Flybe/state aid: UK sets good precedent as coronavirus bites
It is not the role of taxpayers to underwrite bad business propositions rejected by the markets
Pterosaurs, winged reptiles from about 100m years ago, barely looked airworthy. You could say the same of Flybe, a small UK airline heading for extinction itself. After months of talks with the government over emergency funding, it has collapsed into administration.
Weighed down with a heavy cost structure, Flybe will join the fossilised remains of Monarch Airlines and Thomas Cook. Coronavirus gets the blame for Flybe’s immediate cash shortage. But this was always a subscale company with a weak business plan.
The epidemic will push other weak enterprises to the brink. They too will demand bailouts. The current government should give them short shrift, even as it supports business broadly by extending tax payment deadlines and speeding payment on state contracts.
Flybe, extant since 1979, has a history of lifting off from one financial mess and landing in another. A restructuring in 2013-14 was meant to create a regional airline competing against trains. Unfortunately, having the highest share of seats from Belfast to Manchester would never guarantee Flybe’s survival into the next decade.
By September 2018 Flybe’s tangible equity per share of £0.50 had hardly changed from five years before, according to S&P Global. Its cost per passenger (ex-fuel) of £52.90 per flight pretty much equalled the equivalent revenue per customer.
In contrast, easyJet has costs just over £40 per flight on routes that are longer. Blame Flybe’s fleet of 54 fuel-guzzling planes.
Connect — a consortium of Virgin Atlantic Airways, Stobart Air and hedge fund Cyrus Capital — has injected £135m over the past 14 months to rescue Flybe. This week, the Financial Times reported the government had declined to stump up a £100m loan. That will play badly with employees, who are understandably distressed. It will also trigger complaints Prime Minister Boris Johnson does not really care about the regions.
The same arguments were rehearsed following the credit crunch. Labour prime minister Gordon Brown dead batted calls for state support back then. They came from LDV, a van company that collapsed, and Jaguar Land Rover, which found the money elsewhere.
Mr Johnson is right to flee commitment this time round. It is not the role of taxpayers to underwrite bad business propositions rejected by the markets. The prime minister has set a precedent. It will prove useful when coronavirus prompts other poorly adapted organisms to seek help in staying aloft.
This article was amended after publication to revise the scale of Connect’s cash injection into Flybe.