Troubled Flybe is latest regional airline to face financial woes

The UK government’s 11^th hour rescue deal for troubled regional airline Flybe may help the airline survive over the short-term future, but fundamental problems with its business model remain.

Key to the government’s plan was the decision to defer payments of Air Passenger Duty (APD), and a promise to restructure the APD system. Introduced in 1994, APD is a tax paid by UK air passengers as they arrive or depart from the UK. Intended to highlight the environmental costs of air travel, it has become a key source of treasury income, raising £3.7 billion last financial year.

Airlines have long-called for the reduction of APD, and with 40% of Flybe’s flights being domestic, the regional carrier is particularly badly-hit: passengers whose flights start and end within the UK must pay APD not once, but twice.

Despite this, ADP is something of a distraction from larger challenges with Flybe’s business model. John Grant of the Official Aviation Guide says there is a history of British regional airlines facing financial woes, with British Midland, BMI Baby and AirUK being among the highest-profile carriers to face eventual collapse. “All of them struggled with operating regional services where seasonal demand can be so variable, cost efficiencies hard to deliver and operational efficiency not always possible,” Mr Grant said.

Flybe, along with its regional forebearers, operate a markedly different business model to larger low-cost carriers such as easyJet and Ryanair. More traditional airlines tend to have a small number of distinct bases, with routes emanating from them in the hub-and-spokes model. Flybe, meanwhile, operates from 26 UK airports and attempts to connect many of them directly. Some of these routes are well-served by larger airlines, while others connect smaller city pairs and are lower in frequency and demand.

To accommodate its lower-demand routes, Flybe operates small regional aircraft such as the Bombardier Dash 8 Q40, with capacity for up to 80 passengers. On routes connecting small city pairs, such as Newquay to Guernsey, unpredictable and seasonal demand can make it hard to fill even these small planes. Meanwhile, the route from London to Belfast sees Flybe’s small turboprops compete with 200-seat Airbus A320 family jets and Boeing 737s from the likes of British Airways and easyJet.

The higher cost per seat in Flybe’s smaller planes make the airline much less attractive than its larger counterparts, yet Mr Grant says Flybe still attempt to plough many of the same routes. “Despite those higher costs FlyBe have frequently tried to compete with those other carriers whose cost base allows them a significant competitive advantage,” he said. “In the long term it just isn’t possible.”

Flybe, meanwhile, has faced near-disaster before, coming close to collapse in 2017 and 2018. There is little to suggest that this week’s rescue deal could stave off disaster again in years to come.

It is Flybe’s regional connections between small city pairs that are of value to the government, and such connections will help deliver on the Prime Minister’s pledge to improve regional connectivity. Flights from Exeter to Newcastle, for example, start at £46.33 and take only 75 minutes. Taking the train would take five and a half hours, and driving would take seven. Flying is also greener than driving, producing around 0.16kg of carbon dioxide per passenger per kilometre on a typical regional flight, while the average car will produce around 0.25kb per person per kilometre. By reducing the number of cars on the roads, regional flights also lessen emissions from traffic jams.

With this in mind, it has been suggested that the government should remove Air Passenger Duty on domestic flights entirely, which would doubtless benefit Flybe and its competitors – but APD is now such an important source of income for the government that they would likely have to make up the difference by increasing tax in international flights. Making it more expensive to visit the UK in the immediate aftermath of Brexit is not necessarily the right approach either.

The airline also faces a conundrum at Heathrow Airport, which could be – but isn’t quite – an integral part of its network. Flybe’s small planes are perfectly equipped to link Heathrow to small regional destinations such as Exeter, Durham, Cardiff and Liverpool, connecting them to countless international routes from the airport recently ranked as the best-connected in the world.

At present, slots at Heathrow are enormously expensive and short in demand, and Flybe simply cannot take on enough slots to even begin to reach its potential. Mr Grant says this will likely remain the case until a third runway is opened. Until then, Flybe reaches just four destinations from Heathrow, of which two compete directly with other, larger airlines. “Abandoning them entirely would provide a cash injection,” said Mr Grant, “but would in turn leave them even further exposed to regional flying and ultimately not be helpful at this stage.”

A proper solution to Flybe’s Heathrow dilemma is at least a decade away, and until then Flybe is likely to keep struggling with a mix of seasonal, low-demand routes and more stable ones on which it finds itself undercut by larger airlines. Flybe’s services are enormously valued by the relatively small number of people who rely on them, but a long history of failure in this field means that the airline’s eventual fate could be inevitable.