Exploring the factors that led to the second collapse of the British regional carrier.
Earlier this month, IBA’s webinar on the outlook for the aviation industry in 2023 talked about a positive outlook for demand, whilst also warning that there would be increased consolidation and failures of some weaker players. In particular, we highlighted regional airlines being at greater risk, and so it has turned out, with Flybe once again in administration. It is worth remembering that Flybe was a struggling airline well before the pandemic, finding itself increasingly squeezed by low-cost airlines (and no thanks to a ridiculous double taxation on UK domestic flights, which has now been changed). In the run-up to the pandemic, Flybe was trying to find a buyer, without success. The airline was eventually rescued by a consortium including Virgin Atlantic, Stobart and Cyrus Capital in 2019. The timing was unfortunate, and Flybe was one of the first casualties of the COVID-19 pandemic, going into administration in March 2020 when lockdowns came into force in the UK and around the world.
Cyrus capital bought the business and assets, but in reality, the only real value was the 12 Heathrow slot pairs. Given that these slots were originally owned by British Airways but given up to Flybe as part of a remedy following the BMI takeover, the CAA would not allow Cyrus capital to have the slots without being a viable operation. Cyrus found itself with no choice but to restart Flybe operations, but with an even worse strategic position than before the pandemic. Our analysis shows that on the routes they operated, their share of seats was only 10%, and they found themselves competing with larger aircraft with a lower cost pear seat. Lowest cost almost always wins on short-haul, and therefore it was inevitable that Flybe would struggle.
In theory, the slots revert to British Airways now and with leased aircraft it is questionable whether there is any value that can be salvaged. Yes - in theory, an investor could buy the business and try again, but is anyone crazy enough to try this? Well, this is the airline industry so, we wouldn’t totally rule it out! Though this is unlikely in our view. easyJet would love to take on British Airways at Heathrow, but 12 slot pairs are not enough to create a viable operation.
In summary, IBA believes that in 2023, the divide between the strong and the weak will get even wider. We saw Ryanair reporting record Q3 profits today and other Tier 1 players are guiding very positively, so we continue to believe there will be an acceleration in consolidation in 2023 with is very positive for pricing from the airline’s perspective if not from the consumers.
IBA’s operator risk assessments provide the aviation finance community with an unbiased, third party perspective on airline risk. Aviation market turbulence can make margins tighten and send concerns over defaults and bankruptcies soaring. We support clients to weather the storm, helping them understand the risk potential of asset class, age and mix, credit, operational practice, jurisdiction, and lease agreement.