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Aviation: The battle for BEE

Over the weekend it was reported that International Airlines Group (IAG, parent of British Airways) was entering the fray, increasing the possibility that the fight to acquire Flybe (flight code BEE) might involve IAG's CEO Willy Walsh sparring with his arch-rival at Virgin Group, Sir Richard Branson. Such could become the stuff of airline legend as both men have big egos, but each now have their ambitions fettered by wider interests. In fact IAG has not even formally declared that it is throwing its hat into the ring yet, although some pundits see it as favourite to win the battle. Whatever unfolds over the days ahead, the possibility of a bidding war has already sent Flybe’s share price soaring – by lunchtime on Monday November 26 it was trading just over £0.22 while at its nadir ten days earlier the price was just under £0.09.

​So the obvious question is: are these two potential suitors serious, and what could Flybe bring to either of them?

FlyAG?

Firstly IAG. It is a multi-airline conglomerate that already owns British Airways, Ireland’s Aer Lingus, Spain’s Iberia and several smaller carriers including some in the budget and regional sectors. The group’s British Airways (BA) and BA Cityflyer operations are already well entrenched at London Heathrow, London Gatwick and London City, at each of which Flybe also holds slots. British Airways and its partners get very little domestic feed from Flybe, which prefers to channel its passengers onto BA’s rivals.

It seems almost inevitable that an IAG takeover of Flybe would face an investigation by the Competition and Markets Authority (CMA), much as its acquisition of bmi did six years ago. The likely outcome would be the surrender of another tranche of slots at BA’s key hubs, potentially opening the door to alternative and maybe stronger competition. Meanwhile, British Airways has largely forsaken the UK regional airports such as Belfast, Birmingham, Manchester and Glasgow, the only exception being links to London. So it’s difficult to see what positive impact acquiring of Flybe would have on IAG’s existing businesses. On the other hand IAG may see an underlying potential in Flybe – the latest accounts do point to some light at the end of the tunnel if it was rid of costly leases and onerous finance charges, while it could also gain from the better dollar-based fuel purchase rates that can be achieved by a much larger group. So if it could be turned around, Flybe might become a valuable stand-alone member of the group.

Flyve?

Virgin Atlantic on the other hand is only a long haul carrier with routes radiating out from London Heathrow, London Gatwick, Manchester, and to a lesser extent Glasgow and Belfast. It already has codeshare agreements with Flybe that channel passengers from some smaller UK airports through Manchester in particular and Heathrow to a lesser extent, onto its transatlantic services. Acquisition of Flybe would undoubtedly strengthen those connections, while losing to IAG could weaken them. Furthermore, Virgin is part-owned by Delta Air Lines of the USA (49%) and [soon] Air France / KLM (31%). Air France / KLM in particular is locked in a battle with IAG for European market share using links from its bases in Paris and Amsterdam to UK regional airports. It just happens that Flybe has a large at slot holding at both European hubs, through which it has the potential to carry passengers travelling between Exeter, Norwich, Southampton or East Midlands (to name just a few) and Asia, Africa or the Americas.