Flybe sold to Virgin: Will it redefine the regional flying market?

Written by: Oliver Watts

Introduction

As a frequent user of Flybe; I have found it to be a convenient airline that makes cross-country travel relatively hassle-free. Indeed they are the largest regional airline in Europe. Well connected they may be, but, until very recently, Flybe were facing the prospect of looming insolvency. The Exeter-based carrier has now been acquired by a consortium led by Richard Branson’s Virgin Atlantic called ‘Connect Airways’. With such a prominent regional airline to be controlled by a major long-haul airline, what does this mean for the future of regional flying in the UK?

Virgin Atlantic’s deal

On January 11th 2019, Flybe announced they had agreed, in principle, to be sold to a Virgin Atlantic-led consortium for £2.2 million, a far cry away from its value of £215 million when floated on the London Stock Exchange in 2010. The aforementioned consortium ‘Connect Airways’ entails Virgin Atlantic (30%), Stobart Group (30%), and investment firm Cyrus Capital (40%). The consortium will initially inject £20 million to keep Flybe’s current operations and trading afloat which could not be better timing as the airline has been losing £7000 an hour. A further £80 million will be invested in due course as transition and integration work begins. For Flybe it evidently saves them from collapsing when recent times have seen the demise of fellow UK airlines Monarch (2017) and FlyBMI (2019), Nordic low-cost carrier Primera Air (2018), and Cyprus-based Cobalt Air (2018). For Virgin it is another chance to have a shot at the UK regional market. Its previous attempt, ‘Virgin Atlantic Little Red’, operated flights between London Heathrow and Manchester, Aberdeen, and Edinburgh, but lasted little over two years (2013-2015) before low demand led to losses of £3 million a week and its shutdown. The sale was finally approved on 21st February 2019, but had been at risk due to Flybe’s key shareholders, Hosking Partners (19% stake), protesting against the low share price they will receive. Flybe aircraft are in time to be rebranded into Virgin Atlantic colours, but it will still operate independently under its own AOC (air operator certificate).

Flybe’s descent in turmoil

Despite its enviable route network, Flybe has been in the red for a long time.  Its shareholders are due a mere 1 pence per share from the sale, as opposed to 295 pence in 2010 when Flybe floated on the LSE.

Higher operating costs

Flybe’s fleet is too big but previous management sought not to address this. Airliners only make money when they are flying and full. A surplus of aircraft that are not flying often or at all, due to lower passenger numbers, immediately puts a financial strain on the airline. Flybe currently operates a mixture of Bombardier Dash 8 Q400 turboprops, Embraer E-175 and Embraer E-195 jets. Its strategy is to reduce the fleet from what was a peak 85 aircraft to 70, and be rid of the expensive E-195 jets that will be returned to lessors by 2020. Unprofitable routes will be cut. The Dash 8 Q400 and E-175 are due to become the backbone of Flybe’s fleet, as they carry fewer passengers (78 and 88 respectively) and are more cost-efficient to run. However, Flybe’s new streamlining strategy has led to increased maintenance costs, because they need to be operating at maximum reliability to prevent frequent technical issues. The above issues contributed to its 2017-18 profit before tax fall from to £8.4 million from £15.9 million in 2016-17, as well as a profit warning in November 2018 projecting losses as high as £22 million.

Fuel prices

Flybe buys its fuel in US dollars and the average price has increased as much as 19.1% to $560 a barrel. US President Donald Trump’s continuing trade war with Europe has affected this price and currency projections are always uncertain. Fuel plays a significant role in an airline’s operating costs and aviation is heavily regulated. Pilots have to take on a legal limit of extra fuel, at least 30 minutes worth, per flight. When combined with weaker passenger demand that already brings financial woes, high fuel prices only exacerbate the situation.

