The airline and government officials will meet this week to discuss the potential terms of a state loan, Sky News understands.
Flybe, the struggling regional airline, will be handed proposals for financial support from the government this week as it seeks to avoid a collapse that could undermine ministers’ pledge to bolster regional connectivity.
Sky News has learnt that Whitehall officials are expected to meet with Flybe and its shareholders as soon as Thursday to discuss the prospective outline of a £100m government loan.
The terms of a proposed deal may pose a dilemma for Flybe’s shareholders, led by Sir Richard Branson’s Virgin Atlantic.
Among the options being drawn up by officials would be for the government’s loan to rank above that of existing investors’ capital – an idea that at least one of Flybe’s shareholders has previously signalled they would reject.
Another scenario would give the taxpayer security over many of the airline’s remaining unencumbered assets.
A third idea, comprising warrants that would convert the government loan into equity in a rejuvenated Flybe, is said to be “significantly less likely”.
City sources say Flybe has sufficient financial resources to support the company’s operations until the end of March, but that the company’s existence would be imperilled at that stage if no deal has been secured.
Contingency plans that would allow the government to continue operating Flybe routes seen as critical to preserving vital regional connections are understood to be being drawn up, rival airline executives say.
While Flybe insists that it is not in talks about “a bailout”, and Sajid Javid, the chancellor, has denied any plan to support the company with state aid, its rivals have responded furiously to the idea of it being propped up by ministers.
British Airways’ parent – International Airlines Group – and Ryanair have threatened to take legal action against the government for breaching state aid law.
This week’s talks between the government and Flybe’s owners are said to represent an important step towards determining the scope of any loan, although the impending Cabinet and ministerial reshuffle will mean a delay to any formal decisions.
Officials from the Department for Transport, Treasury, and Department for Business, Energy and Industrial Strategy are involved in the talks.
UK Government Investments, a unit of the Treasury, is helping to coordinate the negotiations.
On Wednesday, BA said it would step in to operate a Heathrow-Newquay route recently – and controversially – vacated by Flybe.
Last month, Heathrow Airport’s chief executive intervened in the row over Flybe’s future, demanding urgent government action to preserve “lifeline routes” from Britain’s busiest airport.
John Holland-Kaye wrote to Paul Maynard, a transport minister, to call for the ring-fencing of so-called Public Service Obligation (PSO) routes for flights to and from Heathrow.
A number of additional routes, including some operated by Flybe, are expected to be given PSO status following a forthcoming consultation on regional connectivity.
Ministers have also pledged to review Air Passenger Duty (APD) in next month’s Budget, with Flybe already benefiting from a short-term deferral of part of its tax bill.
Flybe, which is one of the UK’s biggest domestic carriers, transports more than eight million passengers annually.
It employs more than 2,000 people.
Michael O’Leary, Ryanair’s chief executive, has accused Mr Javid of being “blindsided by billionaires”, asking him last month: “If these billionaire shareholders are not willing to put their hand in their own deep pockets to bail out the loss-making Flybe, then why is your government and HMRC [the tax authorities] giving them a bailout?”
The restructuring experts Alvarez & Marsal have been drafted in to advise the government on the terms of any loan, which would have to be made on commercial terms to avoid breaching state aid rules.
Flybe’s inability to access a loan from commercial lenders has, however, provoked criticism that a loan from the government could be on such terms.
The airline could not be reached for comment, but said at the weekend: “Flybe and its shareholders continue to have productive and positive discussions with the government regarding support to enable us to deliver our long-term strategic plan.”