Why the government's plan to rescue Flybe is doomed to fail

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After taking a nosedive towards financial ruin, British regional airline Flybe has narrowly avoided a disaster, thanks to the UK government, which has confirmed a plan to save it.

The government's rescue package includes a potential loan of around £100 million and a pledge to review taxes on domestic flights, as well as a headline-grabbing measure – a possible short-term deferral of the £106 million air passenger duty (APD) bill due from the beleaguered airline, a tax introduced in 1994 to pay for and highlight the environmental costs of air travel.

The initial response to the government's action has been negative – both environmental groups and British Airways, who filed a complaint with the EU over a "blatant misuse of public funds" on Wednesday, have argued that Flybe should be left to fail.

What complicates these grievances is that many of Flybe’s 9.1 million passengers rely on the service for regional connections – two fifths of its flights are domestic. For instance, suggestions that these passengers’ needs could be met by alternative forms of transport, like high speed rail, fall short for island economies – such as the Isle of Man, Jersey and some Scottish islands. “That that's a laudable ambition,” says Grant. “But how far away [from realisation] are these alternative modes of transport, and what would happen to these regional economies in the meantime?”

But while government intervention may temporarily correct Flybe’s course, it won’t fix underlying problems. APD was a major issue for the company because Flybe has to pay the tax twice, since a return flight within Britain incurs double charges. “APD has been a moan for airlines for a long time,” says James Brass, a partner at consultancy York Aviation. “Flybe’s exposure to domestic travel and the oddities around that and APD has been problematic, but equally they've got more serious problems.

“They really struggle to compete with low fare carriers, like Ryanair and EasyJet, simply because their cost per seat is higher.”

He argues that Flybe has also been a victim of circumstance: rising fuel prices, an economic slowdown brought on by Brexit and a depreciation of the pound against the dollar. After all, less than one per cent of Flybe’s revenues are in dollars, the currency with which most airlines pay their bills.

The focus on APD has actually been misleading, says John Grant, an analyst at digital flight information company OAG. “It is not the single most important factor, and it's been a wonderful Trojan horse for [Flybe] to use to hide other failings and problems in the business.”

An obvious problem that Flybe suffers from is the lack of a hub airport. Its destinations are made up of an extremely fragmented network of low frequency flights. Only around two per cent of its flights operate out of London Heathrow each week, missing out on the connecting traffic of the UK major hubs, explains Grant.

“If someone said to you ‘Where’s British Airways based?’, they'll tell you Heathrow. Or ‘Where is EasyJet based?’ It’s Luton and Gatwick,” he says. “Flybe flies to 26 airports in the UK and most of them have less than six flights a day. In terms of where the aircrafts are located, it’s so fragmented, so complex, that as a business you can’t manage it.”

Without access to slots at a major UK airport, Flybe cannot access more lucrative routes to support its wider business, including connecting passengers travelling to the rest of the world. (“It's interesting that Mr. Walsh and British Airways did not offer to give up any slots at Heathrow to allow Flybe to grow their network and build connectivity,” says Grant.)

It’s this regional connectivity that makes Flybe, which provides trips for internal business and personal business, a very different beast than previous failures such as Thomas Cook and Monarch, who largely offered charter services taking people on holidays.

“People talk a lot about the UK being a trading nation with its ports of international connectivity,” says Brass. “But we need to remember that we do trade with different parts of the UK. That’s a fundamental part of our economy as well.”

There’s also the broader question about the commercial viability of Flybe’s domestic model. “There are key challenges in the operation of smaller domestic routes, particularly if they aren’t subsidised” says John Strickland, an air transport consultant. “Some routes are operated under what is called PSO, or public service obligations – a subsidy based on a tender to operate for social benefit. But this doesn’t apply to most regional routes.”

PSOs become problematic in marginal locations, where the government doesn't want to pay for services that are potentially commercially viable. Examples of places that fall in these margins include large cities like Manchester and Birmingham, small markets in and out of Scotland and Northern Island, as well as the West Country.

“Take the case of Newquay and Exeter,” says Strickland, “If someone wanted to take a short business trip to Manchester, flying is their only realistic option. But the number of people willing to pay higher business fares is not only lower than out of London but much more subject to seasonal variation, meaning that in certain times of the year there might be very little traffic.” (A seasonally available rail trip to Newquay takes around five hours; a Flybe trip from Heathrow takes an hour).

While Flybe’s anguish lies far deeper than air passenger duty, one thing is certain – the government's actions have ensured that this is not the last time we will hear about APD.

“It's such an important source of revenue for the UK Treasury that if they did eliminate it on domestic flights, you can be pretty sure they’d put up APD on other flights – international flights in Europe and long haul,” says Strickland. “That will create problems of its own, affecting airline traffic in other markets and impacting overseas tourism, and will be another way of putting people off coming here especially in light of Brexit.”

This article was originally published by WIRED UK