Friday 17 January 2020 5:20 am

Flybe or not to Flybe? This bailout flies in the face of market economics

The philosophy of the market is based on the idea that the key to a prosperous economy is competition.

Fair and vibrant competition, the argument goes, spurs businesses to improve quality and reduce prices, benefiting consumers and fuelling economic growth. 

Companies that struggle should be allowed to fail, making room for more agile or innovative rivals that can do a better job. The role of the government is not to pick winners or prop up faltering businesses, but rather to make sure that the field is level and everyone is playing by the same rules.

This is the traditional turf of the Conservative party, historically home to economic liberals who believe that government meddling only serves to distort the business landscape and waste taxpayer money when it could be better spent — or, preferably, remain in people’s pockets.

A softer form of pro-market liberalism popular among Conservatives holds that there is a role for government in supporting business by investing in areas of strategic national importance, such as infrastructure. But such investment must make clear economic sense, spurring productivity and innovation rather than protecting incumbent players who cannot survive on their own.

The rescue deal this week to save the struggling airline Flybe would therefore have come as a surprise to anyone familiar with how Conservatives usually operate. In last-minute talks with shareholders, Flybe has been granted a government loan and a £100m temporary tax break to keep its planes in the air.

This deviation from the laws of market economics has not gone unnoticed. In addition to the general backlash over taxpayers subsidising an airline whose main shareholders include Virgin Atlantic (owned by billionaire Sir Richard Branson),  British Airways, which competes with Flybe on some routes, has filed an official complaint with the European Commission.

It is ironic that the EU, long held up by eurosceptics as a behemoth of protectionist bureaucracy, is now looking into whether the market-oriented UK broke state aid rules that ban distorting competition. 

Also pushing for “fair competition” is the Ryanair boss Michael O’Leary, who has called for all airlines to get a tax break like Flybe.

It has been noted too that diving in to rescue an airline that exclusively runs short-haul flights, one of the highest polluting forms of travel, flies in the face of Boris Johnson’s post-election commitment to make Britain the “cleanest, greenest” country on Earth.

No one is in any doubt about why the rules were bent for Flybe. It can be summed up in two words: regional connectivity. 

Flybe, we have been told ad nauseum this week, may not matter much if you live in London, but the airline is vital to the “left behind” places that have been in focus since the election — Birmingham, Manchester, Belfast, the Isle of Man, Exeter, or Newquay in Cornwall. Without it, we have been warned that regional airports would collapse, and with them the prospects of the communities they serve.

In this topsy-turvy world where the Conservatives are now the party of anywhere outside the M25 and MPs are tripping over themselves to talk about “levelling up” the regions, letting Flybe fail wasn’t an option. It just didn’t fit with the messaging that won Johnson the election.

And if the government’s priority genuinely is investing in forgotten parts of the UK and building centres of corporate gravity outside London, then the move is logical. 

Defying both the tenets of market economics and the pressure to focus on environmental sustainability may be deemed a price worth paying for the ability to fly direct from Cornwall to Luxembourg or Manchester to Aberdeen.

But if that’s the case, the government should be honest with itself and with taxpayers: it doesn’t care about curbing public spending, cutting taxes, promoting competition, or moving towards a greener economy as much as it cares about ensuring that a relatively small group of people in a handful of places of comparatively low national economic importance still have an airline.

This a risky and short-termist way to run a country, especially when global headwinds hint of a recession on the horizon. With slowing growth in key markets, a still-smouldering US-China trade war, the inescapable disruption of Brexit, and the looming threat of climate change to businesses across a range of industries, the UK is going to need all the firepower it can muster. 

That means taking decisions to maximise productivity and long-term economic sustainability, not handing out cash in a panic because allowing a company to fail wasn’t in line with the new branding.

Letting Flybe collapse would have been disastrous for a small number of businesses and individuals who rely on it, and damaging for the communities it serves. But over time, smarter and more viable transport options would have emerged — and if they didn’t, the government could have designed a more sustainable investment package, based on upgrading rail infrastructure across the country or upskilling people from struggling industries.

In opting instead for a short-termist subsidy, the government hasn’t only jeopardised both the free market traditions of the Conservative party and the green credentials of the Prime Minister. It has revealed a set of skewed priorities that could leave it poorly equipped when the next crisis strikes.

Main image credit: Getty

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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