By Mateusz Frączek | 3rd April 2020
In recent years, developments in the aviation industry have been wrought with company bankruptcies. On 2nd October 2017, Monarch Airlines entered into administration, shocking many worldwide. The closure of Thomas Cook on 23rd September last year delivered another harsh blow and, furthering the trend, this year marked the downfall of Flybe, with consequences that could have a tremendous impact on the UK’s regional development. Although COVID-19 certainly worsened circumstances, the reasons behind this airline’s demise lie much deeper than the impact of the pandemic.
A glance at Flybe’s financial performance serves as a reminder that its past can hardly be called a successful one. Despite strong revenue growth, the British regional operator exhibited an ongoing struggle with its profitability. In 2015 and 2017, its losses were substantial at £35.6 million(m) and £48.5m respectively. Due to this, credit card acquirers of Flybe - entities which managed Flybe’s accounts through processing card transactions when consumers purchase the airline’s services - decided to retain cash as collateral, in case the company failed to meet its obligations. This restricted cash amounted to an astonishing £16.4m at end of September 2018, significantly worsening the company’s working capital.
Seeking capital to improve its financial position, Flybe entered into an acquisition contract with the consortium of Virgin Atlantic, the Stobart Group and Cyrus Capital, which were tempted by the potential gains from recovering the operator. Coming to an ultra-low 1p per share (£2.2m overall), Flybe’s second biggest investor considered this acquisition “an insult to the aviation industry”.
Although the consortium pumped fresh capital into Flybe, the injection required to avoid bankruptcy was far beyond investor expectations. In attempts to rescue the airline, they cut almost 45% of flights from its domestic winter schedule compared to last season. Nonetheless, the sheer size of Flybe’s fleet and the cost of its maintenance was too much of a long-term problem for the new owners. As a result, they all turned to the government to ask for help.
The conservatives were quick to meet with negotiators, assessing whether there was any potential for a deal to be successful. Rescuing a regional airline, which served underdeveloped airports such as Anglesey, Southampton or Newquay, was a perfect chance for Boris Johnson to achieve his promise to voters last year: “levelling up” economic performance outside London.
A proposal from each party was put on the table. The government offered reductions in Air Passenger Duty (APD) tax, costing Flybe roughly £106m at the time, while representatives of the consortium suggested state aid in the form of a £100m loan. However, neither of these methods could successfully assist the airline.
Firstly, the loan could be on commercial terms or it would have to comply with state aid rules. These rules would mean that it would last for 6 months, with the primary aim of rescuing and restructuring the airline. As the majority of Flybe’s assets were heavily depreciated in value, said loan would require a very high interest rate. This is because the government would assume more risk if they lent to Flybe. Given the airline’s financial position, defaulting on additional loan repayments was highly likely and, if this were to occur, the government would struggle to fully recover the amount owed to them through ceasing and selling Flybe’s remaining assets. This is hardly a sustainable solution for a company on the brink of collapse.
Furthermore, this loan was already facing criticism from other market players such as Ryanair and British Airways, which claimed that taxpayer’s funding, which would be lent out by the government, should not be called on to save the ailing business. They threatened to submit a complaint to European Courts, in the event that Flybe was to receive this aid.
The APD tax reduction was also not a worthy solution. Although it could be granted, it would not kick in until January 2021, when the UK finally exits the single market rules of the EU. The luxury of time was not on Flybe’s side and unfortunately, the coronavirus outbreak hit the nail on its coffin, with demands for flights plummeting as countries closed their borders.
With no cash on hand to meet creditor demands, in addition to unsuccessful negotiations with the government, the airline declared bankruptcy, entering administration early last month.
Among grief and sorrow, this led to 2400 employees losing their jobs. The conservatives are potentially also to blame, failing what many see as a test to its “regional connectivity” commitment. Flybe was often the only airline providing links to some of Britain’s peripheral airports.
In its defence, the government had its hands tied due to the rather strict precedent on state support imposed after Thomas Cook. However, aviation experts have pointed out that the introduction of Public Service Obligations, permitting state support for vulnerable routes rather than the company, could have been pushed forward to a greater extent.
As other airline operators and the railway have agreed to bring home some of Flybe’s passengers, abandoned due to its abrupt collapse, the government is desperately trying to re-establish some of the routes served by the regional airline. Boris Johnson’s promise cannot be ticked off yet, potentially something that should be addressed if he wishes to remain prime minister.