Flybe hits heavy turbulence

Flybe hits heavy turbulence

Flybe’s business is stalling, having suffered weaker demand during the winter months. Europe’s largest regional airline had been looking for a lifeline and entered discussions with the UK government on 13 January 2020, culminating in a rescue deal which will involve Flybe’s owners injecting more cash in exchange for a partial deferral of tax owed to the government and a possible loan.  

Flybe has been operating since 1979 and carries around 8 million passengers a year across 71 airports across Europe and the UK. It was close to collapse when it was bought and rescued by a consortium of Virgin Atlantic, Stobart Air and Cyrus Capital in March 2019. The buyers initially pledged to inject £100 million of cash into Flybe. However, uncertainty created by Brexit, a weak pound, and volatile oil prices since the acquisition put financial strain on the airline, which was already suffering from a drop in demand. EY had been instructed to act if the airline was going to collapse into administration, with 2,400 jobs and a number of regional UK routes that are solely operated by the airline at stake.

A key factor creating trouble for Flybe is its unpaid Air Passenger Duty Bill (APD), a type of tax levied on aircraft carriers transporting goods or passengers. This tax costs the airline around £106 million a year. Flybe was in discussions with the Department of Transport and Department of Business, Energy and Industrial Strategy on 13 January 2020. Flybe asked for relief on this tax, but this would have been in breach of EU State Aid rules as well as existing UK tax policy.

While the government is considering a more general cut to the tax on some or more domestic flights which may help Flybe in the future, on 14 January 2020 a short-term plan was agreed. The rescue deal includes a short-term deferral of some of the outstanding APD and a potential government loan. In return, the consortium has pledged to inject tens of millions of pounds into the airline.

The rescue plan has drawn criticism from other airlines. British Airways’ owner IAG filed a complaint to the European Commission, arguing the rescue deal breaches EU state aid rules. Ryanair has written to the chancellor, Sajid Javid, warning the chancellor that any more to help Flybe which cuts APD on domestic routes would breach EU law. Senior executives from IAG, Ryanair and Easyjet have stated that such a rescue deal is waste of taxpayer money.

Market Tracker will continue to monitor this transaction as it develops.

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