confirmed “an urgent review into . . . strengthening regional connectivity”, but redirected queries about a possible government loan to Flybe to BEIS, which declined to comment.

Anderson confirmed BEIS is considering “a commercial loan, the same as any loan from any bank”. This would have to be on commercial terms to avoid contravening EU state aid rules.

Striking contradictions

Flybe’s owners agreed in return to invest “more than £30 million” in additional funds.

The listed Stobart Group confirmed the new investment in a release to investors, noting Stobart would contribute £9 million in “short-term funding, with the funds drawn down only if required”.

Virgin Atlantic and Flybe declined to comment, and it remains unclear how much relief this package will provide given the consortium insists it had already committed £110 million to support Flybe.

Stobart noted it had “invested £45 million” already. Yet my understanding was it invested no cash last year – instead contributing the assets of Stobart Air, which operates on behalf of Flybe from Stobart-owned Southend Airport, and aircraft-leasing business Propius.

The Stobart Group also appeared remarkably untroubled by Flybe’s predicament last week, with a spokesman for Southend Airport issuing a statement downplaying the importance of Flybe to the airport.

It noted: “In 2019, 2.3 million passengers chose London Southend, with more than two million using easyJet and Ryanair.

“The balance came from Air Malta, Loganair, Wizz Air and Flybe. Ryanair has already announced six new routes for summer 2020.”

None of what is now proposed appears likely to transform the economics of Flybe’s operation.

It looks no more than a short-term fix for a perennially troubled business. Analysts suggested it would keep Flybe operating for no more than a few months.

The carrier lost £9.4 million in 2018, £48.5 million in 2017 and reportedly lost £60 million last year – although no figure has been released.

It serves 26 UK airports, most operating at a loss, with 10 of these reliant on Flybe for more than half their flights.

Yet more than half Flybe services are to and from five airports: Manchester, Southampton, Birmingham, Belfast City and Edinburgh.

Cutting APD on domestic return flights so it’s charged solely one way would save Flybe £53 million a year assuming it does not pass the savings on to passengers.

That would be in keeping with what the Treasury has always suspected airlines would do with a cut in APD, of course.

If the government decides to provide ‘public service obligation’ (PSO) subsidies on more regional services that would also help.

But nothing we have heard appears to address two striking contradictions about Flybe and its parent consortium.

One is that part-owner Virgin Atlantic wants feeder services into Heathrow and Manchester, while Stobart wants traffic to and from Southend.

The other is the fact that every aviation analyst agrees Flybe must slash its loss-making network and reduce its fleet to stem the losses.

But government support depends on maintaining a significant regional network including unprofitable routes.

Square that circle if you can.

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