When Flybe put itself on sale earlier this month it looked like it might end up as a one horse race, with previous suitor Stobart expected to make a fresh bid for the UK regional carrier. But Virgin Atlantic's disclosure that it is also considering making an offer adds an intriguing new dynamic to the sale process.
Virgin says its talks with the Exeter-based carrier range from "enhanced commercial arrangements to a possible offer". But what are the potential benefits of a tie-up for the London-based carrier?
An anonymous source with knowledge of the matter tells FlightGlobal that Flybe has "a lot of potential but it will require someone quite brave" to take it on.
The two UK airlines are already codeshare partners, with Flybe using its UK domestic operations to feed Virgin's long-haul services from Manchester, London Heathrow and elsewhere.
Flybe has essentially replaced Virgin's Little Red operation, using the defunct carrier's slots at Heathrow to start routes Little Red previously provided to Edinburgh and Aberdeen.
An acquisition of Flybe could offer the opportunity to find even more synergies between the two airline's networks. In Manchester, Virgin is planning a new service to Los Angeles and will boost frequencies to other US cities. The carrier already operates to New York, Orlando and Atlanta from the UK airport.
A tie-up could provide opportunities for Virgin to better align Flybe's UK domestic services into Manchester to better match its US schedule and maximise feed opportunities.
Virgin is 49% owned by Delta Air Lines, and the two carriers are in the process of cementing closer ties with Delta's SkyTeam alliance partner Air France-KLM. Under the proposed deal, Air France-KLM will acquire 31% of Virgin Atlantic from the Virgin Group for £220 million ($287 million), reducing the latter's stake to 20%. This move is part of Virgin joining Delta and Air France-KLM's joint ventures in Europe and on transatlantic routes.
Outgoing Virgin chief executive Craig Kreeger told FlightGlobal earlier this year that he expects the tie-up to clear regulatory hurdles and come into force early in 2019.
KLM is already a significant operator in the UK, especially in the regions that it connects into Amsterdam Schiphol. A Virgin takeover of Flybe could indirectly provide Air France-KLM with even greater access to the UK market.
Flybe's portfolio of UK airport slots might only be of nominal interest to Virgin. The carrier has significant operations at airports such as Manchester, Exeter, Southampton and some slots at London Heathrow, although it does not own the latter having been awarded them for specific services to Scotland.
But beyond the UK, Flybe holds airport slots at Paris Charles de Gaulle and Amsterdam Schiphol, and these could be of value, especially in the context of Virgin's wider strategic relationship with Delta and Air France-KLM.
Flight Fleets Analyzer data shows that Flybe has a fleet of 68 aircraft in service, consisting of 53 Bombardier Q400s, 11 Embraer 175s and four E190s, with the latter two types being slowly phased out. Flybe owns 18 of the Q400s and seven of the E175s.
At first glance, Flybe's fleet of predominately turboprops would seem to be of little value to Virgin beyond their use to feed its long-haul operations. However, if the wider relationship with Air France-KLM is considered, the aircraft could in places be redeployed for use with KLM Cityhopper or elsewhere in the Franco-Dutch airline group's network.
Meanwhile, Flybe's recent sale and lease back of a hangar at its Exeter base for £5 million ($6.4 million) and its deal with NordLB to release $5 million of funds secured against one of its Bombardier Q400 turboprops might be small amounts, but could be a way to advertise to a potential buyer that it is still able to raise money and has assets of some value.
The decision by Flybe's board to put the UK carrier on sale earlier this month came as it disclosed a halving of pre-tax profits to £7.4 million over the first half of the year. In October, it had issued a profit warning for the full year, citing a weaker outlook for demand and the effects of fuel and currency movements.
While the performance was far from encouraging and saw a further denting of its share price, beyond those recent numbers there is evidence that Flybe's underlining business model might be fairly robust.
Flybe has itself identified factors dragging down its performance such as unfavourable aircraft leasing agreements. Excluding the effect of an onerous E195 lease, Flybe's adjusted pre-tax profit of £9.9 million was "slightly ahead" of guidance given in October.
Flybe is in the midst of a restructuring programme to cut capacity to better match demand, while also trying to improve yield on seat sales. In its last financial disclosure, the airline said its third-quarter performance, beginning on 1 October, had been "positive".
While it has cut seat capacity in the third quarter by 6% compared with the previous year, it has increased the proportion of seats sold from 59% to 63%.
Analysts Liberum issued a note in which it says it still saw "turnaround potential at Flybe as it brings capacity into line with potential profitable demand".
"There remain self-help opportunities to continue to improve revenue per seat, such as new commercial systems, and non-fuel unit costs ought to be brought under better control, helped by cheaper aircraft leases, even with the headwind of seat capacity reductions."
If Virgin could strip Flybe of its additional businesses such as its training academy and even its MRO arm and exit its unfavourable lease agreements, the airline could become a streamlined operating unit and theortically profitable. It could also have uses within the wider Air France-KLM group, potentially in a similar feeding role to that which KLM Cityhopper performs in the Netherlands.
At present both EasyJet and Stobart have declined to comment officially on any interest they may have in Flybe, which makes it difficult to predict whether a geniune bidding war could develop for the carrier's assets, but the rising price of Flybe's shares certainly suggests that the markets sees rising interest in the UK carrier as genuine.
Source: Cirium Dashboard