On Tuesday, January 14th, 2020, the UK Government had announced that it planned to give Flybe more than $138 million (or 106 million pounds) in Air Passenger Duty, which is essentially a tax placed on all flights departing from airports within the jurisdiction of the United Kingdom, all in an effort to place the ailing airline on a path to recovery.
In return, Flybe’s owners promised to invest 20 million pounds in working capital into the airline as well. Flybe is owned by a joint venture between Connect Airways and Virgin Atlantic, which had bailed out the airline in previous years.
In doing so, Prime Minister Boris Johnson has upset not only the competing airlines, but also some increasingly assertive environmental lobbyists denouncing his use of the Duty tax for Flybe’s sake. Willie Walsh, the chief executive of British Airways parent, International Airlines Group, or IAG for short, called the move a “blatant misuse of public funds,” and filed an official complaint for violation of the European Union’s antitrust regulations. The UK government claims otherwise, stating that it is within their jurisdiction to allocate funds this way.
Walsh is primarily upset since it benefits the airline of his rival in Richard Branson’s Virgin Group as well as their smaller regional connection partner, Connect Airways. And in October of 2019, Connect Airways announced that Flybe would be rebranded as Virgin Connect, which would reflect it’s ever increasing role as a feeder airline for Virgin Atlantic's hubs in London and other cities in the UK.
Other Flybe competitors had their fair share of criticism as well: “Taxpayers should not be used to bail out individual companies, especially when they are backed by well-funded businesses,” said Easyjet CEO Johan Lundgren on Wednesday.
The question remains however;l why be so generous to Flybe? Even if the airline went under, the routes that the airline served would be easily picked up by regional competitors like Loganair or Eastern Airlines, or even by the likes of Ryanair or Easyjet before long.
Interestingly enough, as much as we have heard about Brexit, the UK Government is still bound to the European Union’s rules, at least for regulating commercial aviation activities, which allow for extensive subsidies for loss-making services, through what it calls the Public Service Obligation (PSO). The PSO guidelines from the EU focus on making rural routes viable by offering subsidies, grants, and financial support to cover any unprofitability/monetary losses suffered by the airline.
Another complaint from some of its competitors is the claim that all of their problems were their own fault. For a majority of the previous decade, Flybe was operating half-empty flights, and trying to escape the burdening lease contracts that it had signed, including Stobart Air, which is now one of Connect Airways’ partners.
The full details of the deal between the government and Flybe’s owners aren’t yet publicly disclosed, but the 106 million pound bailout using Air Passenger Duty revenue is a relatively short term loan that does little to put taxpayer money at risk, mainly due to Flybe’s bounty of sellable assets. And if the airline really can’t be salvaged, the government’s tax revenue service, officially called Her Majesty’s Revenue Collection, will always be the most prominent list of creditors in any bankruptcy settlement. This essentially means that the government loan would have the most insurance in getting repaid the money that they loaned to the airline, should it end up filing for bankruptcy.
Indirectly, we could see the UK Prime Minister's actions as trying to prevent the collapse of the third airline in four years. He might be doing this to help gain the support from more of his working class voters, which voted for Johnson to favor more economic intervention from the government to foster more market stability, as opposed to the more conservative voter base.
In an official statement, Flybe said it is “pleased with the support received from the government and the positive outcome for our people, our customers, and the U.K.”
In response to much of the staunch criticism received, the government has promised a review of the whole Air Passenger Duty program during its annual budget conference in March, which could lead to cuts to the scheme, and ultimately lower duty taxes that airlines would have to pay. The whole situation has opened up an entire new can of worms, as the APD is one of the government’s biggest cash cows, pulling in nearly double the revenue from tariffs that it did only a decade ago.
Ironically, the APD has been seen as an important part of the UK’s climate strategy, in trying to skew the regional transportation market in favor of trains over small aircraft. With the goal of making the country carbon-neutral by 2050, the recent use of those funds in bailing out Flybe may be seen as a conflict of interest.
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