Virgin Atlantic and Others Buy Flybe, Delay Its Demise

I don’t know what it is about regional airline acquisitions being so complicated, but we have a new champion. Flybe is a large regional airline based in the United Kingdom, and it has been looking for a good strategy for years. It now thinks it has found one… as Virgin Atlantic. Virgin is teaming up with another regional airline and a hedge fund to save Flybe from the grave. Will it work? It’s an uphill battle.

Technically, it’s Connect Airways that will be buying Flybe, but Connect Airways is brand new and also not an airline. Instead it is a holding company that’s owned 30 percent by Virgin Atlantic Limited, 30 percent by Stobart Aviation, and 40 percent by Cyrus Capital Partners. Together, they will pay 2.8 million British pounds to take over Flybe. Part of the deal includes a 20 million pound bridge loan of which half was made available immediately. (Apparently things were getting quite desperate for Flybe.) Further, Connect will invest 80 million pounds in the operation

You know all about Virgin Atlantic, but let’s talk about the other two players. Stobart Aviation will put Stobart Air along with its sister leasing company under Connect’s ownership. Stobart Air is an airline that already flies some flights under the Flybe banner with most of the rest as Aer Lingus Regional. It made an offer for Flybe last year, but that didn’t go through. Stobart’s inclusion means we can officially call this a consolidation play. The two carriers won’t be fully integrated, however, and for good reason. Stobart has an Irish operating certificate while Flybe is in the UK. If Brexit happens, then having both becomes very important.

It’s not entirely clear to me whether Stobart will continue to operate for Aer Lingus or not, but if it does, well, the parent of Aer Lingus (also parent of BA) would be funding BA’s chief rival in London, Virgin Atlantic. There are other ties to BA, including the fact that Flybe uses BA’s Avios currency for its frequent flier program. So that’s a mess that may need to be untangled.

Then there’s Cyrus Capital. Does that sound familiar? It should, because it had one of the hedge funds that put up the cash for Virgin America when that airline started. Richard Branson must have reminded them how he made them rich on Virgin America, and twisted an arm or two to make this happen. Either that, or Cyrus was so sick of having all that money from Virgin America’s sale that it wanted to find a way to get rid of some. This seems like a good way to burn cash.

The new owners have a tall task ahead of them, especially since all indicators are that Flybe is in dire financial shape. The airline is surprisingly large with more than 50 Q400 turboprops and a handful of Embraer E-jets for bigger routes. What’s the plan for success here? We don’t know details of course, but there is a lot in the press release that would indicate how this is going to be focused. Let’s pick apart the airline’s current route map.

First and most obvious is London. Virgin Atlantic has its primary base at Heathrow with leisure operations from Gatwick. Here’s what Flybe has:

Now I obviously use the term London lightly here. First, you’ll see Gatwick isn’t on here. All of those slots are gone or being sold off. So what’s of interest that’s left? Well, remember when Virgin started Little Red to fly to Edinburgh and Aberdeen? That was a miserable failure, but Flybe took over those slots and flies the routes with smaller airplanes. Those slots, I believe, can’t be moved to more lucrative routes, so it’s not clear that there’s a huge play here. Flybe was already taking connections from Virgin Atlantic before and had a codeshare. I’m not sure how much additional synergy there could be.

There’s also the network from London’s City airport which appeals to the business traveler. Maybe Virgin thinks it can help expand loyalty at Heathrow for long haul if it can also serve short haul from City. I don’t know, but the press release doesn’t mention City at all. So we’ll see if that’s even part of the long term plan.

Lastly, let’s not forget about Southend. That’s loosely considered a London airport, but Stobart and Flybe both like it. In fact, the quote in the press release from Stobart’s CEO said:

It will allow us to continue to work with Flybe and provides an excellent opportunity to continue to grow passenger numbers at London Southend Airport

So keep an eye on that one. Also, keep an eye on Manchester.

Flybe has an extensive network in Manchester, and the press release says that will be a focus. One of the stated benefits of the deal is to “Deliver more choice to customers by linking UK regions and Ireland to Virgin Atlantic’s extensive long-haul network through improved connectivity at Manchester Airport and London Heathrow.” Again, this was already happening before, but in Manchester, there will be the ability to move flights around and optimize connections. It doesn’t face the same slot controls as at Heathrow.

Those are the most obvious areas where Connect is likely to focus Flybe. But is there anything else of interest? Indeed there is.

Remember that Air France/KLM has taken a stake in Virgin Atlantic and they are working on pushing through a single Transatlantic joint venture with Delta. Flybe already is an Air France partner and has a surprisingly decent network from the UK into both Paris and Amsterdam. Other than a few ATRs flying under the Hop! brand, I don’t believe Air France/KLM has a fleet of props. Flybe could be used as a way to improve connections from smaller UK cities into the big Paris and Amsterdam hubs. There may be room for growth elsewhere too.

That leaves us with the rest of the network where I’m sure there are going to be winners and losers. There’s the impressively-dense network of flights within the British Isles (and yes, I’m lumping Jersey and Guernsey in.)

Lastly, there’s the network from the British Isles into the European Continent.

This really looks like two networks. There are the routes that seem to connect the UK into business centers in Europe, and then there are the leisure routes that go to the southern half of the Continent. I have to wonder how well those do.

What we do know is that Flybe isn’t working in its current form. What we don’t know is how Connect is going to fix that issue. It sounds like a focus on London and Manchester along with, possibly, Amsterdam and Paris could create a future for the airline…maybe. Whatever fits into the Virgin Atlantic/Air France/KLM network should be the best opportunity.

Then again, there is the cynical take here. This could just have been about keeping Flybe away from British Airways. The initial price was so cheap, it wouldn’t be hard to make that argument.