Peter Morris, chief economist at Ascend Flightglobal Consultancy, here teases out some of the aviation implications of the UK electorate’s vote to exit the European Union
We would perhaps all be rich if we had been given a euro for each time a complex issue has appeared in relation to the UK referendum and been met with: “No one knows quite what will happen.” Yet for the European aviation business, the outcome is now very real for services and businesses – and their future.
Over the course of today’s trading up until 13:00, IAG’s shares were down by around 25%, EasyJet’s by 18.5% and Lufthansa’s by nearly 10%. Clearly, the markets don’t feel this is a “wait and see” event and are extremely pessimistic about the impact of the vote on EU aviation, particularly in the UK.
It probably helps to go back to the basics of the aviation business, whose impressive growth over the last four decades has been spurred in Europe by an EU-wide aviation liberalisation framework, within which new business models have evolved, networks increased, fares fallen in real terms, and the costs per unit of flying dramatically reduced.
Travelling by air over the last two decades has been a key element of the new economic mobility in Europe for jobs, tourism and friends and family travel. It is probably one of the EU’s most outstanding achievements.
The first context is the EU aviation regulatory framework, within which the UK and its airlines have prospered mightily, inside and outside Europe. In an upcoming divorce, of course, we will no longer be in the realms of common sense, and we cannot take a continued framework for granted. Anything from travel visas to a return to bilateral route negotiations is on the table. All we can say is that it will surely never be that good again for UK-based airlines and their passengers.
This leads on to the aviation supply side. If an airline now looks at business prospects in an EU (ex-UK) market of 440 million population, the business potential there far exceeds that of a UK market of 60 million.
Expect IAG to adjust its network to give far more prominence to hubs at Dublin and Madrid, and develop the Aer Lingus, Vueling and Iberia brands with EU air operator certificates, far more than British Airways with its UK AOC. Ryanair will simply follow the traffic flow, and will downsize its already limited dependence on the UK. EasyJet will doubtless already have plans under way for a head office within the EU, perhaps under a different brand.
This brings us to the impact on customers – passengers travelling to, from and through the UK by air. My view, echoed by many economists, has been that a devaluation of the pound by 25% is possible, which has an immediate impact of at least minus 10% on UK outbound travel. Further, the inevitable downturn of the UK economy by 2017 will cut back both business and travel spend, and the airlines will rebalance their EU networks accordingly. Whether the largest international air market – EU visitors – will be stimulated by a lower pound is debatable. My feeling it will not offset the outbound loss, so services will be cut and fares rise.
The UK aviation market was indeed one of the stand-out beneficiaries of the EU framework and market, and will now be the one most impacted by this referendum decision. Other EU-domiciled airlines will be happy to take up the slack.
“They are not long, the days of wine and roses” – for UK airlines, airports, passengers and the industry overall.
Flightglobal
Brexit: how will it affect airlines?
