Flybe plays down size of rescue deal as rivals step up criticism

Flybe has admitted to having secured a £10m tax holiday and confirmed ongoing negotiations over a state loan, as rival airlines stepped up attacks on the government’s rescue of the struggling carrier.

The Exeter-based airline said that, contrary to reports, only a small amount of its annual air passenger duty (APD) bill – believed to be £106m – had been deferred, in what it said was a standard arrangement for businesses in difficulty.

Flybe said: “A payment plan was agreed with HMRC for a debt of less than £10m. This agreement will only last a matter of months before all taxes and duties are paid in full.”

On Thursday, Mark Anderson, the chief executive of Flybe’s parent company, Connect Airways, told staff the airline was seeking a loan on commercial terms from the government, rather than a bailout, according to the BBC.

The playing down of the rescue package by Flybe is unlikely to mollify airline competitors, after the Ryanair boss Michael O’Leary accused the UK government of covering up the true terms of the deal to rescue Flybe and threatened to launch legal action at home and in Brussels over what he claims is illegal state aid.

The outspoken airline chief said he did not believe the government, which has insisted it has not offered unlawful state aid to the ailing company. He hit out at the refusal by the chancellor, Sajid Javid, to reveal the terms of the rescue deal that was struck on Tuesday night.

Related: Ryanair demands same 'tax holiday' amid Flybe rescue deal backlash

“We don’t believe them and the reason we don’t believe them is they won’t publish the deal,” O’Leary said.

“Flybe is not a viable business; it never has been. It has lurched from reconstruction to reconstruction and this is the government misusing state funds to discriminate in favour of Flybe. It’s in breach of competition rules, it’s in breach of state aid rules, which is why the government are covering up the deal,” he told the BBC’s Today programme on Friday morning.

As well as agreeing the deferral of the outstanding APD payments and the possible loan, the government has promised to review APD levels before the March budget, potentially cutting the rate on domestic flights.

Air passenger duty, or APD, is a British tax on aviation, introduced in 1994. It is charged on each passenger on flights departing from the UK, and set according to the distance of their final destination and the class of travel.

It is intended to incentivise passengers to seek alternative arrangements from flying, which is the most carbon-intensive form of transport. By reducing demand for flights, it seeks to decrease carbon emissions from the air industry.

Destinations are grouped into two bands, above and below 2,000 miles from London, and charged at three rates – effectively for economy class, premium economy and business/first-class seats. All short-haul flights to Europe, including domestic, are charged in the same band, rising from £13 in economy to £78 in first class. A long-haul first-class flight now attracts APD of £528.

Airlines have long lobbied against the tax, particularly after the rates were doubled in 2007.

Flybe has argued that it is especially hard hit as the tax only applies to UK departures, and is therefore applied to each leg of a domestic return flight. That means, for example, that a return flight from Cardiff to Manchester is taxed at £26, while an international return flight from the UK to Moscow pays £13 in APD.

Long-haul flights from Northern Ireland are exempt from APD, as well as departures from remote parts of Scotland.

O’Leary warned that he would take legal action against the UK government at home and in Brussels, unless the deal was revealed or its terms were extended to other airlines.

“We’ve given the chancellor of the exchequer seven days. If he doesn’t publish the deal within seven days or at least extend the same holiday to all of the other UK airlines, so that we can pass it on to our customers as well, I think we launch competition law proceedings in the UK and state aid proceedings against the UK government for breach of state aid rules in Brussels.”

O’Leary’s comments come a day after he wrote to Javid demanding that the government extend any “tax holiday” granted to Flybe to other airlines, and accused them of subsiding the “billionaire owners”. After the Connect Airways takeover last year, Flybe is ultimately owned by Sir Richard Branson’s Virgin Atlantic, Stobart and Cyrus Capital.

Flybe serves almost two in five domestic UK flights and employs more than 2,000 people. It carries 8.5 million passengers a year and is the main airline at several regional airports, including Belfast, Southampton and Exeter.

However, O’Leary said its services were not essential to the UK economy and competitors such as Ryanair, easyJet and British Airways would step in to cover most domestic flights.

“The point is the government can’t keep lending a non-viable airline £100m every three months to keep non-essential services available,” O’Leary told the BBC. “The reason Flybe loses money at airports like Exeter and Newquay is because most people use the train or use the motorway. They don’t use Flybe.”

On Friday Flybe announced an expanded schedule from Newquay, adding a year-round service to Amsterdam’s Schiphol hub, as well as more flights on the state-subsidised route to London Gatwick.