It’s easy to be indignant about the rescue of Flybe. Ministers on the job – business secretary Andrea Leadsom, transport secretary Grant Shapps and chancellor Sajid Javid – have been disgracefully unclear about what assistance has been extended, and on what terms. The trio proclaim they’ve cobbled together a splendid deal in tricky circumstances, but won’t say what it is.
So, yes, it’s fair for Willie Walsh at British Airways-owner IAG and Michael O’Leary at Ryanair to rev their engines and demand answers. Why are the owners of Flybe – all profit-seeking companies, including Virgin Atlantic – begging the government for a loan if they are willing, as they say they are, to borrow on “commercial” terms? Or is a “commercial” rate being defined as one that no commercial lender would offer a company with Flybe’s troubled history?
Why has HMRC granted a short-term deferral on an air passenger duty (APD) liability if, as Flybe claims, the sum is less than £10m? And what’s the justification for the government rushing a review of APD? Such studies are normally detailed and take ages, but Javid plans to announce reforms in his budget in March.
The politics, in other words, is deeply murky. The government says it hasn’t broken state-aid rules but Walsh’s accusation of “a blatant misuse of public funds” still needs to be addressed in detail.
Yet the condemnation should stop there. Ministers would have been reckless not to listen to Flybe. This is not a repeat of Thomas Cook, where the hole in the package holiday market will be filled by rivals. The sudden collapse of the UK’s largest regional airline would have been followed quickly by the failure of several regional airports. If that regional connectivity is judged to be valuable, then it’s better not to risk the overnight collapse of a key domino. A controlled restructuring would be a better outcome.
That is the critical point that Walsh and O’Leary ignore in their let-the-market-prevail blasts. They might be willing to step into Flybe’s shoes on the profitable routes, but they wouldn’t be interested in saving the marginal services. And it’s not as if Flybe’s corner of the aviation market is untouched by government policy already: the main competition on many routes comes from rail, where the national network receives £5bn of annual funding from the public purse.
Ministers shouldn’t be suckered into believing the long-term survival of the company itself is essential
A messy and temporary rescue of Flybe at least buys space to find a solution. Ministers shouldn’t be suckered into believing the long-term survival of the company itself is essential. If Flybe fails once the financial sticking-plaster is removed, so be it. The consortium that bought Flybe last year – Virgin Atlantic; Stobart Group, owner of Southend airport; and US investment firm Cyrus Capital – is ultimately responsible for protecting the company and its investment.
Instead, the government should decide quickly which of Flybe’s routes are worth preserving via public service contracts, which already exist on a few routes. Ministers should be ready to invite tenders for what, in effect, would be a series of management contracts. Maybe Flybe will be in a position to pitch, maybe it won’t be; but the chances of somebody fulfilling the role will clearly be greater if the company survives.
It is also reasonable for the government to fiddle with APD, which is badly designed as a per-passenger charge. A better approach would be to tax emissions. The timing of Javid’s review is not coincidental – no quibble on that score. But the purist’s argument that Flybe should be left alone doesn’t wash on this occasion. Vital connectivity could have been lost for the sake of small sums, or so it currently appears. A touch of pragmatism is justified.
Cancelling HS2 benefits only the south
Not so long ago, Theresa May’s government caused consternation by suggesting the second phase of HS2, running north to Manchester and Leeds, was not a done deal. With the political world now turned on its head, the latest wheeze to trim the runaway costs of the high-speed train network may be to axe the first leg, between London and Birmingham.
There are superficially attractive elements to this proposition: the price tag for the entire scheme has escalated from £55bn to more than £80bn and the prime minister speaks of HS2 costing £100bn or more. The north’s transport links are far inferior to the south’s. The government is supposedly levelling up the regions, listening to its freshly minted northern supporters, and redirecting cash to worthier causes, such as a high-speed trans-Pennine link from Manchester to Leeds.
Some close to the prime minister reportedly believe the network is a white elephant; but to lop off its lower leg would create an even more curious beast.
Phase one from London to Birmingham is already passed in law, painstakingly designed, with the groundwork prepared at critical junctures of the route. It has taken a decade to get even this far – a genuine alternative will not be conjured more quickly. Memories are short, but the proffered fast trans-Pennine links were in development before Boris Johnson; he would not be giving, merely taking away.
Leaders and planners in the north know that HS2 underpins schemes to link up northern cities, and that connectivity to London is vital – and will be vastly improved to all regions north even when only the first phase to Birmingham is built. Scrapping phase one would play into a politically expedient fable of helping the north – while in fact only benefiting those in the south, spared the pain and cost of HS2’s construction.
Need for rate cut becoming clearer
A shrinking economy and a Christmas to forget for major high street retailers, to cap off the worst year for sales in a quarter of a century. At any other point, the Bank of England would have already stepped in with an interest rate cut. But not in topsy-turvy Brexit Britain.
Yet as Mark Carney prepares for his final rate decision as the Bank’s governor on 30 January, the latest snapshots from the UK economy, published over the past week in a steady drumbeat of disappointing news, suggest a cut in borrowing costs has gone from an outside bet to near certainty.
Inflation is well below the central bank’s 2% target, with the consumer price index (CPI) measure falling to 1.3% in December as retailers slashed their prices to tempt shoppers. According to the Office for National Statistics, it was a gamble that didn’t pay off: sales failed to rise in December for the fifth month in a row – the worst run since 1996. Against a backdrop of heightened Brexit uncertainty, dire trading updates from major chains – including M&S and John Lewis – show the weakness in the economy is real. Five members out of nine on the Bank’s monetary policy committee have indicated their readiness to cut rates to support the economy – including Carney. Almost seven years after entering Threadneedle Street when rates were at 0.5%, the Canadian looks likely to depart in March with rates in exactly the same position, down from the current level of 0.75%.
But despite the gloom, much will depend on whether Boris Johnson’s unexpectedly decisive election victory delivered a much-needed bounce in household and business confidence after a torrid end to 2019.
There are early promising signals. According to Deloitte, confidence among company finance chiefs rose at its fastest rate in 11 years following the election. A survey from Barclaycard also found the public has become much more upbeat. However, difficult questions remain given the scale of the task of striking a new relationship with the EU.
Normally a rate cut would be a racing certainty. Should the weakness at the end of 2019 persist, and due to the challenges ahead, the Bank would be wise to act sooner rather than later.