A new flightpath?

The UK government’s recent announcement that it would bail out struggling regional airline FlyBe, regular carrier of the ICDP team on our flights to and from Birmingham, to the tune of £100 million, has inevitably been met with howls of protest from its immediate rivals.  Willie Walsh, outgoing Chief Executive of British Airways' owner IAG, called the decision a "blatant misuse of public funds" that "constitutes unlawful state aid", before confirming that the European Competition regulators in Brussels had been notified.  Environmentalists pointed out the obvious inconsistency between propping up an airline and the shift to a low carbon economy.

The UK government has countered that FlyBe plays a significant role in regional cohesion, connectivity, and employment, as the airline constitutes the major operator at a number of smaller airports around the country, and is also responsible for the lion’s share of the domestic air travel network.

At face value, the move would appear to be tangible evidence of the government’s recent statement that post-Brexit UK will not necessarily remain in alignment with EU rules, but will instead plough its own furrow where this will benefit UK interests, although of course in practice, the bail-out was announced before the 1st February leaving date, and whilst we are still subject to the EU’s state aid rules, so we might not have heard the last on it from Brussels ...

Nevertheless, the prospect of the UK diverging from EU rules once the transition period runs out at the end of the year is currently alarming many sectors of business, and none more so than the automotive sector.  Any move away from alignment on Type Approval regulations and their mutual recognition would force OEMs into a costly second homologation process for UK-bound models.  The prospect of UK new car fleet CO2 emissions having to count towards separate national targets threatens both to complicate the task for OEMs of reaching their EU targets (with UK sales no longer counting towards the overall average), and also to introduce the possibility of new fines for OEMs based on their UK-specific sales mix.  Furthermore, the announcement in recent days that the UK is looking to bring forward a ban on all ICE new car sales (so not just petrol and diesel models, but hybrids and PHEVs too) to 2035 threatens to derail new model plans for a number of brands.  Taken together, these challenges may cause more than one OEM to question the value of their UK market presence, at least with their full range of models.

But returning to the issue of state aid, it has been pointed out that freedom from EU rules may make it easier for the UK government to get behind the kinds of schemes that are needed to accelerate R&D, and to boost competitiveness, in the transition to a low carbon economy.  For example, UK EV battery production is currently limited to the relatively small-scale operations of JLR and Nissan, but with mass EV take-up on the horizon, should we be looking to support the creation of a UK battery ‘gigafactory’ as a key element in continued UK car assembly, and to reduce our reliance on imports from other parts of the world?

Whilst the idea of promoting ‘national champions’ has understandably come to the fore in the Brexit debate, it is not one that is limited to the UK.  Indeed, the combination of a more protectionist stance on global trade together with greater support for key sectors needing to transition to new market conditions are ideas coming back into fashion at the moment right around the world.  There is no better example, again in the field of EV battery technology, than the Northvolt consortium, currently building Europe’s first lithium-ion battery production ‘gigafactory’ in Northern Sweden with funding from the European Investment Bank alongside commercial partners including BMW, Volkswagen, Goldman Sachs, AMF, Folksam, and the IKEA-linked IMAS Foundation; public sector support for the development of a European ‘champion’ to rival global competitors.  With an expected capacity of 40 gigawatt-hours by 2024 (larger than Tesla’s Nevada ‘gigafactory’, the Skelleftea plant would produce enough battery cells for 500,000 to 600,000 cars per year.

Whether in the EU, the UK, or further afield, the calls for governments to develop more integrated industrial policies to help a number of sectors, including the automotive industry and the car market, to transition to a new low carbon economy are growing.  Such interventionism does not have universal support, especially amongst those with long memories of the inefficiency of state-protected monopolies of the past, but there is a belief that the scale of change that is needed cannot be left to market forces alone.  It is against this backdrop that the bail-out of FlyBe should be viewed.  Whilst in this particular case it smacks of a quick fix, inconsistent with longer-term transport policy goals, and may in the end only delay the inevitable, it does illustrate a new willingness for governments to step in, and to seek to manage business outcomes.  And this may itself provoke more divergence between markets and trading groups than any conscious move away from harmonised rules.