U.K. aviation industry and Brexit
NewsJuly 28, 2016
LONDON. A Frost and Sullivan analyst says United Kingdom's (U.K.'s) vote to leave the European Union will likely result in uncertainty in the aviation industry as well as a decline in traffic and revenue.
Brexit will have three major impacts on this aviation market, says Diogenis Papiomytis, Consulting Director, Aerospace & Defence, at Frost & Sullivan.
Th first in order of magnitude is the great uncertainty, as it is still early since the vote for anyone to have developed a concrete view on what comes next. "For better or worse, the debate between the two opposite camps in the referendum only focused on the advantages and disadvantages of a possible Brexit rather than providing a theoretical implementation plan on the road to Brexit," he says. "Accordingly, companies have very little in terms of guidance on which to base their short- and medium-term strategies."
While U.K. and European airlines with a strong U.K. presence brought up their concerns before to the referendum, clearly seeing Brexit as a major negative event, the majority of airlines have not yet developed comprehensive plans to deal with the result, he says. The table below summarizes the pre- and post-referendum opinions and actions by the largest airlines in the UK and Europe.
"It is clear that the general uncertainty will intensify and the impact on airline operations will be greatest if the U.K. delays negotiations or fails to secure continued membership in the European Common Aviation Area (ECAA)," Papiomytis says.
Next is the impact on trade and business traffic, he continues. The U.K. is one of the world’s largest traders, with exports of $506 billion and imports of $684 billion in 2014 (Source: WTO), Papiomytis states . "Moreover, an estimated 40 percent of Britain’s imports and exports by value travel by air (Source: Let Britain Fly), while almost 54 percent of Britain’s trade is with the European Union (Source: Centre for European Reform). Accordingly, as much as $257 billion worth of U.K.-European Union trade may be affected by future Brexit negotiations. Clearly, carriers with significant cargo business and cargo-only carriers will be most affected by any decline in trade as a result of a potential increase in the cost of doing business."
What is more important is that "business traffic is already impacted and will be further affected in future and until there is clarity over the future role of the U.K. in the European marketplace," he continues. "A fall in premium traffic, which is the main source of profitability for the majority of carriers, will put further pressure on yields and airline profits. It will come as no surprise if Europe experiences a new wave of airline bankruptcies, should major cost factors such as fuel prices compound the negative effect of premium traffic decline."
Thirdly, is the Brexit impact of a drop in outbound traffic. As the UK is primarily an outbound aviation market, with more than two thirds of all U.K. traffic being outbound airlines with significant operations to and from the UK will be negatively affected by the current and future weakness of the British pound vis-à-vis the European and U.S. dollar, Papiomytis says. "As European and international destinations become more expensive for U.K. travelers, we would expect airlines to adjust and reduce capacity deployed to the U.K. The fact that the U.K. will become more attractive as a destination itself, will not compensate the drop in outbound traffic fully.
"We believe the net effect of Brexit on the aviation market will be negative in the short- to medium-term as airlines deal with the effects of uncertainty and drops in premium and outbound traffic," he continues. Over the long-term however, everything depends on the whether the U.K. successfully negotiates continuous membership in the European Common Aviation Area (ECAA). A possible exit from the ECAA will raise the costs of doing business for both U.K. and European carriers alike."
There are also concerns about the U.K.’s ability to negotiate beneficial trade agreements and Open Skies aviation bilateral agreements with the U.S. and other partners, Papiomytis notes. "Overall, we expect U.K. carriers to spend substantial time and resources on lobbying for a continuation in the (aviation) status quo in a post-Brexit world.
The political situation
The new Prime Minister, Theresa May, has stated she will not trigger Article 50 of the Lisbon Treaty, which would formally take Britain out of the European Union after as many as two years of negotiations, before the end of 2016 (Source: BBC 14 July 2016), Papiomytis says. A new Transport Minister is expected to be appointed and regardless of who takes the hob, aviation will be at the top of the new Brexit Agenda and the new Transport Minister will likely make changes at the top of the Department for Transport (DfT) and the U.K. Civil Aviation Authority (CAA).
Papiomytis says he expects there to be a significant period of deliberation, during which the country’s top aviation stakeholders will be sought for their opinions. "It is essential that airlines, airports and aviation suppliers use this time to set up their Brexit task force and appoint special Brexit 'Champions' that can effectively represent their (and their customers’) interests," he adds. "For airlines, this will mean empowering the Government Affairs, International Affairs and Legal teams to lead the efforts, with support from almost every other airline department. The aim of the Brexit task force should be to persuade the government of the need to remain in the ECAA and support the DfT’s negotiation team in the development of a clear business case to present to Brussels."
Papiomytis goes on to say that clear corporate and business strategies will need be developed by the aviation industry. "These are no longer contingency plans, but rather long-term strategies in light of the new Brexit reality," he explains. "Virtually every component of a company’s long-term strategy plan has now been made obsolete and needs to be reworked, incorporating alternative post-Brexit scenarios. This includes a redesign of long-term network & fleet plans, sales & marketing plans, financial plans, operating plans and research & development plans."
For more information, visit www.frost.com.
