Flying into Trouble? Stephen Kitching

The Government’s decision to contribute to the rescue plan for troubled airline Flybe, in the form of the deferral of air passenger duty payments, has proven controversial. Quite apart from the ideology of such state intervention, and what deferring payment of a tax designed to reduce carbon emissions does to the government’s climate change credentials, there is also the thorny matter of rules against State Aid.

Flybe, an operator of short haul flights in the UK and Europe, has had troubles for some time and to continue operations it has required a significant injection of capital from its two main shareholders, Virgin and Delta. As part of the rescue deal, the UK government has agreed to a deferral of a £100m tax bill for air passenger duty payments.

The problem is that there is a general prohibition in the EU regarding State Aid, which includes special tax deals. As the Irish government and the technology company Apple discovered to their cost, the European Commission looks unsympathetically on any financial agreement where one organisation is treated more favourably than the general rules require.

Willie Walsh, Chief Executive of British Airways’ parent company IAG, certainly felt something was amiss. He described the agreement as “a misuse of public funds” and immediately reported the deal to the European Commission for breaching State Aid rules.

Although the UK is set to leave the EU at the end of the month, State Aid rules will remain in place during the period covered by the Withdrawal Agreement, and some rules will need to stay in place long after that as part of free trade agreements with other countries. The government will have taken advice on any deferral – so what’s going on?

Generally the prohibition on State Aid can be avoided if the transaction is on market terms, but this would be difficult to demonstrate when it comes to not paying your taxes on time. One way the government may have satisfied this rule is by agreeing that the deferred payment will attract a market rate of interest. However, a charge of this kind would need to be high; equivalent to that which a private company such as a bank would have charged Flybe for a £100m loan. The rate could be reduced somewhat by strong covenants such as security over assets, or shareholder guarantees.

Any interest rate would need to be commensurate with the terms of the loan, and if this route was taken the government would want to be totally sure that the rate charged was at a market level – the last thing the government (or its lawyers) would want is for this to rumble on well after we have officially left the EU.

Alternatively, the Government may have used one of a number of “exemptions” - rules where the Commission considers specific types of State Aid to be compatible with the healthy working of the market. Most of these exemptions are unsurprising, such as funding for social housing or infrastructure. Others are more esoteric, with very specific requirements and hard judgement calls to be made.

Perhaps a clue to the government’s approach can be found in the fact that Flybe services a large number of UK domestic routes that are not flown by other airlines, and that the head of the Airport Operators Association made a statement about Flybe’s “critical and unique role in the UK aviation system, supporting the development of the regions". There are rules around aid for local development so the government may argue some time-limited support is compatible with rules.

One may ask why the government was able to step in to assist Flybe but has been unwilling or unable to help heavy industry such as steelworks in the past. Besides that fact this is a new Prime Minister and Chancellor, these rules are complex, with exemptions applying in some cases and not others, and most requiring any intervention which is not on market terms to be temporary, meaning that an unprofitable business cannot be propped up indefinitely.

The case of Flybe shows three things; one that any state intervention will be controversial, two that the risk to public authorities of State Aid challenge is very real, and three that any case involving State Aid needs careful consideration and guidance, especially when the situation is likely to be time pressured.

Arlingclose has extensive experience of working alongside public authorities to ensure compliance with State Aid legislation.

If you would like to discuss these or similar issues, call a member of the Arlingclose team on 08448 808 200 or email