Airline chiefs have accused the UK government of misusing taxpayer funds and flouting EU state aid rules, after it agreed a rescue package with the owners of struggling airline Flybe.
The Treasury, the Department for Transport (DfT) and the Department for Business, Energy & Industrial Strategy (BEIS) struck a deal with Connect Airways earlier this month. The government’s decision to defer Flybe’s obligation to collect air passenger duty (APD) from its customers, under a ‘time to pay’ arrangement for a debt of up to £10m, has enraged competitors.
Connect Airways, a consortium made up of logistics business Stobart Group (STOB), airline Virgin Atlantic and US investment fund Cyrus Capital Partners, will pay £30m into Flybe over the coming months (Stobart has said that it will commit up to £9m). The group gained control of Flybe in July 2019 and to date has invested £110m in the airline.
After it was announced that Flybe’s near-term future had been secured, Ryanair (RYA) chief executive Michael O’Leary wrote to Chancellor of the Exchequer Sajid Javid accusing the government of distorting fair competition between airlines with a package that “clearly constitutes illegal state aid”.
Under the terms of the Withdrawal Agreement, as part of the UK’s exit from the European Union, the UK is obliged to comply with EU competition and state aid rules. International Consolidated Airlines (IAG), which owns Virgin Atlantic rival British Airways, has submitted a complaint to the EU Competition directorate “about the state aid that the UK government has granted to Flybe”, according to a spokesperson.
The UK government has denied breaking state aid rules. It observed that there were more than 700,000 ‘time to pay’ arrangements in place during 2018-19, which have helped businesses facing short-term difficulties in meeting their tax obligations by spreading their payments.
Flybe has not published financial results since being taken over by Connect Airways. The airline put itself up for sale in November 2018, before receiving an offer from the consortium in January 2019. Cyrus Capital owns 40 per cent of Flybe, while Virgin and Stobart both own 30 per cent. Flybe is set to be rebranded as ‘Virgin Connect’.
Stobart targets regulator
The takeover was opposed by Flybe’s largest shareholder, Hosking Partners, which sought to oust then-chairman Simon Laffin over the sale and the decline in Flybe’s value. The deal also ran into regulatory difficulties with the European Commission, which Stobart has subsequently blamed for delaying Connect’s plans to revive the airline. “This resulted in a situation in which a further injection of funds is required to ensure continued flying,” it said on 16 January.
With 8.3m seats, the airline accounted for 29 per cent of the UK’s 28.8m domestic scheduled airline seat capacity in 2019. This made it the UK’s second-largest domestic operator, behind easyJet (EZJ) and ahead of British Airways. Last year, Flybe confirmed plans to expand its presence at London Southend Airport, which is owned by Stobart.
"A blatant misuse of public funds"
This month, Sky News reported that the airline had entered crisis talks with the government in a bid to secure financing. The resolution includes a deferment in collecting APD, an environmental tax laid against flights from UK airports, which will take place on a monthly basis up to the value of £10m. This proposal has incensed airline executives.
The government has announced reviews of APD and ‘regional connectivity’. At £13 per flight, the tax is one of the highest of its kind in the world. As of 2019, Germany had an air passenger tax of €7.50, while Austria levied a tax of just €3.50, according to Ryanair's 2019 annual report.
Were Flybe to fail, the likes of Ryanair, easyJet and British Airways would be ready to absorb its flights, Mr O’Leary at Ryanair told the chancellor in a letter dated 16 January. Mr O’Leary demanded the details of government support offered to Flybe, and asked for confirmation that “this APD holiday will now be extended to all other competitor airlines in the UK”.
Ryanair’s chief executive issued the chancellor with a seven-day ultimatum for the confirmation of these facts. Failure to receive these details will result in the airline suing the British government for breach of UK and EU competition law and the breach of state aid rules. The treasury declined to comment on Mr O’Leary’s letter.
Easyjet chief executive Johan Lundgren is also opposed to the deal. “We do not support state funding of carriers,” he said. “Taxpayers should not be used to bail out individual companies especially when they are backed by well-funded businesses,” he added.
A Wizz Air (WIZZ) spokesperson said subsidies "contradict fair competition".
Mr Lundgren welcomed the government’s APD review, observing that the tax “provides no incentives for airlines or passengers to improve the carbon efficiency of their flying” and “simply acts as a revenue raiser”.
IAG filed a complaint with the European Commission on 20 January. The airline group declined to disclose details of its submission. The group counts British Airways in its airline roster, which is a competitor to both Flybe and one of its co-owners, Virgin Atlantic.
“Prior to the acquisition of Flybe by the consortium, which includes Virgin/Delta, Flybe argued for taxpayers to fund its operations by subsidising regional routes,” departing IAG chief executive Willie Walsh commented.
“Virgin/Delta now want the taxpayer to pick up the tab for their mismanagement of the airline,” he added. “This is a blatant misuse of public funds.”
A European Commission spokesperson said “we stand ready to discuss with the UK the compatibility of proposed public measures with EU state aid rules”.
A Flybe statement confirmed that the airline had agreed a payment plan with HMRC, adding that “this agreement will only last a matter of months before all taxes and duties are paid in full”.
“This is a standard time-to-pay arrangement with HMRC that any business in financial difficulties may use.”
APD is unsustainable
The government’s willingness to sustain Flybe appears to sit within its commitment to “level up” the UK’s cities and regions. While the airline has struggled, it remains a critical component of the country’s regional connectivity, providing over half of domestic seats outside London.
Canaccord Genuity analysts said that “a bankruptcy of Flybe would... have had a disastrous effect on a wide range of cities, communities and regions in the UK, which would have been starved of airline transport connections”.
The analysts argued that "the arguably unsustainable high level of domestic APD has been a prime factor in Flybe’s financial struggles". The tax came into effect in 1994, and last year was forecast to raise £3.7bn over the 2018-19 period.
The £26 levied on a return domestic flight can be equivalent to almost half of Flybe's initial promotional fares.
Of IAG’s €3.15bn (£2.64bn) overall tax bill for its 2018 full year, it spent €885m on UK APD. Airlines in Europe don’t pay a duty on fuel, although a tax of €330 per thousand litres of fuel has been touted, which would increase ticket prices on average by around 10 per cent.
APD has been criticised for disproportionately impacting regional travel, owing to the fact that it is levied on both legs of a return journey. Tim Alderslade, chief executive of trade body Airlines UK, said that a benefit of Brexit would be the ability to cut or remove APD on regional travel. “Levying £26 in tax when – in the case of Flybe – the average fare is £52 – is not sustainable when so many other costs on airlines are increasing.”
“APD is not and never has been an environmental tax,” he added. “It has no bearing on the ability of the aviation industry to decarbonise and achieve net zero emissions by 2050.”
Peel Hunt transport analyst Alex Paterson dismissed the possibility of any interest from the UK's quoted airlines in acquiring Flybe. He expressed surprise at the government’s offer to defer Flybe’s APD obligations. “That’s not the sort of thing that the British government has tended to do historically,” he said.
“Clearly they’ve got to be careful not to make it look like they’re favouring Flybe over anybody else,” he added. “If you defer that payment, you are favouring them, because nobody else is getting those terms.”
