flybe. (BE, Exeter) is in discussions with the UK government and the European Commission (EC) over the possibility of London purchasing shares in the airline, according to a report from the BBC. The move follows an announcement last month that the UK government had granted the airline more time to pay its outstanding GBP106 million (USD138 million) Air Passenger Duty (APD) bill and had offered a potential state loan of up to GBP100 million (USD130 million).

A loan, raised on commercial terms and charging an interest rate that mirrors the risk being taken with taxpayer money, remains the government's favoured option. However, flybe.'s competitors are questioning how the government can provide a loan on realistic commercial terms, as the carrier has not been able to source the funds it needs from any commercial lenders at market rates.

Loss-making businesses like flybe. are typically not able to access funds at low-interest rates as the risk of payment default is recognised as being high. However, a loan at a higher rate of interest would reduce the airline's chances of returning to improved financial health.

A possible way to solve the problem is for the government to provide the loan but reserve the right to acquire shares at a pre-determined value following the airline's return to financial health. It is hoped that this suggested solution increases the likelihood of flybe. being able to pay its debts, make the airline more valuable, and allow UK taxpayers to take the returns for the risk taken.

When contacted by ch-aviation on the matter, 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."

"Ahead of finalising this agreement, the airline is being supported by its shareholders and leading suppliers, is managing its cash position carefully and currently has strong liquidity. We are pleased to say that our bookings have returned to normal levels and we are grateful for the confidence that our customers, suppliers, airport partners and the CAA have shown in us. Spurred on by this overwhelming demonstration of support, we have in the past week delivered the best operational performance in three years. There remain real challenges ahead, but the achievements of the past few weeks have given us renewed determination and shown us what is possible."

The UK government's ongoing talks with the European Union (EU) are to determine whether any financial help for the airline would breach EU competition rules. Member states only need to notify the EC if any support is deemed as state aid by the member government itself - which the UK believes its backing of flybe. does not. However, other parties, such as IAG International Airlines Group and Ryanair (FR, Dublin Int'l), can complain that the support breaks state aid rules, and the EU can then investigate the claims.

In addition to the complaints raised with the EU, IAG has also lodged a Freedom of Information request with the UK government seeking more information on its proposed support package. The government has until February 13 to respond to the airline group's request.

The two rivals also suggest that the Connect Airways consortium which owns flybe., has "billionaire shareholders" which should be providing more survival funding rather than the UK government. The consortium is made up of three entities - namely Virgin Atlantic (VS, London Heathrow), Stobart Group and Cyrus Capital Partners - which have agreed to invest GBP30-40 million pounds (USD39-53 million), but this sum is not enough to secure the airline's long-term future.

Other concerns raised by competitors include the likelihood of valuable London Heathrow slots to be used by part-owner Virgin following the switch of flybe. 's Newquay services from the hub to nearby London Gatwick, as well as the carrier's expansion at Stobart Group-owned London Southend.

Earlier this month, it became apparent that the owners of aircraft leased by flybe. were closely tracking the carrier's financial situation amid concerns that the UK Civil Aviation Authority (CAA), acting on behalf of Eurocontrol, has the legal right to impound aircraft and sell them to recover debts. In late January, it was reported that the regional carrier was in talks with some of the airports it serves about unpaid fees.