Flybe Rescue May Include U.K. Subsidies for Some Routes

Flybe Rescue May Include U.K. Subsidies for Some Routes
Flybe Rescue May Include U.K. Subsidies for Some Routes
Christopher Jasper and Guy Johnson

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The U.K. government is considering subsidizing some routes operated by regional airline Flybe as part of the rescue deal struck with the owners of the country’s biggest domestic carrier, according to a person with knowledge of the matter.

Any decision to grant Flybe routes so-called public service obligation status would come on top of a deferral of air passenger duty payments and a proposed government loan, said the person, who asked not to be identified discussing details not disclosed in the initial blueprint.

Only one Flybe service, from London Heathrow airport to Newquay in the far southwest of England, currently benefits from U.K. government aid through the PSO mechanism. Another, linking Cardiff with the island of Anglesey, is funded by the Welsh Assembly.

Prime Minister Boris Johnson this week took the unusual step of coming to the aid of Flybe as it teetered on the brink of collapse. Johnson said he intervened because a loss of the airline would have left some of the most economically challenged parts of the country with diminished transport links, given the relative lack of suitable alternatives such as high-speed trains.

The Department for Transport “will lead the review and consider a number of options for ensuring that we continue to have good regional connectivity, including existing policy levers such as PSOs,“ it said in a statement to Bloomberg. “It is important that all options are properly considered.”

A representative for Virgin Atlantic Airways Ltd., part of the Connect Airways consortium that owns Flybe, declined to comment. A call to Flybe wasn’t immediately returned.

‘Communications Fiasco’

British Airways owner IAG SA said Flybe’s rescue had become a “communications fiasco,” in response to news on the likely addition of PSO routes. “The sooner the government comes clean, the better,” it said in an email. IAG has filed a complaint about the tax deferral to the European Union.

“We stand ready to discuss with the U.K. the compatibility of proposed public measures with EU state aid rules,” the European Commission said in a statement.

Further details of the rescue emerged Thursday, with Stobart Group, another partner in the consortium, saying it injected 9 million pounds ($12 million). Based on their holdings, Virgin would have supplied a similar sum and private-equity firm Cyrus Capital provided 12 million pounds. That’s on top of 110 million pounds committed after they bought Flybe in 2019.

An evaluation of PSO designations will begin immediately, while a state loan to Flybe granted on commercial terms is likely to be finalized in coming weeks, said the person.

The APD deferral, which the government says concerns a debt of less than 10 million pounds, will apply for 60 to 90 days, according to the person. A review of the tax regime for domestic routes could see the 13 pound charge levied once rather than on outbound and return flights, the person said. The outcome of deliberations will be revealed in Chancellor of the Exchequer Sajid Javid’s March budget.

Johnson has faced criticism for stepping in to save Flybe after Monarch Airlines, Flybmi and Thomas Cook Group Plc all failed in the past 2 1/2 years, with environmental campaigners saying the rescue was inconsistent with the government’s commitment to slash carbon emissions.

Ryanair Holdings Plc, which is based in Ireland but counts the U.K. as its biggest market, said Flybe’s business model is unsustainable and that a company backed by Virgin founder Richard Branson and a private equity firm shouldn’t qualify for government help. It also said the APD tax “holiday” should extend to competitors including Ryanair, BA and EasyJet Plc.

Stobart shares rose as much as 2.9% in London. Virgin and Cyrus aren’t listed. Ryanair and EasyJet pared gains.

Cities Cut Off and Airports at Risk: What’s at Stake at Flybe

Flybe was delisted in March after its purchase by Connect Airways for 2.2 million pounds. The carrier, which employs 2,400 people, has struggled for years with the narrow margins on regional routes, where demand is lower, together with fluctuating fuel prices and uncertainty around Brexit.

Under European Union transport law, governments or other authorities can offer subsidized PSO contracts in an auction for those routes deemed vital for the economic and social development of a region, and which would otherwise not be attractive to an airline.

There were 176 such routes in the bloc as of Sept. 18 last year. The U.K. government currently funds three PSOs; Flybe’s Newquay flights - which will switch to London Gatwick from Heathrow this summer -- and trips from the U.K. capital to Dundee in Scotland and Derry in Northern Ireland, both flown by smaller regional carrier Loganair.

Loganair also operates most of the 18 PSOs in Scotland funded by the Edinburgh government and local authorities to provide links between outlying islands and to the mainland.

(Updates with European Commission comment in eighth paragraph)

--With assistance from Thomas Penny, Siddharth Philip, Jeremy Diamond and Aoife White.

To contact the reporters on this story: Christopher Jasper in London at cjasper@bloomberg.net;Guy Johnson in London at gjohnson87@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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