May 24, 2017    5 minute read

The Airline Industry and Brexit: the Challenges Ahead

Upcoming Negotiations    May 24, 2017    5 minute read

The Airline Industry and Brexit: the Challenges Ahead

The airline industry plays a crucial role in the growth and development of Europe’s economies, especially for the labour intensive tourism industries. It is currently exposed and threatened by the forthcoming Brexit negotiations. As with sectors such as car production, airlines are anxious to mitigate the impact of a hard Brexit on their businesses.

This is particularly critical for British Airways, which is owned by parent company International Airlines group (IAG), and EasyJet. Both are UK-registered companies that need to maintain existing agreements in order to fly both between the UK and the EU as well as within the EU. But to benefit from the EU Open Skies Agreement they must remain party to the jurisdiction of the European Court of Justice (ECJ). This scenario is anathema to the present British government, who are prepared to sacrifice membership of the single market to avoid this.

EasyJet has so far put on a brave face. After the 2016 referendum result – in which it campaigned strongly for Remain – a statement was put out insisting that it was confident the vote “will not have a material impact on its strategy or its ability to deliver long-term earnings growth and returns to shareholders.”

Examining the Issues

Brexit is an enormous concern for EasyJet. With its home base in the UK, it reports its earnings in pounds, meaning it is heavily exposed to the sterling’s plunge. Currency fluctuations of between 12 and 15% have added over £100m to EasyJet’s annual costs.

Although the company’s share price is still lower than it was before the referendum vote, it has picked up in recent months. Despite pre-tax losses of £236m for the six months to 31/03/17, shares in EasyJet have climbed from £9.31 in late February to their present level at £13.40. By contrast, last May they sat at £15.50. In any case, revenue forecasts are more upbeat for the rest of the year, and for the European airline industry as a whole, based on increasing demand.

As the second-biggest carrier in France, its business there has been significantly affected by the Paris and Nice terror attacks, leading to the cancellation of over a thousand flights in the three months to the end of June 2016 and a loss of £20 million.

As a result, successful Brexit negotiations are crucial for the company, which is ready to move its legal headquarters back into the EU if necessary. As a further precaution, the airline is applying for an Air Operator certificate (AOC) in an EU member state in the same way as Ryanair (whose HQ is based in Dublin), which would be required in the UK when a departure from the EU takes effect. This, of course, would be a requirement for all UK based airlines. But having an AOC may not be enough as the real issues relate to ownership, as non-European parties are not allowed to own a majority stake in a European airline and vice-versa.

Airline industry executives hope that the UK will negotiate its continued access to the EU market so that Britain does not lose its flying rights into the EU. A sluggish approach is therefore not an option. Airlines forward plan their timetabling schedules and purchase their aviation fuel requirements on futures contracts to hedge against currency volatility.

In reality, and to remove uncertainty about their business requirements, what is required is a reciprocal bilateral aviation agreement permitting UK airlines to fly into the EU (and vice-versa). It is likely that any compromise will require the UK to accept EU aviation law and with it, the overriding jurisdiction of the ECJ.

Need for Reform

The EU Commission has responded to pressure to review its ownership rules and relax its requirement on foreign investment for European airlines, which have a limit of 49% on non-European ownership (a potential issue for Ryanair, with its large number of UK-based institutional shareholders).

As a quid pro quo, there have to be tighter rules regarding state aid for airlines of non-EU airlines (rules which EU members already carry for their airlines). Behind these measures is the desire to increase the competitiveness of the European aviation industry, which has been affected by the challenge of lower-cost rivals such as Emirates, Etihad and Qatar airlines, together with rise of rival airport hubs in Asia and Dubai.

Both Lufthansa and Air France-KLM have expressed concern about whether they are competing on a level playing field with Gulf airlines. They have both joined with IAG, Ryanair and EasyJet to form a group to lobby for amendments in public policy and regulation – ultimately with the intention of reducing taxes and the effect of strikes. These and other issues draw together erstwhile rivals to effectively speak with one voice.

The Importance of a Deal

It is inconceivable for airlines that a deal is not struck soon after the Brexit negotiations commence. Rumours abound that transitional arrangements following a ‘hard’ Brexit may restrict or limit UK carriers to direct flights only without intra-EU activity.

This is bad news for operators such as EasyJet and, should the UK retaliate with similar restrictions, equally worrisome for Ryanair. Consumers will be deeply concerned if political wrangling delays their business and leisure travel plans. Between 150m and 200m (business and leisure) travellers pass through UK airports every year. Tourism is a flagship driver for economic growth in the EU and air travel is key to the continued development of countries both inside and outside the EU.

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