The immediate future of Flybe was secured on Tuesday night after ministers agreed a rescue deal with shareholders to keep Europe’s largest regional carrier flying.

The package of measures includes a potential loan in the region of £100m and/or a possible short-term deferral of a £106m air passenger duty (APD) bill, plus a pledge to review taxes on domestic flights before the March budget.

After the spectre was raised of another UK airline failure, Flybe’s owners Connect Airways – a consortium led by Virgin Atlantic – were persuaded to commit millions more to cover ongoing losses.

The government is still in negotiations to finalise any loan to Flybe, and although Treasury sources denied reports that it had agreed to defer outstanding APD, it is understood that HMRC could allow the airline a short-term extension to settle its debt.

The deal was condemned by British Airways’ owner IAG as “a blatant misuse of public funds”. Chief executive, Willie Walsh, accused Virgin of “wanting the taxpayer to pick up the tab for their mismanagement of the airline”.

Any government loan would also attract EU commission scrutiny for breaching state aid. However, the EU approved loans made last September by the German government to save Condor, a subsidiary of the Thomas Cook Group, when the UK allowed its sister airline to go bust.

The Treasury will also face the wrath of environmental groups after it announced a review of APD, a tax that adds £26 per passenger to all Flybe domestic return flights, to “ensure regional connectivity is strengthened while meeting the UK’s climate change commitments to meet net zero by 2050”.

An additional review has been promised to examine how else regional transport connectivity can be improved. The Treasury said: “In light of these discussions Flybe have confirmed they will continue to operate as normal, preserving flights to airports such as Southampton, Belfast and Birmingham.”

Q&A What is air passenger duty? Show Hide Air passenger duty, or APD, is a British tax on aviation, introduced in 1994. It is charged on each passenger on flights departing from the UK, and set according to the distance of their final destination and the class of travel. It is intended to incentivise passengers to seek alternative arrangements from flying, which is the most carbon-intensive form of transport. By reducing demand for flights, it seeks to decrease carbon emissions from the air industry. Destinations are grouped into two bands, above and below 2,000 miles from London, and charged at three rates – effectively for economy class, premium economy and business/first-class seats. All short-haul flights to Europe, including domestic, are charged in the same band, rising from £13 in economy to £78 in first class. A long-haul first-class flight now attracts APD of £528. Airlines have long lobbied against the tax, particularly after the rates were doubled in 2007. Flybe has argued that it is especially hard hit as the tax only applies to UK departures, and is therefore applied to each leg of a domestic return flight. That means, for example, that a return flight from Cardiff to Manchester is taxed at £26, while an international return flight from the UK to Moscow pays £13 in APD. Long-haul flights from Northern Ireland are exempt from APD, as well as departures from remote parts of Scotland. Photograph: Pete Byrne/PA

The 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.”

Lucien Farrell, chairman of Connect Airways – the parent company of Flybe – 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. As a result, the shareholder consortium has committed to keep Flybe flying with additional funding alongside government initiatives.”

Flybe’s chief executive, Mark Anderson, said: “Flybe is made up of an incredible team of people, serving millions of loyal customers who rely on the vital regional connectivity that we provide. This is a positive outcome for the UK.”

The transport secretary, Grant Shapps, said his department would undertake “an urgent review into how we can level up the country by strengthening regional connectivity”. He said it would look at all the options to ensure airports could continue to play an important role in driving economic growth.

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The government had been urged by MPs, unions and business to save Flybe, which serves almost two in five domestic UK flights and employs more than 2,000 people. It carries 8.5 million passengers a year between 56 airports across the UK and mainland Europe, and is the main airline at regional airports including Belfast, Southampton and its Exeter base.

The deal came after a day when the prime minister, Boris Johnson, pledged that the government was “working very hard to do what we can” for Flybe and avert a further airline collapse so soon after Thomas Cook. The Conservatives had committed in their manifesto to improve regional connectivity.

The pilots union, Balpa, welcomed the news. General secretary Brian Strutton said: “This is good news for 2,400 Flybe staff whose jobs are secured and regional communities who would have lost their air connectivity without Flybe.

“The government is to be applauded for stepping up to the plate to help one of the few remaining independent UK airlines and a vital one at that.”

The company’s pleas for help to survive the winter came less than a year after it was taken over by a consortium led by Virgin Atlantic, with Stobart and Cyrus Capital, after posting recurring losses of around £20m per year.

Flybe has long struggled financially, and the fall of sterling since the 2016 EU referendum has piled additional pressure on UK airlines, with major costs such as fuel incurred in US dollars.

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The airline has argued it is particularly hard-hit by APD, which is charged on each passenger on a flight taking off in the UK. While all short-haul economy flights, including domestic, are charged at the same rate – £13 – the tax is applied to each leg of a domestic return flight. That means, for example, that a return Flybe flight from Cardiff to Manchester is taxed at £26, while the duty on a Glasgow to Malaga return costs half that.

Potential moves to ease APD were condemned by environmental groups. The MEP for South West England – a constituency that includes Flybe’s Exeter home – Molly Scott Cato of the Green party, said it was “absurd to suggest that we should provide a further boost to the aviation industry”. She highlighted that routes deemed socially necessary could be subsidised under EU rules – Flybe’s Newquay to London route is already funded with state aid.

Greenpeace UK’s chief scientist, Doug Parr, said: “The government cannot claim to be a global leader on tackling the climate emergency one day, then making the most carbon-intensive kind of travel cheaper the next. Cutting the cost of domestic flights while allowing train fares to rise is the exact opposite of what we need if we’re to cut climate-wrecking emissions from transport.”

Flybe flights were operating as normal on Tuesday.