Is Flybe not a flyer?

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The FT has reported that:

Flybe mortgaged off the majority of its remaining assets to its shareholders last year, potentially complicating the UK government’s efforts to provide a loan on commercial terms to the struggling UK airline.

Connect Airways — a consortium of Virgin Atlantic, Stobart Air and hedge fund Cyrus Capital — formally took over the regional airline last year, with the members of the consortium also providing loans to Flybe.

UK corporate filings show that Flybe received a loan from the three shareholders in February 2019 that required the airline to pledge assets such as buildings, equipment and intellectual property as collateral.

So, what Flybe is asking for from the UK government is a £100 million loan to an exceptionally vulnerable business that has no security to offer, and whose shareholders are not apparently willing to let go of their own security to avoid having to provide the support that might underpin the value fo the asset that they have already put on their balance sheets.

As business propositions go this is about as unattractive as they come. Almost no interest rate can compensate for the risk in this loan.

So what might the government do?

First it could say that Flybe’s not a flyer on this basis. They need to pass the problem back to the companies that acquired it  not very long ago.

Second, they need to say that if these companies want help with their investment then they have to give up their collateral to secure it, or offer their own guarantees in place of that collateral. The small business owner who has had to offer a guarantee for a business loan will be entirely familiar with that type of demand.

And third? They could nationalise the company, because they are being asked to take an equity risk. I have little doubt that the EU could be persuaded on grounds of maintaining infrastructure, just as no doubt it will be in the case of Northern Rail.

Fourth, they could let the company go. Of all the options this looks the most likely in this scenario. And anything else might look deeply irresponsible.

The ball is in the court of the current owners of Flybe. If they want a bail out they’re going to have to pay for it. The price will be a loss of security.

The question they’re being asked is a simple one when considering their options. It is do they value their backstop security more than any social obligation to keep an airline running when they bought it so recently?

To put it another way, what is being asked is whether there is corporate social responsibility in action?

Let’s see.