ALEX BRUMMER: Rishi Sunak is on a tricky flight path as coronavirus picks his pocket before first budget
The collapse of Flybe into administration is a crisis for the airline’s millions of passengers and its 2,400 direct staff – and a Covid-19 setback for Boris Johnson’s government.
There will be bigger challenges ahead. The spread of the virus to at least 85 countries and the impact on global commerce, the economy and next Wednesday’s Budget will be immense.
Chancellor Rishi Sunak will have to work with shaved growth forecasts which will narrow the spending window.
Chancellor Rishi Sunak will have to work with shaved growth forecasts which will narrow the spending window
Outlays on the NHS, local authority emergency funding and social security will use up fiscal space before he embarks on more ambitious investment projects.
Damage being done to the travel sector is a symptom of much wider disruption likely for business and why share markets have gone into freefall.
Flybe was optimistic the Government would do more to help – not least because of Mr Johnson’s plan to ‘level up’ the country by improving regional transport links.
Rescuing an airline with three well-heeled owners – Richard Branson’s Virgin Atlantic, hedge fund Cyrus Capital Partners and Stobart Group – would have been an uncomfortable. It would also have risked breaching EU state aid rules.
These concerns were rendered irrelevant by the rapid spread of the Covid-19 virus –which has cast a dark pall over all travel-related markets and put paid to any rescue package.
The International Air Transport Association estimates that the coronavirus will hack up to £90bn off the revenues of global airlines in a hit which is likely to leave other highly indebted carriers staring into the abyss.
No-frills transatlantic airline Norwegian has slashed its number of flights and told investors it cannot provide a profit forecast for this year.
Alitalia is also under threat and already is being probed by Brussels for infraction of state-aid rules.
At the core of Flybe’s demise was the relationship with Virgin Atlantic, 51 per cent owned by Branson and 49 per cent by America’s largest airline Delta.
Virgin Atlantic planned to rebrand the airline as Virgin Connect and to link it to global routes.
The coronavirus scare led to a sudden collapse of bookings for Virgin Atlantic on its long-haul routes and crushed its plans for Flybe.
The company’s owners claim to have pumped £135million into the carrier since it was rescued for just £2.2million by the Virgin-led consortium in January 2019.
They had hoped to keep the company afloat with a waiver of Airline Passenger Duty (APD). To have lifted APD just for Flybe would have meant other UK airlines screaming unfair competition and cost the Exchequer £3.7billion.
Among the reasons the former Chancellor Sajid Javid said he was minded to assist Flybe in the first place was that it served parts of the country such as Newquay in Cornwall and Belfast City Airport – routes which already are subsidised.
The coronavirus has turned normal economics on its head, In times like this, cash is king – and the impact of the disease on those firms with heavy debts will be particularly devastating.
When the money stops flowing because of the fall-off in demand, whether from travellers, shoppers or buyers of industrial components, it becomes all but impossible to pay the interest rate bill let alone pay down the debt.
This is why the Bank of England is under pressure to follow the American, Australian and Canadian central banks in slashing interest rates.
Airlines and travel companies are particularly vulnerable to a loss of confidence. It is not just that consumers are reluctant to fly abroad because of disease fears; it is also that no one is going to pay up front for flights if they believe an airline is endangered.
Stock market values of even the most healthy airlines have fallen dramatically since the crisis flared. Shares in British Airways’ owner IAG have slumped by £3.8billion in the two weeks since the virus arrived in Italy, and this is a company sitting on £5.7billion of cash. In contrast, Norwegian has £5billion of debt.
Across the world, passenger numbers and shares in airlines are falling like stones and some transatlantic flights are virtually empty.
The collapse of Flybe, although important for UK connectivity, is but a flea bite. The real calamity for airlines, travel companies and global output is still to come.