Aviation: Flybe - in a mess again?
A year ago, the airwaves were full of stories speculating over the future of Europe’s largest regional airline, Flybe. The carrier had issued a profits warning and had put itself up for sale, predicated by Brexit uncertainty, weaker than forecast demand and currency fluctuations. Several suitors came forward but in the end the airline was sold to a consortium comprising Cyrus Capital, Stobart Group and Virgin Atlantic in a cut-price deal that left ordinary shareholders with almost nothing. The Aviation Oracle wrote extensively on the subject at the time, and when the takeover deal finally went ahead it seemed like the story had ended.
Are there dark skies ahead again for Flybe, of has government intervention fixed the problem?
The consortium suggested it would inject as much as £100m in the ailing regional, £20m to get it over its immediate problems and remove the threat from credit card acquirers withholding funds for future flight tickets, and a further £80m to turn around the business. Most observers assumed that the controversial signalled an end to Flybe’s woes, and in due course it would emerge rebranded as part of the much larger Virgin empire which would deliver it connecting traffic at the long-haul hubs of London Heathrow, Manchester and Glasgow. It was also presumed that Virgin Atlantic’s relationships with other carriers including Delta Air Lines, Air France and KLM would feed yet more passengers onto Flybe’s UK domestic and short-haul European services.
There was delay until the EU approved the acquisition in July, and the only obvious signs that progress was being made were the establishment of a place-holding website for the rebranded operation, the return of some expensive-to-lease aircraft to their owners, and route cutbacks at airports such as Doncaster, East Midlands and Cardiff. Beyond that there was a general optimism that Flybe would soon be on the right track again, especially if its patchy reputation for customer service and ancillary charges could be straightened out.
Government to the rescue
Then on Sunday January 12, 2020 the almost devastating news that Flybe was again on the brink of bankruptcy surfaced. Accountancy firm EY was supposedly on standby and mange the firm being put into administration, while last-ditch attempts to save the operation were launched through negotiations with the UK government. It later emerged that Flybe had requested deferring more than £100m of APD (air passenger duty) taxes that have to be paid to the treasury as a means of staving off the inevitable chaos that losing regional air connectivity at short notice would bring.
The talks finally paid off and it has been reported that the airline will be allowed to defer £106m of APD payments for three years. The government has also agreed to review the application of APD to domestic flights, partly in recognition that customers undertaking such trips incur two APD charges (outbound and return) while others travelling into Europe only pay once (for the UK departure). Quite what the review of APD will entail remains to be seen – and may be unveiled in March’s budget – but the commitment and the three-year deferral of payments appears to have calmed Flybe’s owners to the point where they are prepared to invest more in the business to tide it over the remaining lean winter months.
Questions to be answered
The future of Flybe now seems to be more secure again, which in undoubtedly good for the 2,000 plus jobs that are at stake and for regional connectivity in the UK. but there are some serious questions have to be asked (and answers needed):
APD paid by Flybe’s customers was never the airline’s money to do with as it pleased – it was a tax that should have been ‘ring fenced’ and passed on to the treasury. If we assume – as has been reported but not confirmed – that Flybe has effectively used customer’s APD payments to support its business (or will do in the coming weeks and months), then the latest deal with the government amounts to little more than the equivalent of a loan of £106m, repayable in three years time.
The Connect Airways consortium – Cyrus Capital, Stobart and Virgin Atlantic – rescued Flybe by paying £2.2m. The new owners pledged to inject up to £100m, but it is far from clear whether the whole amount has yet been provided. If Flybe has indeed burned the entire £100m since Connect took over, then the auspices for the future do not look particularly rosy – the APD payment holiday would then appear to offer only a further nine months respite at most, unless significant further improvements can be made to the business. If on the other hand the new owners have not yet injected the promised cash into Flybe, why are they now not being pressured to do so as an alternative to a pseudo-government bail-out?
According to one statistics website, Flybe has made money in only three of the last ten years amounting to a total of £35.4m, while pretax losses in the other seven years have totalled £179.4m. Connect Airways has already moved to alleviate some of the red ink at Flybe but clearly those steps haven’t been enough. Is there another £33m per annum (in addition to returning the business to profitability) that will enable the APD to be paid when the deferred amount becomes due again? Or will there have be yet another begging bowl put out three years down the line?
Why did the government not step in and give a similar APD payment relief to carriers such as Thomas Cook – and more particularly bmi Regional that had a similar regional / domestic air services business model – both of which failed last year? And why should Flybe be given respite when other airlines operating in the UK domestic market including British Airways, easyJet, Eastern Airways and Loganair still have to pay APD to the government on time? Indeed Willie Walsh, head of British Airways’ parent IAG, has now entered the fray and has made a complaint to the EU noting that he believes the ‘bail out’ of Flybe represents a misuse of company money. As BA competes with Flybe on routes from London to Scotland and Northern Ireland, he certainly has a point. Johan Lundgren, easyJet’s chief executive, chipped in too, saying that "taxpayers should not be used to bail out individual companies, especially when they are backed by well-funded businesses."
The real question then is should the government have offered Flybe a lifeline, especially given that it seemingly now has well-funded parents?
There is no doubt that some of Flybe’s routes do deliver vital regional connectivity across the UK. A round trip for business from Exeter to Glasgow, for example, can be completed in a day using Flybe’s services which are scheduled for one and a half hours each way. The equivalent using the train takes around seven hours each way, turning a day trip into a two or even three-day expedition. Some of Flybe’s routes are too low-volume for the likes of easyJet or Ryanair to consider, while British Airways has long eschewed regional routes in the UK market. It therefore seems unlikely that if Flybe collapsed, all of its routes would be picked up by other carriers.
However, the government offering support to an airline that has a lengthy history of making losses, which is owned by well-funded backers that do not appear prepared to invest enough to keep Flybe afloat themselves, is interesting. Boris Johnson’s Conservatives made a play of promising to support the regions during the recent election, and clearly losing regional air services so soon after it came to power again would be an embarrassment.
Is there a future viable for Flybe?
Flybe has already cut routes, aircraft and staff since it was acquired by Connect Airways and these actions clearly were not enough to turn the business around. There have been no major external influences coming into play in the intervening period – the UK currency has been fairly stable and Brexit was already known about. There is no evidence as yet that APD will be totally abolished so the airline will still have to make such payments in future. And let's not kid ourselves that a reduction in APD will result in an equal reduction in air fares – the likelihood is that fares will be maintained at least at current levels and the advantage of reduced APD will be used to shore up balance sheets.
It seems inevitable then that further drastic action will be needed to keep Flybe afloat. Whether Connect Airways can reign in the losses and return to something nearer profitability with only internal changes and cuts remains to be seen, but there must be a risk that the begging bowl will again emerge. Should the UK government really be skewing the market by supporting one carrier while not offering the same to others? Should the government even be considering supporting airlines in light of the current drive towards reducing emissions from aviation?
Its difficult to ignore the impact on staff and the UK aviation scene overall that Flybe failing would have. However, it is also difficult to support government intervention in a business that has shown no signs of turning around, despite its owners having had some time now to make corrections. Its very hard to say, but maybe Flybe should have been left to die, enabling the other players such as easyJet, Loganair, Blue Islands, Aurigny and Eastern Airways to fill the gaps that are worth filling while letting the rest go.