By Sarah Young
LONDON (Reuters) - The British government defended a rescue deal for privately owned regional airline Flybe, after the owner of rival British Airways filed a complaint with European Union regulators on Wednesday calling it a "blatant misuse of public funds".
A spokesman for Prime Minister Boris Johnson dismissed the claims made by Willie Walsh, the boss of BA's parent company IAG (L:ICAG), that government help for Flybe contradicted European Union rules.
"The government is fully compliant with state aid rules and there has been no state aid for Flybe," the spokesman told reporters on Wednesday.
Flybe was kept afloat on Tuesday after its shareholders agreed to invest more money alongside a UK government support plan, reported to involve the deferral of a tax bill and a potential government loan.
Johnson's spokesman said that the government stepped in to retain transport links between UK regions and any support that is given "would be made on strictly commercial terms". Many details of the plan have not been made public.
Flybe connects smaller UK cities such as Southampton and Newcastle and boosting transport links outside London was one of the promises made by the Conservative government.
But Flybe's competitors attacked what they said was government backing for Flybe, arguing that it was no longer a level playing field.
Walsh said the taxpayer was picking up the tab for Flybe's mismanagement. "This is a blatant misuse of public funds," he said in an emailed statement.
IAG, whose airlines BA and Aer Lingus compete with Flybe, took its complaint to the European Union's Directorate-General for Competition and asked it to look into whether support for Flybe constituted a breach of EU state aid rules.
OLD FOES
Walsh and other critics of the Flybe bailout have suggested the carrier's ultimate owners, which include British Airways' (BA) old rival Virgin Atlantic, had deep enough pockets to ensure the airline's survival without government help.
Rivalry between Virgin Atlantic and BA dates back more than 20 years to when Virgin accused BA of conducting a smear campaign.
Virgin Atlantic is 51% owned by Richard Branson's Virgin Group with the balance held by another BA rival, Delta (N:DAL), the second biggest U.S. airline by passenger numbers with a market capitalisation of $40 billion.
EasyJet CEO Johan Lundgren said it was hard to comment given the lack of detail about Flybe's support package, but added: "Taxpayers should not be used to bail out individual companies especially when they are backed by well-funded businesses."
Despite their criticism, both British Airways and easyJet (LON:EZJ) could benefit from one part of the Flybe rescue plan - the government's decision to review air passenger duty, a tax on flights departing from UK airports.
Governments are permitted to provide state aid under EU rules, but only with approval from the European Commission. The Commission said on Wednesday it was willing to discuss Flybe with the UK government.
While Britain is set to leave the EU on Jan. 31, it will then move into a nearly year-long transition phase during which it will continue to abide by EU rules.
Across the EU, airlines have historically been big recipients of state aid. Carriers such as Belgium's Sabena received contested bailouts for years before eventually being allowed to go bust.
Italy has promised another 400 million euros to Alitalia even as the EU continues to investigate its last 900 million euro loan. And when Thomas Cook collapsed last September, Germany kept its Condor subsidiary afloat with a 380 million euro rescue loan that won swift approval from Brussels.