- Flybe - a brief
- Reasons for Flybe’s collapse
Europe’s largest regional carrier and an integral part of UK’s aviation industry, Flybe, has gone bust, receiving its last blow from the fast-spreading Covid-19. Flybe, in fact, is the second British airline to go out of business in the past 6 months alone and the fourth in the past 2 years. The airline, serving 57 airports, with about 2,000 employees and serving around 8 million passengers, had been long-struggling to strengthen its books, despite several cost-cutting plans, and restructuring measures over the years.
In fact, Flybe was rescued just last year (February 2019) by Connect Airways – a consortium of Virgin Atlantic, Stobart Air and the hedge fund Cyrus Capital. Even prior to the takeover, Flybe was reporting losses to the tune of £20 mn a year, indicating financial stress that had long been plaguing the Company’s business model. Below we look into the factors, that apart from Coronavirus, were the compelling factors that forced Flybe into adminstration last week, after the UK Government refused to dish out a £100 mn loan last week.
- Competitive Industry
As is common knowledge, the airline business is one of the toughest industries to operate in. Several airlines, across the globe, grapple with pressurized margins due to tough competition posed by low cost carriers and the effective management of fuel costs (exacerbated further by currency fluctuations). In 2019 alone, around 18 airlines filed for bankruptcy. As was no exception, Flybe, operated in a rather competitive UK aviation industry, with the likes of British Airways, Ryanair and EasyJet. Not only this, the airline was perpetually trying to compete domestically with both road and rail travel. Too add to the pressure were high regulations, aggressive unions, and high bargaining power of customers.
- Geographically concentrated operations resulting in greater vulnerability
Being a key regional player, the airline operated ~40% of UK’s domestic flights, and thereby was more prone to macro-economic factors impacting the home country. Additionally, its domestic concentration had it flying on routes that were remote and thereby were only accessible by flights, but which often allowed the aircraft to be flown at barely half capacity. Flybe struggled with sluggish demand emanating from a decline in domestic consumer spending apart from the effects of Brexit. The weak pound after the referendum further added to its increased fuel cost as well as aircraft leasing costs. As mentioned earlier, the airline had to compete with other modes of travel as well owing to the domestic concentration of its operations.
APD (Air Passenger Duty)
In the UK, airlines have to pay a tax per passenger for flights taking off from the UK, what is referred to as APD or the Air Passenger Duty and had been majorly opposed by several airlines since its implementation in 1994. Airlines need to pay APD both on departure as well as arrival, for domestic journeys (within the country), whereas for international flights, APD only has to be paid for departure (from the UK). For instance, the charge is estimated to be around £13 for a short-haul economy flight, whereas the same could shoot up to £528 for a long-haul first-class flight. Flybe had long been complaining about the airline being put at an added disadvantage by the implementation of APD due to its domestic concentration of flights. In fact, recently the government had announced it was considering a cut in APD on domestic routes in order to help Flybe (before it went in to administration), even though it would’ve done little good as the cut could only have come into effect next year as the UK was cautious to not contravene EU state aid rules amidst the Brexit transition period. Additionally, even the slightest chance of a rescue attempt by the Government, in the form of a tax holiday or a tax deferral for Flybe, was legally challenged by two of Flybe’s competitors: IAG & Ryanair, challenging that any such move would amount to illegal state aid.
Large fleet and an expansion plan gone wrong:
Back in April 2014, Flybe was listed on the stock exchange to raise money to buy more planes backed by a rather ambitious plan of a pan-European expansion strategy. The airline was seen expanding on destinations and routes merely in order to use up the airlines, instead of an ideal state wherein planes were purchased in order to fulfil increased demand - a situation that successive management struggled to deal with. The table below shows the low payload factor that had plagued the airline for several years.
- Successive management changes and rebranding strategies:
Flybe grappled with falling profits, rising oil prices and a weaker pound for several years and this wasn’t the first time the airline faced a threat of closing down; it had neared collapsed almost three times earlier. Not only this, it had undergone several restructuring attempts, gone through multiple CEO’s and been rebranded twice. The last time the Company faced a severe financial crunch, as stated previously, the airline was bought by a consortium of Virgin Atlantic, Cyrus capital and Stobart Group just last year in February 2019. The intent of all the three parties involved varied with Virgin hoping to add Flybe’s passengers onto its long-haul flights, while Stobart itself was a regional player (much like Flybe). Cryus, on the other hand, was simply looking to make a good return on its investments. With such divergent views coupled with a lack of a common strategy to rehaul Flybe’s operations, its collapse was called for.
While Flybe had been struggling for several years with a clearly flawed business model, several operational inefficiencies, spread of Covid-19 (which further dampened demand) ultimately led to its collapse, amidst lack of government intervention. Even if the Government had dished out the £100 mn state loan to the struggling airline, it would’ve been a far cry from resolving the multiple issues that the airline battled with thus far. The airline suffered from competitive pressures, in the absence of several measures that the Company and Government needed to take, the business model of Flybe was a far cry from an operationally sound one.