Why it makes sense for the government to help run a regional air company

With the demise of Flybe, and its importance in connecting the country, Geraint Harvey, Professor in People & Organisations, Swansea University, asks whether the government should actually run a regional carrier

FLYBE’S collapse has left passengers stranded and put 2,000 jobs at risk. Europe’s biggest regional airline is thought to be one of the first business casualties of the new coronavirus outbreak, which reduced demand for flights. Both tourists and businesses have cut back on flying due to the epidemic.

But the airline had longstanding issues, which raise the question of whether the state should support a regional carrier of Flybe’s significance. While small compared to airlines such as EasyJet or British Airways, Flybe is disproportionately important for smaller airports around the UK. If you want to fly between Cardiff, Aberdeen, Belfast and Jersey, it is one of the main options, if not the only one.

Of course, this raises issues around climate change and the extent that government should support people commuting by plane between cities like London and Exeter. But more remote parts of the country, in particular are always going to be difficult – and potentially unprofitable – to service. Flybe served many of them.

Flybe was rescued in July 2019 by a consortium that includes Virgin Atlantic. This followed losses of almost £30m in 2018. Reasons for Flybe’s collapse include the competitive nature of the airline industry, an ineffective use of its fleet and a lack of clarity in its business strategy, especially so after its acquisition in 2019.

Flybe also claimed, not unreasonably, that the UK’s air passenger duty tax had a disproportionate effect on its profitability. This is a tax paid on international flights out of the country, but for internal UK flights the tax is charged on departure and arrival. So for an airline that operated 38% of UK domestic flights the duty was a significant burden. It is estimated that the duty cost Flybe around £100m per year.

Coronavirus hit Flybe in this context. Demand for air transport is procyclical, which means more people fly when the economy is strong, and fewer people fly when it is weak. For example, following crises like the 9/11 terrorist attacks, Sars and in the wake of the financial crisis fewer people booked flights. The impact of the recent coronavirus outbreak on the airline industry as a whole has been estimated at $113bn due to travel restrictions and reduced demand, with airlines in Asia and Europe worst affected.

As part of Flybe’s 2019 rescue deal, the UK government agreed to defer the air passenger duty tax of £100m for for three years and considered cutting air passenger duty for domestic flights because of the importance of the airline to public transport in the UK. The airline operates almost two in five of the UK’s domestic routes.

There followed an outcry from competitors. Ryanair and IAG (which owns British Airways) complained