Huge Customs Savings: Government and HMRC bailout Flybe

February 11, 2020

2 min read

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What's going on here?

The British government recently brokered a deal to rescue Flybe (a UK regional airline owned by a consortium that includes Virgin Atlantic) by deferring ÂŁ106m of tax due in air passenger duty.

What does this mean?

Flybe was founded in 1979 and transports nearly 8m passengers to 71 airports in the UK and the EU every year. Last year however, Flybe was bailed out for the price of 1p per share by Connect Airways, a consortium led by Virgin Atlantic. The airline had previously seen their value drop from around £250m to just £2.8m. Connect Airways in return took on Flybe’s struggling assets and £82m of debt in the hope of turning the airline around.

A year later, it is clear that Connect Airways have failed. To avoid bankruptcy, Flybe turned to the government in the hope that the taxpayer will pick up the bill. The British government’s new deal will see:

  • The British government defer ÂŁ106m of air passenger duty owed by Flybe; 
  • Connect Airways inject about ÂŁ20m into Flybe;
  • The potential for short-term loans from the government to Flybe.

For now, this has saved the jobs of 2,400 Flybe employees, as well as the UK’s capacity to offer regional flights.

What's the big picture effect?

Climate change activists are disappointed that the British government has rescued the regional airline. Green Party MP Caroline Lucas described the deal as “utterly inconsistent with any serious commitment to tackle the Climate Crisis”. The government has responded that the tax deferral will not compromise its carbon-emissions targets. 

Flybe’s competitors have contested the government’s intervention as anti-competitive. British Airways’ holding company and Ryanair have argued that the deal not only violates European competition law but also EU rules on state aid. “Unlike Flybe we all operate profitable business models (without the benefit of being owned by billionaires)” wrote Ryanair’s CEO Michael O’Leary. “We must be treated the same as Flybe if fair competition is to exist”. The UK will still have to abide by European law for 11 months following Brexit on 31 January 2020. 

However, the British government has argued that it has saved both British jobs and is in line with the Conservative’s election promise to “level up” the UK regions. In the past few years we have seen other airlines such as Monarch and Thomas Cook go bust after failing to secure a rescue deal from the government and other investors (for more information on Thomas Cook going bust, see our article on that here). 

Many believe that this is just a temporary reprieve for the airline with deep-rooted problems. Flybe has been criticised for leasing more planes than they have the demand to fill. Others point to Brexit uncertainty and the weakness of the pound. What is clear is that Flybe’s survival in the long-term is far from certain.

Report written by Will Holmes

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