Flybe rescue signals Boris Johnson’s resolve on the regions

The decision by Boris Johnson to step in to save Flybe, one of the UK’s largest domestic airlines, illustrated the prime minister’s determination to strike a more interventionist industrial policy to deliver on his pledge to boost the regions.

The last-ditch rescue of the airline – which operates more domestic services than any other carrier – came just weeks after Mr Johnson secured an emphatic election victory by seizing scores of seats in northern England and the midlands on his promise to “level up” underperforming regions.

In the Budget in March, his Conservative government is expected to authorize a swath of infrastructure investments to underscore that promise, drawing on a £ 100bn pot over the next five years of new capital spending.

The political template Mr Johnson has adopted is to some extent that of Michael Heseltine, the former Tory deputy prime minister and champion of regional regeneration.

During a cabinet meeting last September Mr Johnson described himself as a “Brexity Hezza” – to the irritation of the man himself, an ardent Remainer who was subsequently suspended from the Conservative party because of his strident opposition to Brexit.

Lord Heseltine told the FT the tag was somewhat premature: “They have a window with that majority to get things done if they do it from the beginning with panache. . . otherwise they could run out of steam. ”

Peter Mandelson, the former Labor business secretary, said Mr Johnson’s position was best defined as “in a holding pattern on industrial policy” somewhere between Lord Heseltine and former PM Margaret Thatcher. “Flybe is a pragmatic decision that reflects the importance of‘ place ’in the government politically,” he said. “But Johnson wants to build a wider industrial policy based on technology, AI and data analytics.”

Downing Street has said repeatedly that the government is fiscally responsible and therefore has no desire to prop up failing industries or companies. In September, for instance, the previous Johnson government stood back as tour operator Thomas Cook collapsed.

The prospect of a similar failure at Flybe alarmed ministers who feared the potential repercussions of allowing the airline to fail, given its crucial role in the domestic transport system.

The company provides almost two in five domestic flights, including most of the links to some of Britain’s peripheral airports such as Anglesey, Exeter, Newquay, Wick and Jersey: allowing it to collapse would have undermined the government’s regional credentials just weeks after the general election .

“Be in no doubt that we see the importance of Flybe in delivering connectivity across the whole United Kingdom,” Mr Johnson told the BBC earlier this week.

Downing Street was lobbied hard by regional representatives, including those from the Channel Islands – the home of one of Flybe’s predecessors – who warned about the potential impact on the financial services industry.

Similarly, Andy Street, Tory mayor of West Midlands – who is up for re-election this year – also pushed the government to support the struggling airline, which has its second largest base at Birmingham airport.

The rescue package was hammered out in talks between chancellor Sajid Javid, business secretary Andrea Leadsom and transport secretary Grant Shapps, which convinced Flybe’s shareholders – Virgin Atlantic, Stobart Air and Cyrus Capital – to inject about £ 30m into a company that they only rescued a year ago

But some in the airline industry questioned whether the deal could come back to haunt the government, pointing out that Flybe’s long-term future looks bleak without significant surgery.

The carrier has struggled for profitability since it floated in 2010 despite multiple attempts at restructuring.

Series of graphics and a map looking at Flybe's profits and sales plus their uk airports and routes

Aviation analysts believe the best way to turn Flybe around is for management to trim the route network and reduce the size of the airline, a prospect that would be at odds with the government’s rationale for keeping Flybe operating and maintaining regional connectivity.

John Strickland, a London-based aviation consultant, said there was “no guarantee of Flybe’s future at its current size and scale”.

Another consultant, Andrew Charlton, said the government would do better to expand the number of routes it subsidized, recognizing the fact that many of the routes vital to smaller communities were inherently unprofitable. “Focusing on supporting routes rather than a flagging regional airline would have been a better option,” he said.

The government’s decision to help prop up Flybe could also run into problems in Brussels under state aid rules, despite Brexit looming at the end of the month. The UK will remain bound to EU legislation until the end of December at the earliest under the Brexit deal set to be approved by parliament.

Downing Street insisted the rescue package, which includes a short-term deferral of some of Flybe’s air passenger duty (APD) payments, does not constitute state aid. However, talks are continuing on a potential loan that could fall foul of Brussels ’rules.

James Webber, a partner at Shearman & Sterling in Brussels, said such a loan could breach EU rules if the financing was not on the same terms as a private investor. “A loan is tricky because the UK government would need to show that it is acting like any other lender.”

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The ADP bill must still be paid and the government insisted Flybe had not been given “any sort of special treatment” given that any company can apply to spread tax payments under the so-called “Time to Pay” arrangement.

Meanwhile, the government is facing an outcry from environmental groups over its promise to review charging APD across the board on domestic flights, which has long been presented as a “green tax”.

Lobbyists argued that this runs counter to the government’s promise to create a zero-carbon economy by 2050. “Cutting the cost of domestic flights while allowing train fares to rise is the exact opposite of what we need if we’re to cut climate-wrecking emissions from transport, ”said Doug Parr, Greenpeace UK policy director. He argued that the aviation sector had been increasing its carbon footprint for years.

Aircraft emissions are unlikely to fall much over the next two decades because the technology needed to move to electric propulsion is still some way off. Airbus is aiming to deliver a 100-seat commercial aircraft part-powered by electric propulsion sometime in the 2030s at the earliest.

Additional reporting: Andrew Bounds in Manchester and Javier Espinoza in Brussels

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