The collapse of Flybe has been averted after the Government told the airline it would review air passenger duty and shareholders agreed to inject tens of millions of pounds into the business.
The Treasury announced on Tuesday evening that the Exeter-based, loss-making carrier would continue operating after the review of the tax featured in rescue talks.
But industry experts are seeing this as a short-term fix for what has been a troubled airline and campaigners warned Prime Minister Boris Johnson that any air passenger duty (APD) review that leads to cheaper air travel would be a "complete scandal" and "rip up" his pledge to show leadership on the climate crisis.
Meanwhile, it is reported that Willie Walsh, the chief executive of International Airlines Group which owns British Airways, has written to Transport Secretary Grant Shapps questioning the deal.
In a letter seen by the BBC, Mr Walsh asked why the taxpayer was being asked to foot the bill as one of Flybe's biggest shareholders was Virgin Atlantic, which in turn is part-owned by US aviation giant Delta.
Flybe's shareholders agreed to a cash injection - understood to be in the region on tens of millions of pounds - to keep Europe's largest regional carrier in business "alongside Government initiatives".
The airline would not comment when asked if the Treasury had separately agreed to the deferral of a portion of the airline's outstanding tax bill over a period of months.
The emergency agreement seeks to prevent Flybe becoming the second UK carrier to fail in four months after Thomas Cook went bust in September 2019.
Chancellor Sajid Javid said: "I welcome Flybe's confirmation that they will continue to operate as normal, safeguarding jobs in UK and ensuring flights continue to serve communities across the whole of the UK.
"The reviews we are announcing today will help level up our economy. They will ensure that regional connections not only continue but flourish in the years to come - so that every nation and region can fulfil its potential."
The Treasury said the APD review ahead of the March Budget would consider the UK's climate commitments to meet net zero greenhouse gas emissions by 2050.
Business Secretary Andrea Leadsom said she was "delighted that we have managed to reach an agreement with Flybe shareholders to keep the company in operation".
Flybe chief executive Mark Anderson welcomed the deal as a "positive outcome for the UK" which "will allow us to focus on delivering for our customers and planning for the future".
Mr Shapps said his department will "undertake an urgent review into how we can level up the country by strengthening regional connectivity".
Mr Shapps said APD worked "slightly oddly", adding "it costs twice as much to fly within the country as it does to fly to for example France and back".
He added the taxpayer had not paid any money into the firm.
Flybe's shareholders Connect Airways, a consortium including Virgin Atlantic, Stobart Group and Cyrus Capital Partners, will put in more funding as part of the agreement.
Connect Airways chairman Lucien Farrell said: "We are very encouraged with recent developments, especially the Government's recognition of the importance of Flybe to communities and businesses across the UK, and the desire to strengthen regional connectivity.
"As a result, the shareholder consortium has committed to keep Flybe flying with additional funding alongside Government initiatives.
Professor Loizos Heracleous, an aviation industry expert from Warwick Business School, said: “The fact that Flybe has been kept afloat is good news for flyers, local economies, employees, and UK connectivity. However, this currently looks like a short-term fix rather than a long-term solution.
"Flybe requires significant changes to its operations and business model to become sustainable as a company for the longer term in a fiercely competitive environment.
"Cash injections and deferring its air passenger bill merely kick the can down the road. Reducing APD will also benefit Flybe’s competitors, such as Easyjet, who will continue to offer flights at lower cost than Flybe. This is not the answer.
"Flybe has to find ways to become more efficient, concentrate on routes that are profitable and remove money-losing routes; or consider whether these routes can be made profitable by investigating, for example, elasticity of demand in relation to price.
“Holding on to money-losing routes does make it harder for competitors to expand in those slots; but it is not good strategy.
"Further, revenue growth only makes sense if it is profitable growth or if the company has a solid plan to swiftly squeeze higher margins from the higher revenues - via benefiting from economies of scale and scope for example.
“None of these seem to be the case for Flybe.
"Flybe needs to apply turnaround actions. These typically involve selling of non-core assets to reduce debt and streamline the business, careful cash flow management, focusing on core, profitable parts or the business, increasing revenue streams such as ancillary revenues, and making investments and undertaking initiatives to make the core business more competitive. Without decisive turnaround actions, the same problem will haunt Flybe in the near future."
