Aviation: flybmi - another Brexit casualty?

United Kingdom based flybmi called in the receivers on Saturday and cancelled all of its flights with immediate effect. Its fleet comprised 17 Embraer 135 and 145 regional jets, and it employed 376 staff based in the UK, Germany, Sweden and Belgium. The firm operated regional flights across the UK and into Europe. It also conducted contract flying on behalf of major carriers such as Lufthansa, and was active in the sports charter market.

The closure of flybmi (British Midland Regional) brings to a close a legacy of 81 years flying which started as Air Schools in Derby during 1938. The fledgling business grew and became Derby Airways in 1955 and British Midland Airways a decade later.

Some flybmi services were flown for major airlines including Lufthansa. (Kiefer)

The airline developed a reputation as "the friendly independent" and eventually muscled its way into London Heathrow as a competitor to British Airways. The branding changed again to bmi British Midland in 2001, while its subsidiary British Midland Commuter (formerly Business Air) that operated Saab turboprops became bmi Regional. When bmi was acquired by British Airways, Regional was subject to a management buy-out and subsequently became part of Airline Investment Limited which also controls Loganair.

A spokesman for flybmi said that the airline has faced several difficulties, including recent spikes in fuel and carbon costs, the latter arising from the EU's recent decision to exclude UK airlines from full participation in the Emissions Trading Scheme. Current trading and future prospects have also been seriously affected by the uncertainty created by the Brexit process, which has led to our inability to secure valuable flying contracts in Europe... We sincerely regret that this course of action has become the only option open to us, but the challenges, particularly those created by Brexit, have proven to be insurmountable."

Its the B-word again

flybmi was quick to blame Brexit (the UK's departure from the European Union) for some of its woes. It is undoubtedly part of the truth. The proportion of the firm's business came from contract flying in Europe, on routes that did not touch the UK. Come March 29 this year, there is a significant risk that these operations will no longer be permitted as legislation [as it stands] will prohibit airlines based in the United Kingdom from operating services that do not have one end or the other in the UK. Major airlines have mitigated the risk by setting up Europe-based subsidiaries - an effective move for easyJet which could afford to split its resources and 160 aircraft to the Austrian register, but much more challenging and restrictive for a firm like flybmi with only 17 aircraft and 376 staff.

flybmi lost a lucrative contract with Brussels Airlines last year and there were concerns over some of the routes it operated for Lufthansa in the post-Brexit environment. The uncertainty over the future regulations is extremely likely to have reduced the chances of the airline being offered new or extended flying contracts in Europe - why would any business sign up with flybmi when its activities could have been halted at the end of March?

Emissions trading

Another consequence of leaving the European Union is that British airlines have had their quotas of free carbon credits withdrawn. At the same time, the ability to access cheap credits on the open market has been restricted.

Perhaps its worth backtracking here a little, and explain that all airlines in Europe have to cover their emissions through carbon credits. Typically 80% of baseline needs have been allocated for free, while the remainder have to be bought or traded. The idea is to encourage airlines to cut emissions, thereby reducing spending on the acquisition of the remaining credits that are needed to cover all flying.

With the UK leaving the EU, access to free carbon credits was withdrawn at the beginning of this year. And that means, at the moment have to purchase or trade 100% of the credits they need rather than somewhere nearer 20%. Its difficult to establish the cost of these credits, but estimated typically suggest around £3.00 per passenger for a one-way trip from London to Frankfurt. The change has resulted in significant additional costs for all UK carriers, not just flybmi.

Low loads

When it was announced that flybmi was closing, an official statement said that the airline had carried 522,000 passengers on 29,000 flights in 2018. That implies each service carried a mere 18 customers.

flybmi's Embraers were operating with low loads. (Ingy the Wingy)

flybmi's Embraers had a capacity of either 35 or 49, suggesting that on average only around 40% were filled. The UK Civil Aviation Authority (CAA) point to its load factors (the percentage of occupied seats) varying between 49% and 59% over the past six years. Those are pretty grim figures for most airlines.

