Flybe finally folds

Regional airline Flybe went into administration on 5^th March, with lessors already moving to repossess their aircraft and leaving questions around the airline’s valuable Heathrow slots.

The collapse comes less than two months after Exeter-based Flybe, the UK’s largest regional airline, snagged a controversial government rescue deal (see Insight: ‘Is Flybe on the brink?’). The rescue involved a £10 million tax deferral and a state loan of £100 million loan ($129.3 million), however according to Flybe parent company, Connect Airways, this funding never “materialised”. EY has been appointed as administrator as the company goes through liquidation.

Flybe was owned by consortium Connect Airways – a joint venture between Cyrus Capital Partners, Virgin Atlantic and UK infrastructure giant Stobart Group – after a £2.8 million ($3.6 million) bailout at the start of 2019 that saw its equity valued at just a penny a share. Cyrus held 40% of Flybe, with Virgin Atlantic and Stobart Group taking 30% each.

Flybe has highlighted the global Covid-19 outbreak as expediating the airline’s default. “The coronavirus has impacted both our shareholders and ourselves and has put additional pressure on an already difficult situation,” Mark Anderson, CEO of Connect Airways, wrote in an email to employees.

The airline had enough cash only to make it to the announcement of the UK’s new budget next week, the Financial Times reported, with the hope that the airline’s air passenger duty – a UK tax on aviation – would be cut.

“Despite every effort, we now have no alternative – having failed to find a feasible solution to allow us to keep trading,” wrote Anderson, “While our shareholders and the Leadership Team have worked with the Government and key suppliers to try to get the funding and support needed, this has not materialised.”

 

UK backs out of state loan

 

Talks for Flybe’s state loan fell apart on Wednesday after nearly two months of negotiations. It is not yet known exactly why the UK government walked away, however the airline’s request for a state loan has been beset by controversy from the outset. Competitors from air and rail alike lashed out at the rescue deal, with IAG launching a complaint to the European Commission that it breached state aid rules.

Anderson stressed in an email to employees in late January that Flybe was seeking a commercial loan from the government, not a bailout: it would be “the same as any loan we’d take from any bank”. “The [tax] agreement will only last a matter of months before all taxes and duties are paid in full,” the airline added publicly in January.

However, Flybe’s 2019 rescue from Connect Airways included a loan that collateralised much of the airline’s buildings, equipment and intellectual property, UK Companies House filings show. Sources told the Sunday Telegraph that Flybe had “got out it’s begging bowl” in discussions with the UK government as it became likely that any state loan would have to be unsecured.

Ryanair head Michael O’Leary was vocal in besmirching the planned government loan. “Flybe is not a viable business; it never has been,” O’Leary said after the rescue deal was announced. “It has lurched from reconstruction to reconstruction and this is the government misusing state funds to discriminate in favour of Flybe.”

 

Lessors repossess ahead of collapse

 

Lessors have acted promptly to rumours of Flybe’s impending bankruptcy. As of 3^rd March 2020, 69% of Flybe’s regional jet and turboprop fleet was leased, according to CAPA Fleets, with NAC and HEH Aviation Management having the largest exposure.

Six leased aircraft left Flybe’s fleet of 65 aircraft between 15^th January and the airline’s collapse, according to CAPA Fleets. Singapore-based lessor Avation got its two ATR 72-600s (MSNs 1260 and 1277, both aged 4 years) out from Flybe and placed with Loganair before Flybe collapsed, the lessor confirmed. Scottish regional airline Loganair has already taken over 16 of Flybe’s routes.

Falko told Ishka that it has no exposure to the bankruptcy as it has LOIs (letters of intent) in place for all six of its ex-Flybe E195s (MSNs 19000104, 19000120, 19000128, 19000143, 19000155, 19000168). The two Falko-managed E195s still with Flybe at the time of its collapse (MSNs 19000155 and 19000168) were already out of service and going through scheduled redelivery. Flybe had been phasing out its E195 aircraft since 2018.

Since mid-January, two Nordic Aviation Capital (NAC)-owned ER175s (MSNs 17000344 and 17000351) also left Flybe’s fleet, according to CAPA Fleets. 

 

The Ishka View

 

Is Flybe Covid-19’s first European airline fatality?

Covid-19 has been an unforeseen and significant pressure on airlines, but Flybe’s collapse is more to do with the UK government backing out of a promised state loan. As a UK regional airline, Flybe had no Asia Pacific route exposure, although the airline may have lost passengers making connecting flights. Covid-19 also made it hard for Flybe’s airline shareholder, Virgin Atlantic, to offer further financial assistance. Nonetheless, Ishka does not believe that the virus alone would have been enough to push the airline into bankruptcy: Flybe has long been struggling to balance its books, approaching collapse at the starts of both 2019 and 2020 and putting the blame on Brexit, as well as rising fuel costs. Covid-19 might have pushed Flybe over the edge, but the airline was already on the edge to begin with.

Virgin Atlantic could be a beneficiary of the collapse. Flybe had planned to move its Newquay-London route from Heathrow to Gatwick from 29^th March 2020, freeing up valuable slots at Heathrow. Rival CEO Michael O’Leary estimated in January that those slots could be worth as much as £60 million ($77.6 million).

As Ishka highlighted earlier, CAPA Fleets data shows that Flybe operates 10% of the world’s active Q400 fleet (see Insight: ‘Is Flybe on the brink?’), meaning that both NAC and HEH Aviation Management will face challenges in remarketing those (primarily midlife) aircraft (see Insight: ‘Turboprop leases rates: Fewer lessors help ATR and Q400 lease rates stabilise’).

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