Market volatility

In the case of Flybe, this concerns the regional flying market. Before considering competitors, UK tax regulations already provides a significant burden. The UK has the highest APD (Air Passenger Duty) tax in Europe which means that when you book your flights, a maximum  of two fifths of the quoted price goes straight to the Exchequer in tax. Therefore, the actual airfare itself is much lower than the quoted price. Flybe faces stiff competition from EasyJet and Ryanair. Though the latter’s operations are primarily between the UK and Europe, they do offer an array of domestic flights such as Bristol – Newcastle and London Stansted – Edinburgh. These are ideal routes for Flybe, but the fact the formers can offer lower fares and are operated by fast jets means they can establish a monopoly. Flybe predominantly utilises its small number of Embraer jets on European ‘city-hopper’ flights such as Manchester – Amsterdam and Birmingham – Paris rather than domestic UK flights. As a result, EasyJet and Ryanair can offer their domestic flights at half the time of Flybe, who would operate them with their comparably slower Dash 8 Q400 turboprops. It cannot be forgotten that British Airways also has the key monopoly on UK domestic destinations, flying from three London airports. Flybe have some slots at London Heathrow, flying to Aberdeen and Edinburgh daily, but currently cannot match the scale BA operate on.

What are the market implications of the sale?

As established, it allows Virgin Atlantic to have a go at regional flying once more and learn from its previously unsuccessful venture into the unknown. Virgin already has codeshare agreements with Flybe, allowing people to connect to Virgin flights at London Heathrow and Manchester. As Virgin will now have control of Flybe’s impressive route network, it allows them to build on this and in turn attract a larger customer base from around the UK. Flights from Manchester are cheaper than London, and under the new operations, regional passengers could take better advantage of this. For example, one could fly from Flybe’s large base at Southampton to Manchester, and then connect to a Virgin flight from Manchester to Las Vegas. In turn Flybe flights could become fuller because it would be a mixture of business and holiday travellers, therefore creating more revenue and ideally, larger profits.

By doing so, the nature of regional flying in the UK could change significantly. It is a faster alternative to car and train, a commuter service for business and leisure travellers between major UK cities. With the aforementioned impact, it could become more of a holiday feeder. Other regional carriers within the UK, though there are not many, will likely suffer. Eastern Airways, for example, has a much smaller fleet, smaller aircraft, and operates less popular routes such as Cardiff-Newcastle and Leeds-Southampton. Flybe has a network of bases unrivalled by other UK regional carriers: Southampton, Exeter, Belfast-City, Cardiff, Manchester, Birmingham, Glasgow, Aberdeen, Edinburgh. If Virgin heavily focusses on feeding its London Heathrow and Manchester long-haul flights, many routes from these bases could become redundant. Whilst Flybe operates to Manchester from Southampton and Exeter, it also flies to the likes of Newcastle, Dublin, and Amsterdam. Their Cardiff and Birmingham bases fly to UK and European destinations, but does not include London Heathrow and Manchester. The risk that could emerge is Flybe’s routes become heavily streamlined to a very select few that fit Virgin’s requirements. Consequently, many jobs may be put at risk, and the needs of regional commuters and travellers could become unfulfilled because the airline they rely on has cut the majority of its domestic routes. It also could put strain on Flybe’s bases as airports in their own right; both Exeter and Southampton’s operations are almost exclusively Flybe flights. On the flipside it appears nonsensical for Virgin to do this as the extensive route network is what attracted them to buy Flybe.

Conclusion

These times are undoubtedly exciting for Flybe and Virgin; the former has been saved from demise and the latter can potentially make a success of a past failing and in turn boost its international routes even further. Virgin needs to make its next moves carefully. It will have inherited a regional route network it did not have to set up like it did with its failed ‘Little Red’ venture, everything will be in place for it. It is surely paramount that Flybe’s regional operations do not become unrecognisable but also that Virgin’s own long-haul network has better connectivity from various parts of the UK. How this balance is struck will be of  keen interest to competitors and regular fliers alike, for who knows, it may even start a revolution of change in the airline industry. 

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