However, flybmi's true position is clouded to some extent as part its business came from major European airlines on a fee-per-departure basis - and that meant it didn't matter how many passengers were on the services as its bigger partner was paying a flat price that covered flybmi's costs. flybmi also flew sports charters for football teams where again, loads are not important as the total cost of the flight is covered.

Funding

Nevertheless, the shutdown statement issued by flybmi said that "it has become impossible for the airline’s shareholders to continue their extensive programme of funding into the business, despite investment totalling over £40m in the last six years."

Civil Aviation Authority data states that the airline carried 2,745,091 passengers during those six years. If investors have put £40m into the business over the last six years, they will have subsidised each passenger to tune of £14.57. Since 2017 the airline has also received a funding of £3.8m per annum from the UK Government's Regional Air Connectivity Fund to support services between London Standsted and Londonderry in Northern Ireland.

Again the figures are not black-and-white because of the contract flying flybmi conducted, but it seems very likely that the business had been on life support for most of its independence.

Punctuality

In 2014 flybmi was the most punctual scheduled airline in the UK wth 92% of its departures on time, based on UK CAA figures. It had held the title for nine years. Things went down hill more recently though. In 2017 the CAA placed flybmi almost at the bottom of the pile with delays averaging more than 21 minutes, with only one other UK-based airline having a poorer on time departure performance.

The carrier had problems recruiting and retaining pilots, and has an aging fleet that increasingly suffered from technical problems. That in turn led to a developing reputation for reliability and cancellations. Hiring aircraft to cover for members of its fleet being grounded with technical problems was expensive, and the compensation that had to be payed to delayed passengers will also have impacted flybmi's trading performance.

Business model

The airline industry is cut throat with margins typically averaging less than 5%. The International Air Transport Association reported that airlines made a 4.7% net margin last year. Meanwhile, the price of jet fuel rose from $1.95 per gallon in January 2018 to $2.25 in September - an increase of around 15%. It fell back to $1.79 at the end of 2018 but has been on the rise again since that start of this year. Aviation fuel is bought in dollars and over the last year the value of £1.00 (flybmi's base currency) has fallen from around $1.40 to $1.29. So, over the last 12 months flybmi's fuel bills increased by as much as 15% while its purchasing power declined by around 9%.

Small airlines like flybmi have also increasingly been squeezed on all sides. The major airlines with large hubs earn a substantial portion of their revenue from premium first and business class seats.

Once popular on short commuter routes, Embraer 145s are now seen as inefficient. (RHL Images)

At the other end of the spectrum, customers have become accustomed to low fares for short-haul flights, and in the current environment where there is an excess of capacity chasing too few customers the low-cost carriers have reduced ticket prices to try to fill their aircraft (and earn extra valuable revenue from ancillaries such as bags, boarding and food and drink).

flybmi was trapped in the middle - rising costs, pressure to reduce fares and a fleet that was expensive to operate. The Embraers that flybmi operated are also known to be less efficient than larger aircraft, but most of the airline's markets could not support larger jets and it had not replaced them.

Should we blame Brexit?

It is very sad to see the last vestiges of the British Midland legacy disappear, and this year will not be easy for many of flybmi's staff who are now out of work. The airline was brought down by a combination of circumstances including Brexit, but which also encompassed a business model that was increasingly difficult to sustain and an inefficient fleet.

So should we blame Brexit for the collapse of flybmi? Most business failures result of multiple problems and it is legitimate to question whether flybmi could have gone on much longer, as least without further substantial funding injections or a significant change in its business. The airline was facing other challenges too, but Brexit was the straw that broke the camel's back.

Carriers such as Monarch Airlines, airberlin, Primera Air, Small Planet and Germania have collapsed over the two few years. Others, even including the giants Ryanair and Norwegian, have announced reduced profits or have had to resort to injection of additional capital. Things could get worse if the major economies drop into recession. It isn't over yet - there is still too much capacity in Europe, chasing insufficient custom.

Text © The Aviation Oracle