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Aviation: Could Heathrow slots be behind the Flybe buyout?

An offer to buy struggling UK airline Flybe by a consortium of Virgin Group, Stobart Aviation and Cyrus Capital hit the headlines yesterday. Many commentators – and Virgin Atlantic itself – talked up the opportunities the proposed deal creates to enhance connectivity between the UK regions and long-haul flights. Indeed, Virgin Atlantic’s CEO Shai Weiss said: “Together, we can provide greater connectivity to our extensive long haul network and that of our joint venture partners Delta Air Lines, at Manchester Airport and London Heathrow. In the near future, this will only increase, through our expanded joint venture partnership with Air France-KLM.”

The Aviation Oracle wonders, however, whether the value of the Heathrow slots held by Flybe is the real motivator behind the proposed deal. It’s interesting that Weiss mentioned Manchester ahead of Heathrow. Flybe has a more intensive operation at Manchester than it does at the London airport and Little Red, Virgin's last attempt at providing services between London and the UK regions, did not go well.

Virgin's previous foray into the UK domestic airline market did not go well. (RHL Images)

Nevertheless Virgin already sells Flybe's connections from Aberdeen and Edinburgh to Heathrow as they present an opportunity to channel passengers onto its long-haul routes.

Remedy slots

Flybe hold eight slot pairs at Heathrow, increasing to 12 in late March when the Newquay service comes online. Its a good portfolio:

Flybe Heathrow slots – summer 2019

Departures: 08:45, 09:15, 09:45, 11:20, 12:45, 14:30, 16:20, 18:05, 18:20, 20:20, 20:40, 20:45

Arrivals: 08:00, 08:30, 09:00, 10:35, 12:05, 13:45, 15:40, 17:15, 17:30, 19:35, 19:55, 20:00

Flybe was able to gain rights to use Heathrow as a result of the arrangements put in place when IAG (parent of British Airways) acquired bmi British Midland from Lufthansa in 2012. Conditions for the allocation of the ‘remedy’ slots were fairly stringent. Quoting European Union regulation (EC) No 139/2004 – Merger procedure which deals with the acquisition:

  • As a general rule, the slots obtained by a prospective entrant must be operated on the city pair(s) for which they have been requested… and cannot be used on another city pair unless the prospective entrant has operated them during at least six full consecutive IATA seasons (the ‘ulitisation period’).

  • Once the utilisation period has elapsed, the prospective entrant would be entitled to use the slots… to operate services on any route connecting London with any other part of Europe.

  • During the utilisation period, the prospective entrant shall not be entitled to transfer, assign, sell, swap or charge… any slots obtained...

Flybe entered the Heathrow market in March 2017 and at the end of winter 2020 – little over a year from now – it will have operated to Aberdeen and Edinburgh for six IATA seasons. It seems that there will then be an opportunity to switch seven of the slots pairs to other European destinations – quite possibly to routes that are more lucrative. Furthermore, it appears that at the same time the slots will also become tradable or swappable.

It’s difficult to put a value on Heathrow slots as details of the trades do not always enter the public domain. However, particularly valuable pairs (an single inbound and a single outbound at peak times) have changed hands for as much as $75m. Some of Flybe’s slots could be classed as valuable – or expensive – if another airline wanted to acquire them.

Potential to trade

With seven of Flybe’s slot pairs become more marketable in March next year, what’s to stop Virgin / Delta / Air France / KLM – the prospective owners of Flybe – trading them? Or swapping them for long-haul slots allocated other airlines? The ‘out’ for Flybe’s new owners could be claims that attempts had been made to turn round the Aberdeen-Heathrow and Edinburgh-Heathrow routes, but they weren’t economic. With a little creative slot dealing, it’s not beyond the realms of possibility that the current Aberdeen and Edinburgh slots at Heathrow could be transferred to Virgin Atlantic (long-haul), Delta Air Lines (USA), Air France or KLM (Europe).

Could Flybe's Heathrow slot portfolio be behind a proposed acquisition? (John Taggart)

Could Flybe's Heathrow slot portfolio be behind a proposed acquisition?  (John Taggart)

Connect Airways (the name behind the Virgin / Stobart / Cyrus buyout) is proposing to commit around £122m to Flybe – £2.2m for the airline, £20m in working capital, and up to £80m in further funding. It will also take on a reported debt of £100m. An investment of £222m could be a good deal if it provides seven Heathrow slot pairs next year, and a further five in three years time. With the slots gone or reused elsewhere in the Virgin / Delta / Air France / KLM empire, the group could walk away from Heathrow domestic and leave the rest of the former Flybe network, including a hub in Manchester, for Stobart to run. Trimming Flybe into a profitable operation in the UK regions would then be just icing on the cake.

It is quite possible that Virgin and Delta are aiming to grow domestic feed into their long haul networks at Heathrow as a means of countering British Airways dominance in west London. Commitment to UK domestic services now could put the airlines in better standing when slots for Heathrow's third runway become available. But it also seems possible that the former Flybe routes could be gone within a year or two, leaving the Heathrow domestic market to BA again.

Text © The Aviation Oracle

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