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The impact of Brexit on the European aviation industry
There are three separate forces impacting the aviation industry, following the United Kingdom's vote to leave the European Union. These are, in order of magnitude:
1: The great uncertainty
It is still early days following the vote of 23rd June 2016 for anyone to have 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. Accordingly, companies have very little in terms of guidance on which to base their short- and medium-term strategies.
Although UK and European airlines with strong UK presence voiced their concerns prior to the referendum, clearly seeing Brexit as a major negative event, the majority of airlines have not prepared comprehensive plans ready to be put into action following the result. 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 UK delays negotiations or fails to secure continued membership in the European Common Aviation Area (ECAA).
2: Impact on trade and business traffic
The UK is one of the world’s largest traders, with exports of US$506 billion and imports of US$684 billion in 2014 (Source: WTO). Moreover, an estimated 40% of Britain’s imports and exports by value travel by air (Source: Let Britain Fly), while almost 54% of Britain’s trade is with the EU (Source: Centre for European Reform). Accordingly, as much as US$257 billion worth of UK-EU 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.
More importantly though, business traffic is already impacted and will be further affected in future and until there is clarity over the future role of the UK in the European marketplace. 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.
3: Impact of drop in outbound traffic
The UK is primarily an outbound aviation market, with over two-thirds of all UK traffic being outbound. As such, airlines with significant operations to/from the UK will be negatively affected by the current and future weakness of the British Pound vis-à-vis the Euro and US Dollar. As European and international destinations become more expensive for UK travelers, we would expect airlines to adjust and reduce capacity deployed to the UK. The fact that the UK will become more attractive as a destination itself, will not compensate the drop in outbound traffic fully.
What comes next?
Frost & Sullivan believes 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. Over the long-term however, everything depends on the whether the UK 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 UK and European carriers alike. Furthermore, there are concerns over the UK’s ability to negotiate beneficial trade agreements and Open Skies aviation bilateral agreements with the US and other important partners. Overall, we expect UK 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 first steps towards the start of negotiations have already been taken, with the resignation of PM David Cameron and the appointment of Theresa May as the new PM. She already has said she will not trigger Article 50 of the Lisbon Treaty, which would formally take Britain out of the EU after up to two years of negotiations, before the end of 2016 (Source: BBC 14 July 2016). The intermittent period will be used to set up her new “Brexit” Cabinet and initiate a long consultation period. As part of this process a new Transport Minister is expected to be appointed. Irrespective of who assumes the position, aviation will be at the top of the new Brexit Agenda and the Transport Minister will likely make changes at the top of the Department for Transport (DfT) and the UK Civil Aviation Authority (CAA).
• The need for Brexit champions
It is obvious that there will be a significant (Q3/Q4 of 2016) period of deliberation, during which time the inputs and opinions of the country’s top aviation stakeholders will be sought. 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. 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.
• Your strategy is now obsolete
Furthermore, aviation businesses have to develop clear corporate and business strategy. These are no longer contingency plans, but rather long-term strategies in light of the new Brexit reality. 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 and fleet plans, sales & marketing plans, financial plans, operating plans and R&D plans.
Scenarios will need to be developed with data fed from an effective market intelligence function, incorporating market research and Voice-of-Customer (VOC) elements, assessing the impact of new regulations, future demand growth (or decline), customer requirements and competitor reactions.
Frost & Sullivan is is ready to support all aviation businesses in these efforts, utilising its extensive European network and expert teams of aviation consultants and market researchers. Diogenis Papiomytis is aerospace & defense consulting director at Frost & Sullivan.
9 August 2016
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