My take on flyBe/Virgin/Stobart – ‘A little less convolution, a little more action please’

It has been a few days since the announcement that a consortium which includes Virgin Atlantic and the Stobart Group disclosed they are to purchase flyBe. While not unexpected following a bid last year, the price they are expected to pay is and there in lies a problem.

Flybe have been in trouble for a while. It can be traced back to the early 2000’s when they held ambitions to expand from their regional UK routes, reaching the at the time blossoming low-cost airline route with routes to major holiday destinations. As part of that, an expensive order for Embraer aircraft following which signalled the start of the downfall.

British Airways offloaded their loss-making BA Connect network to flyBe, minus the Crown Jewels of London City, which failed to turn them around. A promise of an independent regional airline, able to do their own deals with international airlines in Europe (sound familiar?) to feed traffic onto their network hasn’t worked, while the original set of Gatwick slots were sold to easyJet to aid expansion at their biggest base.

Previous management tried to stem the losses. ‘Project Blackbird’ saw the most expensive Embraer 195’s in part-financed deals with regions including Doncaster and Cardiff, while the aircraft could be phased out – ironically some ending up with Stobart.

However, the last few months have been difficult taking the airline to the edge, forcing the consortium to take immediate action. Such expediency has taken shareholders by surprise, with the flyBe board accepting the takeover without shareholder approval at a substantial discount. It wouldn’t be surprising to see legal action from some of the biggest stake holders, threatening the future of the airline further. Give the situation, they have little to lose. A further sale of slots at Gatwick, after FlyBe moved their Newquay route to London, were placed in the hands of IAG.

The future is interesting if a solution is found. A rebrand under the Virgin Atlantic banner is expected, despite the brand being known for predominantly long haul travel. The last attempt at domestic flying ended badly with their ‘Little Red’ programme from Heathrow to Manchester, Edinburgh and Aberdeen, promising ‘Stiff Competition’, but in reality they couldn’t keep it up.

FlyBe have promised no changes to their network before the start of the winter timetable at the end of October. It is clear however substantial changes to the network will take place, with Virgin Atlantic keen to feed their long haul network and Stobart keen to expand services at their owned airports – primarily London Southend.

At present, that value is not easily found. Virgin Atlantic just have six routes out of Manchester for example, where flyBe are already a partner for transatlantic rival Thomas Cook. Flybe only have 2 (soon to be 3) routes out of Heathrow, in a different terminal to which both Delta and Virgin Atlantic operate out of. Not exactly ideal for easy connecting traffic. Without substantial changes in either network, I can’t see how that adds value – especially one with a carrier flying 80 aircraft.

I believe there will be four pillars to the restructuring. 1) How Virgin Atlantic can benefit – either by connecting traffic or brand awareness. 2) How Virgin Atlantic’s owners and partners can benefit. 3) How to facilitate Stobart’s aviation ambitions. 4) Setting boundaries in which they know how they can compete profitably.

When looking at Virgin’s partners, KLM and Air France, the airline already has a substantial network to both bases, including a codeshare agreement in Paris. It wouldn’t be surprising if this was expanded. They could also help in shaping the fleet, either swapping Embrear aircraft, or introducing new aircraft types depending on the capacity needed.

Stobart will also want something out of the deal, with expansion likely at Southend despite both easyJet and Ryanair taking up residency. A long awaited link to London for Carlisle, which went on sale only to be withdrawn is still on the table, along with a possible deal to run Teeside Airport (pending a vote shortly). How the current franchise deal with Aer Lingus works out will be interesting.

‘Odd ball’ unprofitable routes/and or bases will likely be cut to concentrate on the core flying. Cardiff, Norwich and Doncaster-Sheffield could be vulnerable, along with more marginal regional flying from Exeter, Southampton and Birmingham. The future of London City, given Stobart will want to promote their own airport in Southend could also be under threat.

I can’t say that I think this is a marriage made in heaven, I have reservations on how it can be made a success after several failures. Translating the Virgin Atlantic brand will be highly interesting, and just how much influence the Stobart Group will have on the shape of the operation.

Its certainly not going to be an easy ride, and expect more surprises to come…

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