UK airline Flybe has finally gone into administration after months of speculation. It placing some of the blame on the coronavirus outbreak which has globally seen passenger numbers drop dramatically. Amidst the loss of jobs for its loyal staff, communities left without services and even airports threatened by the loss of their anchor airline, and passengers with little other transport options, the roots of the collapse are wide ranging:
- As a regional airline it had to pay departure and landing tax on the majority of its flights in a double tax hit that did not affect international airlines. Whilst considered by the UK government as a provider of essential services to some regions there was no subsidiary or waiver from these fees. The taxes added to the cost of running the airline
- A decade ago the airline floated on the stock market in a bid to expand across Europe. The money raised bought new planes but increased the airlines over capacity of seats and increased costs. Andrew Lobbenberg, analyst at HSBC aviation research, told the BBC Today Programme, that “They ended up putting planes on routes to use up the aeroplanes, rather than buying a fleet to fly routes effectively and successive managements battled with that burden.”
- Its market was highly competitive and Flybe was squeezed between major airlines such as British Airways and the big low-cost carriers like Ryanair and EasyJet. At the same time, average fares have fallen, squeezing margins and leaving no room for mistakes. When it was taken over by a consortium last February, including Virgin, it was losing around £20m a year.
- Flybe operated around 40% of regional UK flights and was particularly exposed to anything that went wrong in this market. The recent fall in demand prompted by the coronavirus outbreak added to a list of woes which in the past few years included major storms disrupting travel; the effects of Brexit including sluggish UK consumer spending; the weak pound following the referendum; increased fuel and aircraft leasing costs.
- In February 2019 it was by a consortium of Virgin Atlantic, Stobart Group and Cyrus Capital. John Strickland, an aviation analyst at JLS Consulting said the three companies were strange bedfellows who wanted different things from the acquisition. “We had two airlines with very different business models. Virgin was interested in Flybe to feed more passengers into its long-haul flights into its airports at Heathrow and Manchester, while Stobart flies regional routes itself. Cyrus Capital were venture capitalists looking to make a return on their investments. None of these were compatible with each other, and I’m sure they had different opinions over time.”
In the end, Virgin was not willing to put in more money, after the consortium had already invested a reported £135m in the first year. The British government was not willing (or able) to provide investment capital or nationalize the airline. Putting the airline into administration (Chapter 11) was the only option.
And it could only be the first of many, that may make 2019 collapse of 23 airlines, look like a good year. Already Emirates and Cathay Pacific have asked staff to take unpaid leave for up to a month to help them survive, Lufthansa is reported to be looking at cutting up to half of its services and Norwegian has seen its share price drop over 20%.