Ask the Experts: What will be the long term impact of Brexit?

Our new feature gives Routesonline readers the opportunity to ask the questions they want answered by a range of industry experts.

We asked the industry experts to give their opinion on the impact of the Brexit vote. This refers to the United Kingdom European Union membership referendum – voted on in June 2016, as to whether the UK would remain in or leave the EU.

In a shocking vote, a slight majority voted to leave the European Union, raising questions of the implications of the vote. Would it raise air fares? Would new legislation have to come into play when flying to EU countries? How would it affect the low-cost carriers? Three months on, our experts consider what the future holds for the world of aviation post-Brexit.

Jeremy Robinson

Jeremy Robinson 

Partner
Watson Farley & Williams LLP

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Why an answer of “It depends” is not adequate…
 
You will see many people answer this question with a variation on two words: "it depends" – not just concerning the aviation sector but across many sectors. As for aviation, the argument is that it depends on whether the UK stays in the EU's Single Market, whether it adopts a particular alternative "model", such as joining the EEA (the "Norway model"), joining EFTA (the “Switzerland model"), joining neither but signing up to the European Civil Aviation Area, or whether the UK does some form of bespoke deal. On this preliminary decision depend such outcomes as the availability of traffic rights to UK air carriers and the application of EU aviation law.
 
Whilst there is nothing essentially incorrect about this analysis, it nevertheless suffers from being too UK-centric. It misses the broader global trends in aviation and fails to measure whether Brexit does more than create even a slight ripple in these global undercurrents. Moreover, it does not distinguish between (i) effects on the legal framework under which air transport services are provided internationally; (ii) effects on the broader economy (whether in the UK, the EU or globally); and (iii) the connection between effect on the broader economy and whether individuals become more or less likely to travel by air. In short, it does not help us to answer the question: "so what happens now and in five years' time?"
 
The argument that little will change…
 
There are some who will say, by contrast, that Brexit will have a negligible long-term effect on global aviation. There are at least two angles to this argument: what is happening in the wider aviation world, and what is likely to happen in the EU. As regards the wider world, you could argue that the big story is not the UK's 23rd June referendum on membership of the EU, but the staggering growth (and forecast growth) of aviation in Asia and in particular in China, amounting to a realignment of the global aviation order which had barely come to terms with the challenge brought by rapidly expanding Gulf carriers. Some would point to the recent benign oil price environment, facilitating global aviation expansion and very large increases in global aviation capacity. Some would also point to the ever-present question of how rapidly expanding global aviation can possibly reach carbon-neutral growth.  These are only some of the big stories.
 
The other side of the coin is what will happen in the EU. To some, it is inconceivable that the UK would not seek as soon as possible to ensure that carriers' operations are not disrupted by loss of traffic rights, and therefore the likely outcome is that in practical terms much will stay the same. The corollary of this is that much of the EU legislation currently applicable to aviation operations in the UK would have to stay the same or very close to what there is now, e.g. as regards consumer law including passenger rights. On the EU side, it could be said that the EU will be very keen for its aviation policy not to be reversed, so we can expect ongoing efforts to encourage liberalisation. Finally, the airlines themselves are resourceful and can find ways to continue to operate effectively even if there is some short-term disturbance. For low-cost carriers who take advantage of seventh and ninth freedom rights to operate their business model, there might need to be some more structural adjustment, but the consumer might not notice very much.
 
The effects will be subtle, long-term, hard to isolate and difficult to measure
 
It is certainly true that the effects of Brexit on aviation may be subtle, long-term, hard to isolate from other developments and difficult to measure. That does not mean there won't be any. Let us assume that the UK does in fact leave the EU, including the EU Single Market, but that the UK remains part of the EU single aviation market and traffic rights to those countries with which the EU has concluded comprehensive air services agreements (including the USA) are protected - i.e. a position of minimal legal and structural change.
 
The debate about whether/how far Brexit will damage the UK economy, the EU economy or both shows no sign of ending, as emerging economic data are employed to support one side or the other. If, however, the EU economies (including the UK) are damaged by Brexit, it is not hard to see how this would affect the propensity of the European consumer to fly, which in turn would harm the industry.
 
A more dramatic picture has been painted in China Daily (European weekly edition, September 2 – 8, 2016). Here, the UK's vote for Brexit is placed in the context of a reaction to globalisation. The message of this article is that globalisation and economic integration are not one-way streets; disintegration is certainly possible even if it is too early to conclude that Brexit will bring it about: “the disintegration of economic unions such as the EU could become the rule rather than the exception." Whereas globalisation and the expansion of aviation are related, a retreat from globalisation may correlate with a decline in aviation.
 
As against this view, I am – for now – more optimistic. The possibility of Brexit has encouraged discussion of new UK trade deals, including with China, while at the same time the UK and China are due shortly to discuss an expansion of their existing bilateral air services agreement, to meet increasing demand for travel. The EU is also seeking a deeper aviation relationship with China which it is in both sides' interest to progress. As the propensity of people in China to fly grows in the coming years, feeding a great expansion in aviation, not only within China and Asia more generally, but across the regions of the world, there is a positive outlook for ongoing aviation growth, despite Brexit.

Robert Hill

Robert Hill

Vice President
Seabury

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Brexit, despite its catchy clever name, may end up more “B-movie” than “Blockbuster.” Right now the popcorn is flying off the shelves at the UK Cinema, however, Britain’s new leading lady is screen shy and prone to results rather than drama.

Politically it sends a message of independence rather than interdependence – which may simply be the world social pendulum tracking a counter fluctuation. But it does say there are underlying forces that oppose what appeared to be an established and inexorable “globalization” mantra.

Economically it creates an unexpected risk – and opportunity - for England, Scotland, Wales, and Northern Ireland. This combine of “nation states” has weathered much more serious threats – and historically, choppy circumstances have enhanced rather than diminished the Union Jack’s competitive position.

The UK will remain United. No one is going anywhere, as unity benefits far outweigh provincial fissures that some journalists trip over.

Britain’s new Prime Minister will say less and do more than EU politicians. She will naturally and admirably strengthen the UK’s transition leadership and outcomes.

As for the successful British flag carrier, Mr. Walsh assures us that IAG’s legal structure has been “tested” for just such a challenge, and that British Airways/Iberia/Vueling/Aer Lingus operating authorities are and will remain intact. Any decline in London Heathrow (LHR) demand will be felt disproportionately by British Airways competitors. As a local passenger dominated “hub,” Brexit may bring teams of financial, legal, and strategic consultants to London, earning lots of frequent flyer miles and filling those comfortable, high-amenity, premium flat-bed seats.

If I were a LHR competitor, I might explore informal or formal – legal!- ways to enhance my connectivity advantages for transatlantic and Asia/Middle East/Africa/Latin America-Europe passenger itineraries. Should BA need a “slot slide” in Nice or Prague or Cologne, cooperation might be a little less certain.

Oneworld, unlike the EU, will experience no defections. In fact, with the addition of EI, it may solve the Northern Ireland / