This Airline Needed More Than Richard Branson’s Magic Touch

(Bloomberg Opinion) -- Even Richard Branson couldn’t provide the spark needed to save struggling Flybe..The U.K.’s largest domestic airline collapsed into administration on Thursday after failing to secure a last-ditch bailout from the government..There is no doubt that the coronavirus played a part in Flybe’s demise. The spread of the deadly disease is having a devastating effect travel and tourism. Saga, the insurance-to-travel business said on Thursday that it couldn’t predict what impact Covid-19 would have on this year’s earnings, after a 20% decline in bookings at its tour operator, with a more significant impact in recent weeks. And the International Air Transport Association warned that carriers may lose $113 billion in sales this year, almost four times greater than an estimate it made just two weeks earlier..But Flybe had problems even before the outbreak. It was acquired in January 2019 for 2.2 million pounds ($2.8 million), or a penny a share. The buyer was Connect Airways, a venture including Branson’s Virgin Atlantic Airways Ltd., and airport operator Stobart Group Ltd., each with a 30% stake, as well as private equity firm Cyrus Capital with 40%. Together they invested about 110 million pounds..Flybe was Britain’s most important carrier for routes outside of London. But it’s difficult to turn a profit in the regional aviation market. Passenger numbers are limited, and even the smaller planes have significant fixed costs..The airline avoided liquidation in January when Prime Minister Boris Johnson’s government came out in support of state intervention and its owners agreed to inject another 30 million pounds, of which 25 million has been invested. It was able to defer some taxes, but a vital 100 million-pound loan, cuts to U.K. flight taxes in this month’s budget and state support for some specific routes were left to further negotiation. These items could not be agreed upon..There was a case for state support given Flybe’s role in connecting more remote corners of the country. But the government was also probably mindful of the risk in rescuing failing firms. After all it didn’t step in to save the 178-year-old British tour operator Thomas Cook Group Plc last autumn. As my colleague Therese Raphael noted in January, there was a danger that even a restructured Flybe wouldn’t have taken off as its owners hoped, creating the need for a more far-reaching rescue later on..Branson’s Virgin group could also have provided more funding, particularly as the British billionaire’s net worth has been rocketed because of the increase in the value of suborbital space travel company Virgin Galactic Holdings Inc..Through Virgin Atlantic, the group has provided about 60 million pounds of Connect Airways’ funding to Flybe over the past year. But it now has its own problems. New bookings have fallen between 40% and 50% over the last 10 days. Stobart Group, which will write down 50 million pounds from the failure, also wasn’t in a position to do more, having suspended its dividend in November, and pledged to sell off non-core assets..While the collapse is devastating for Flybe employees, propping up regional routes just isn’t viable with the world mindful of flying’s environmental impact. In the short term, funding would be better used to mitigate the impact of Flybe’s demise on workers, and in the longer term, invest in alternative transport routes, including rail..It’s also worth casting the mind back to the collapse of Thomas Cook. Images of stranded tourists raised questions as to why the government didn’t step in there. But that reluctance now looks wise. If Thomas Cook had received a bailout, with the coronavirus’s potential hit to tourism in the impending spring and summer travel season, the government would have been facing a potentially even bigger headache than that for a regional airline..To contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net.This column does not necessarily reflect the opinion of Bloomberg LP and its owners..Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times..©2020 Bloomberg L.P.

Bloomberg

Company

Financial Products

Enterprise Products

Media

Customer Support

Communications

Industry Products

Media Services

Follow Us

Bloomberg Customers

BloombergQuint

BloombergQuint

This Airline Needed More Than Richard Branson’s Magic Touch

Bloomberg Quint