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Thursday, August 13, 2020

The policy may be obscure, but if Flybe fails many regions will be severely affected Business

Iit is easy to be outraged at the rescue of Flybe. Labor ministers – trade secretary Andrea Leadsom, transport secretary Grant Shapps and chancellor Sajid Javid – have been shamefully uncertain as to what assistance has been extended and under what conditions. The trio claims to have put together a splendid deal in difficult circumstances, but will not say what it is.

So yes, it is right that Willie Walsh at the owner of British Airways IAG and Michael O ‘Leary at Ryanair run their engines and ask for answers. Why do Flybe owners – all profit-seeking companies, including Virgin Atlantic – ask the government for a loan if they are willing, as they say, to borrow on “commercial” terms? Or is a “commercial” rate defined as one that no commercial lender would offer to a company with Flybe’s troubled history?

Why did HMRC grant a short-term deferral of an Air Passenger Passenger Service (APD) liability if, as Flybe claims, the sum is less than £ 10 million? And what is the justification for the government rushing into an APD review? Such studies are normally detailed and take years, but Javid plans to announce his budget reforms in March.

Politics, in other words, is deeply obscure. The government claims it has not broken state aid rules, but Walsh’s accusation of “blatant abuse of public funds” has yet to be addressed in detail.

Yet the sentence should end here. The ministers would have been reckless not to listen to Flybe. This is not a repeat of Thomas Cook, where rivals will fill the hole in the holiday package market. The sudden collapse of the UK’s largest regional airline would quickly be followed by the failure of several regional airports. If regional connectivity is judged valuable, it is best not to risk the nighttime collapse of a key domino. A controlled restructuring would be a better result.

This is the critical point that Walsh and O ‘Leary ignore in their market outbursts. They might be willing to put themselves in Flybe’s way on profitable routes, but they wouldn’t be interested in saving marginal services. And it is not as if the corner of Flybe’s air market had not already been touched by government policy: the main competition on many routes comes from the railway, where the national network receives £ 5 billion in annual funding from the public exchange.

A messy and temporary rescue of Flybe at least buys space to find a solution. Ministers should not be led to believe that the long-term survival of the company itself is essential. If Flybe fails once the financial patch is removed, so be it. The consortium that purchased Flybe last year – Virgin Atlantic; Stobart Group, owner of Southend airport; and US investment company Cyrus Capital – is ultimately responsible for protecting the company and its investments.

Instead, the government should quickly decide which of Flybe’s routes deserve to be preserved through public service contracts, which already exist on some routes. Ministers should be prepared to invite bids for what would actually be a series of management contracts. Maybe Flybe will be able to launch, maybe he won’t be; but the odds of someone fulfilling the role will be clearly greater if society survives.

It is also reasonable for the government to play with APD, which is poorly designed as a passenger tax. A better approach would be to tax emissions. The timing of Javid’s review is no accident – no quibble about that score. But the purist’s argument that Flybe should be left alone does not wash on this occasion. Vital connectivity could have been lost for reasons of small sums, or so it seems currently. A touch of pragmatism is justified.

The cancellation of HS2 benefits only the south

Not long ago, Theresa May’s government caused dismay by suggesting that the second phase of HS2, which ran north to Manchester and Leeds, was not a done deal. With the political world now in the lead, the last hissing breath to cut the escape costs of the high-speed train network could be to ax the first leg between London and Birmingham.

There are superficially interesting elements in this proposal: the price for the whole scheme has increased from £ 55 billion to over £ 80 billion and the prime minister talks about HS2 which costs £ 100 billion or more. The transport links of the north are much lower than those of the south. The government is allegedly leveling the regions, listening to its recently coined northern supporters and redirecting the money to more deserving causes, such as a high-speed trans-Pennine link from Manchester to Leeds.

Some neighbors to the prime minister reportedly believe that the net is a white elephant; but taking off the lower leg would create an even more curious beast.

The first phase from London to Birmingham has already been approved by law, carefully designed, with the bases prepared in the critical joints of the route. It has taken a decade to get to this point too – a real alternative will not be evoked more quickly. The memories are short, but the fast trans-Pennine links offered were in development before Boris Johnson; would not have given, would have simply taken away.

Northern leaders and planners know that HS2 supports schemes to connect northern cities and that connectivity in London is vital – and will be significantly improved in all northern regions even when only the first phase is built in Birmingham. The demolition of the first phase would result in a politically convenient fable of helping the north – while in effect only for the benefit of the south, it saved the pain and cost of building HS2.

The need to cut rates becomes clearer

A shrinking economy and a Christmas to forget for the main dealers on the main road, to end the worst year for sales in a quarter of a century. At any other time, the Bank of England would already have intervened with an interest rate cut. But not in turbulent Brexit Britain.

Yet as Mark Carney prepares for his final rate decision as bank governor on January 30, the latest snapshots of the British economy, published last week in a constant drum of disappointing news, suggest that a cut in loan costs is gone from outside bet with almost 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 buyers. According to the Office for National Statistics, it was a gamble that did not pay off: sales did not increase in December for the fifth consecutive month – the worst run since 1996. In a context of greater uncertainty about Brexit, terrible commercial updates from major chains – including M&S and John Lewis – show that the weakness of the economy is real. Five out of nine members on the Bank’s monetary policy committee said they were ready to cut rates to support the economy, including Carney. Nearly seven years after joining Threadneedle Street when rates were at 0.5%, the Canadian seems likely to be leaving in March with rates exactly in the same position, down from the current 0.75% level.

But despite the darkness, much will depend on whether Boris Johnson’s unexpectedly decisive election victory produced a much-needed rebound in family and business confidence after a torrid end to 2019.

There are first promising signs. According to Deloitte, confidence among corporate finance chiefs grew at its fastest rate in the 11 years following the election. A Barclaycard survey also found that the public has become much more optimistic. However, difficult questions remain given the scale of the task of establishing a new relationship with the EU.

Normally a rate cut would be a racing certainty. If the weakness at the end of 2019 persists and, due to future challenges, the Bank would be wise to act sooner rather than later.

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