7th February 2020

The true cost of keeping Flybe airborne

The Government has been considering providing support to Flybe amid suggestions - many from competitors - that it would constitute state aid and afford the ailing airline an unfair competitive advantage, and claims that failing businesses shouldn’t be propped up.

The Government has been considering providing support to Flybe amid suggestions - many from competitors - that it would constitute state aid and afford the ailing airline an unfair competitive advantage, and claims that failing businesses shouldn’t be propped up.

There has been much discussion about commercial terms being required, but is that enough? Is the Government partly motivated by non-commercial reasons when it comes to offering support? Is that appropriate and what special price should that command?

Many businesses provide something ‘special’. It might be a product consumers need or have come to rely on. It could be a service that offers a genuine benefit or meets a social need. But do airlines fall into this category - and does Flybe provide a service that fills a need that other carriers do not or will not provide?

If it does, how would special commercial loan terms be priced if, for example, the fundamental risk of failure includes the costs of repatriation of customers that may fall on the CAA and Government and may not be fully recoverable? How are such other benefits factored into the pricing? What price should the Government charge for such a loan and what should be required of the current stakeholders (secured lenders, creditors and shareholders)?

Other businesses and services engender local or central government moral and financial support. In some circumstances the Government may feel compelled to provide support for a public need if a private business fails (as reflected by the Government fronting the £50m cost of repatriation of passengers when Monarch Airlines failed in 2017).

Further education colleges, hospitals, rail operators, insurance companies and banks can also go bust. If they do, substantial costs fall on the community. They have all secured some structural support through ‘special administration’ processes being available to them which support an adjusted objective to other administrations – e.g. to provide for the completion of further education courses in a number of ways ahead of the general interests of creditors (see note for example). These have developed since 2006. In effect these change the risks of insolvency in a specific sector.

Airlines have secured a focus for support via the Airline Insolvency Review - published in 2019 following the Monarch administration - and promises of legislation for a further Special Administration Regime (SAR) that are summarised in a recently published Commons Briefing Paper and report.

The primary purpose of this SAR would be the repatriation of stranded passengers (this would take precedence over duties to creditors).

Other key elements of the proposed SAR are:

  • The appointed special administrator (an insolvency practitioner) would be under a duty to use all available funds until repatriation is concluded;
  • The Secretary of State for Transport would control the identity of the special administrator and be able to prevent alternative insolvency proceedings being commenced in the UK. This is common in existing SARs for other sectors;
  • An enhanced moratorium to prevent creditors taking legal action for a 14-day period at the start of the special administration, including to prevent key suppliers such as aircraft lessors and fuel suppliers from terminating contracts or demanding ransom payments. (According to the report, the key challenge is ensuring this is respected in other jurisdictions which may require the special administrator to pay those overseas creditors threatening action.);
  • Arrangements to ensure funding is available to enable the special administrator to achieve the purpose of the special administration. (For example, arranging payment agreements with staff and suppliers to ensure costs associated with repatriation would be paid as expenses of the administration.); and
  • The Secretary of State would have an express power to provide a grant, loan or indemnity to the special administrators to alleviate concerns over their personal liability.

That seems likely to form part of a range of financial measures that include airlines providing ring-fenced capital funds to meet repatriation costs, a new ‘Flight Protection Scheme’, to protect passengers if an airline became insolvent while they were abroad to include a levy (less than 50p per passenger) on flying customers.

The proposed legislation has, however, not quite made it to the departure lounge. So, for now, continue to take care when buying your ticket and travel insurance as the principle consumer protections still lie in Air Travel Organiser's Licence (ATOL) bonding, travel insurance and the protection provided to all purchases using credit cards.

To discuss this article further, or for more information about issues arising from financial distress affecting businesses and individuals, please contact Mark Cullingford.


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