Flying Low

Brexit Sends Airlines into Tailspin

An Airbus plane of British low cost airline EasyJet takes off under heavy clouds on May 19, 2015 in Geneva. AFP PHOTO / FABRICE COFFRINI (Photo credit should read FABRICE COFFRINI/AFP/Getty Images)
EasyJet and other airlnies are likely to be affected by Brexit.
  • Why it matters

    Why it matters

    European airlines are already struggling to compete with state backed carriers from the Gulf states, and Britain’s exit from the European Union will only make their futures more unpredictable.

  • Facts

    Facts

    • Oil prices are up 70 percent since the beginning of the year, although this will not affect airlines until their long-term hedging contracts expire.
    • Revenues per available seat have declined in the first quarter, with Lufthansa seeing the worst drop, at 7.5 percent.
    • After a Brexit, British carriers will face the additional and costly problem of having to apply for an air operator’s certificate in individual E.U. countries.
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    Audio

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Is it optimism or desperation? The heads of Europe’s largest airlines are currently doing their utmost to downplay the consequences of the impending Brexit.

Carolyn McCall, head of British budget airline EasyJet insisted at a conference of the A4E industry association in Brussels on Tuesday that little had changed. “The demand environment is strong. It hasn’t changed because of the vote,” she said. And her counterpart Willie Walsh of IAG, the parent company of British Airways and Iberia, added: “Does anyone seriously believe people in Europe will stop flying?”

But despite their bullish words, there is no denying that the British vote comes at a bad time for airlines. It presents yet another challenge, in a year in which airline executives already have enough problems on their hands. Oil prices have increased by about 70 percent since the beginning of the year. Nevertheless, airlines can still expect to see their fuel bills go down, because long-term hedging contracts will only expire this year. As a result, airlines are actually benefiting from the “real” oil price, but no one knows to what extent this will last.

At the same time, average revenues are declining. Air France-KLM saw a 1.3-percent decline in average unit revenues per available seat and kilometer flown in the first quarter of this year. British Airways and Iberia parent IAG faced a decline of 3.5 percent, while the figure was down by 7.5 percent at Lufthansa.

Ryanair chief executive Michael O'Leary has already said that for the time being he intends to focus growth plans on continental Europe and not on Great Britain.

In this mélange, the outcome of the British referendum is toxic, because it fuels uncertainty – and harms ticket sales.

To begin with, Brexit will lead to shrinking demand for business travel to and from the British market. The International Air Transport Association has calculated that after a Brexit, the volume of air travel to Great Britain in 2020 will likely be 5 percent lower than if there were no Brexit.

Experts do expect that private travelers, most of all tourists, will partially offset the loss of business customers, as the decline in the value of the British pound makes vacationing in Great Britain more attractive. Still, two airline firms, IAG and EasyJet, have already reduced their profit expectations.

The unresolved issue of traffic rights is even more serious. EasyJet is a case in point. In addition to flying to and from Great Britain, the budget carrier also has many other routes within Europe and plans to expand its business there. European airlines are free to choose their routes within the European Union, even if they do not have an air operator’s certificate, or AOC, for each country.

This will no longer apply to Great Britain after it leaves the European Union. EasyJet would have to apply for an AOC for each E.U. member state, which would require establishing operating units in each country. This is very costly. Alternatively, Ms. McCall can hope that Great Britain will negotiate new aviation agreements with individual E.U. countries or the European Union as a whole. But that will likely take a long time, especially as top E.U. politicians have made it clear that they cannot envision Great Britain leaving the European Union and yet continuing to use its single market.

So far, no British carrier has announced plans to move operations or portions thereof away from Great Britain. But Ryanair chief executive Michael O’Leary has already said that for the time being he intends to focus growth plans on Continental Europe and not on Great Britain.

Investors, for their part, are already annoyed. The share prices of EasyJet, Ryanair and IAG were down by double digits intermittently. Even Lufthansa’s share price was down, despite the fact that air traffic with Great Britain accounts for only about 5 percent of the airline’s revenues. Yet, Brexit is a crisis for all of Europe, and investors know that.

 

Jens Koenen leads Handelsblatt’s coverage of the aviation and space industry. To contact the author: koenen@handelsblatt.com

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