The government is said to be mulling taking a stake in struggling airline Flybe, despite concerns about state aid rules and a fierce backlash from the budget firm’s rivals.
Ministers are in talks with Flybe and the European Commission to ensure any rescue deal did not contravene rules about government intervention, the BBC reported.
While the government has already agreed to measures including a reduction in air passenger duty for the budget airline, it is reportedly now considering offering a loan of up to £100m.
State intervention has already proved controversial among Flybe’s rivals, with Willie Walsh, chief executive of British Airways owner IAG, branding it a “blatant misuse of public funds”.
Government officials have reportedly insisted that any loan would be on commercial terms. However, industry experts have expressed doubts.
“In truth, of course, the government loan will never be on truly commercial terms; if it was on commercial terms there would be external investors willing to do it,” said Rob Burgess, editor of frequent flyer site Head for Points.
“This isn’t to say that the government should not step in — I believe that it should, due to the key role Flybe plays in keeping many regional airports open — but the government should not mislead people about why it is doing it.”
Flybe’s major shareholders, including Virgin Atlantic and Stobart Group, have pledged to pump an additional £30m into the airline, though this is not thought to be enough to secure its long-term future.
Nigel Frith, senior market analyst at Ask Traders, said the reports suggested that Prime Minister Boris Johnson “isn’t willing to let anything get in the way of attempts to level up the UK, even if this means supporting a weak business model in a company which could find support from its wealthy owners”.
Questions have also been raised about the interest rates attached to a potential government loan.
Alana Gomez, spokesperson for flight comparison site Jet Cost, said: “High interest rates would likely stifle any chance the airline would have to recover, whilst a low interest rate would welcome criticism from opposing airlines and allow for complacency.”
Another mooted solution for the government is so-called warrants, which would allow it to offer a loan but reserve the right to purchase shares at a pre-arranged price at a later date.
Gomez said warrants were “probably the more palatable [option] of the two, as there is a higher chance that Flybe will be able to pay back their debts, and the taxpayer benefits from the process if successful”.
However, Burgess questioned what the government would do with the equity, as Flybe’s owner consortium Connect Airways is not a listed company and “there would be no obvious route for a minority stake”.
A Flybe spokesperson said: “Flybe and its shareholders are making good progress towards securing a financial package for the business that will secure its long-term future success.
“We continue to have productive discussions with the government over their financial and fiscal support for the business as well as the UK’s regional air travel sector as a whole.”