The collapse of Flybe puts the government's post-Brexit agenda in the spotlight

There’s a bitter joke, usually told by investors: how do you make a small fortune in airlines? Answer: start with a large one. In fact, that joke has been told about futures trading, wine-making, the movies and the tricky business of owning racehorses too. Some businesses clearly attract a lot more optimistic investment than others.

The collapse of the regional airline Flybe is deeply upsetting for all involved, from the passengers who have come to rely upon its services to its thousands of hardworking staff. But in light of the history of the industry as a whole, it is sadly not surprising. The list of airline insolvencies is long – even longer if you include those that have needed extensive US bankruptcy protection to get back on their feet. The list of famous names to have gone bust worldwide – Delta, Pan-Am, Swissair to pick three – might exceed the number of well-known airlines most of us could name.

Key to this kind of collapse is how the operating model of the typical airline is unavoidably highly geared. There are high fixed costs, and revenues that are extremely variable and sometimes impossible to predict. Competition, particularly since widespread deregulation began around 40 years ago, is fierce. Passengers are fairly quick to discriminate on price, particularly at the lower end. If your operating costs are not absolutely under control, rivals can easily take business, and profits turn to losses.In light of this, what are the implications for public policy?

Comment around Flybe has centred upon two themes – the post-Brexit UK approach towards intervention in general, and the knock-on effects of this particular story for the “levelling up” agenda. Neither provide easy issues for the government right now.

The government needs to explain its principles around free markets and intervention 

On the first, it is well-known but little acknowledged that one of the major attractions for the UK of the single market when first mooted was its promise of tough state aid rules. The UK economic philosophy, at least since the advent of Margaret Thatcher’s Conservatives in 1979, has been to eschew state intervention in failing industries. A higher power promising to enforce those state aid rules is a blessing for the free-market-inclined. Not only did this generate the reassurance that close European rivals would not subsidise their industries to a position of unfair competitive advantage, but the sheer difficulty of intervention decisions no longer appeared on the minister’s desk back in London because "Europe says 'no', I'm afraid."

Brexit throws the decisions back upon the UK. As we set out in our report of last autumn, intervention raises a host of dilemmas around the distortion of competition, skewed incentives in the business community and sheer value for money. Our recommendation was that the UK government needs to “develop clear principles to reflect the purpose and constraints of business support”, for the no-deal situation. This advice could be usefully applied to difficult ad-hoc situations like this, too. This government is avowedly more interventionist than any since 1979 – it needs to get on with explaining its principles around free markets and intervention, ideally before more such situations arise.

The government should pause and assess where intervening helps its 'levelling up' agenda

On the matter of levelling up, the decisions are no easier. It is not possible to evaluate at this point the damage Flybe's collapse does to the economic integration of the “red wall” areas with the rest of the UK. That the airline industry is so competitive means that those routes that are genuinely profitable should, after the effects of coronavirus are in the past, be picked up by other companies. Most of the transport that matters for economic prosperity is intra-regional as much as inter-regional, and road and rail matter more in terms of sheer volume. All these are reasons for the government to want to pause and assess before pondering any other interventions designed to support levelling up and rebuild broken air links.

There is one final irony. As a formerly state-owned industry, the privatisation and development of airlines is generally adjudged a huge success. The market, bluntly, works. No one needs to regulate the routes or the prices, (albeit recent governments are in a huge tangle about the provision of more runway space). Indeed, Keith Williams, formerly of British Airways, was appointed to examine the state of rail franchising in part because it was felt that train operators could learn a great deal from their competitors in the air. But it is this highly competitive nature that also makes it harder to rely on such an industry as a tool of policy, such as levelling up.