U.K. Airline Flybe Collapses (Again)—Why Governments Should Never Save Failing Airlines

When any business fails it is truly devastating on the hard-working employees that make up the lifeblood of a company. In the case of Flybe, unfortunately, today over 2,000 hard workers, many of whom have been at the company for well over a decade have found themselves in a position whereby they have to search for new employment in the aviation industry.

The focus and liability have to turn to how the company was managed right at the top, and quite frankly, Flybe was run incredibly poorly for many years.

The viability of a regional airline in the U.K. is stretched at best, however, Flybe was again “rescued” by government tax breaks just a month ago, after already being rescued just one year before.

Something went fundamentally wrong with the business model and management of Flybe, and it has unfortunately impacted the thousands of hard-working staff there.

The last few years have been fairly dire in the airline industry. Jet Airways, Air Berlin, Monarch, Wow Air and Thomas Cook Airlines are just a few of the high profile airlines to fail. 

However, when an airline is so poorly run, should it be supported by the government, or is this just throwing good money at bad money, and preventing the inevitable failure.

In my opinion, the answer is no. The difference in the aviation sector is that with so many moving parts, and often vital transportation links there is an argument for government support and even perhaps subsidies. Firstly, under EU regulations, subsidies are not allowed, let alone the unfair financial play of supporting a poorly managed airline over other airlines in the U.K. Secondly, if a business is unviable, then it is simply unviable, poorly managed, and history dictates that eventually, it will fail.

With an airline, almost every headwind is against its success, from oil prices to slowing demand, labor strikes, taxes, currency fluctuations and the list goes on.

In the case of Flybe, the airline had already blamed Brexit for a reduction in demand and now the CEO Mark Anderson has said in a press release that “Europe’s largest independent regional airline has been unable to overcome significant funding challenges to its business. This has been compounded by the outbreak of coronavirus which in the last few days has resulted in a significant impact on demand.”

This is despite just in January, after the last time Flybe was in financial difficulty Anderson saying that the airline had a bright future.

Despite pressures from Brexit and Coronavirus reducing travel demand, why is it that other airlines such as British Airways and EasyJet have not solely blamed and masked external factors in their weakening profits? The answer is better management. 

Any business must be prepared for external, unforeseen shocks—that is simply the world of finance. And just several weeks into a drop of demand, to callously hide behind external factors for the companies demise demonstrates that the business model was never viable to start with. 

Granted, Flybe operate thin, lower revenue regional routes, but if that doesn’t work for the business, then you can’t keep “beating a dead horse.” Management has to adapt the model or take drastic measures. Look at BMI for example. The U.K. airline that struggled for many years to compete with their much bigger rival British Airways. After years of fighting an uphill battle BMI was bought by British Airways due to their valuable landing slots at Heathrow, and many of the staff were then employed by British Airways. This was drastic action to ensure the survival and continuation of the legacy in some form, not to mention the employment of staff.

Flybe’s troubles began long ago. Flying small capacity Bombardier Dash Turboprop aircraft from premium airports such as London City and London Heathrow; where landing slots can sell for as high as $75 million (Oman Air purchasing a landing slot from Air France-KLM), was always going to ensure that being profitable was a hard ask for Flybe.

Many airlines cannot even profit on twin-engine larger jets to European destinations from these airports (and mainly feed passengers on shorter loss-making routes to profitable long-haul flights),  let alone using Dash 8 turboprops with just 70 seats.

Flybe already issued a profit warning in 2017 and then again in 2018. When the airline said in 2018 that it would report a £22 million loss the management blamed fuel costs, a weak pound and falling demand—however, what did the management actually do to change the situation?

The then CEO, Christine Ourmieres-Widener said “We continue to strengthen the underlying business and remain confident that our strategy will improve performance” but just two weeks after this statement the airline was up for sale after their shares tumbled 46% in one day.

Air passenger duty has weighed heavily on Flybe, particularly as they mainly operate domestic routes, however, unfortunately, despite the relatively high cost of train travel in the U.K., if the demand is not there for routes such as London the Newquay, then quite simply you cannot force would-be passengers to fly when they would likely be taking overland transportation. By slashing ticket prices to a point where just a small decrease in demand sends the airline into the red is not a viable or sustainable business model.

It seems that Flybe’s management kept doing the same thing, on the same routes, with the same strategy and hoped beyond hope that a miracle would boost demand. 

The consortium of buyers that “rescued” Flybe seem to have done little beyond beg the government for tax breaks. The business model has seen little drastic changes, and Flybe seemed to position itself to be a stalwart of the U.K. governments ambitions to keep regional routes open. 

Flybe’s recent new owners should quite honestly be questioning not only their management but how they have left thousands out of a job. The Connect consortium that “rescued” Flybe a year ago, is comprised of Virgin Atlantic (49% owned by Delta in the U.S.), Stobart Group and Cyrus Capital.

This is yet another attempt by Virgin Atlantic at pushing the domestic U.K. market after founding and collapsing Little Red. All the while the airline bangs the drum about wanting more landing slots at Heathrow to challenge British Airways which I previously wrote about, yet cannot seemingly manage to make a U.K. business work. 

Furthermore, with the hopes that Virgin and Delta would feed long-haul traffic to Flybe now dissipated, where the “big” owners when things went wrong again?

As a closing thought I’ll just leave this here – although not directly having ownership in Flybe, yet owning 49% of Virgin Atlantic, Delta has just recorded record profits of $1.6 billion for 2019 to be profit-shared with their 90,000 employees. Additionally, the airline announced a very healthy $4.2 billion in free cash flow.

However, the main direct players of Virgin Atlantic and Stobart Group both slipped to losses in 2019. The question must be asked why loss-making and struggling businesses are acquiring other loss-making businesses and whether we really expect the results to be any different through consolidation.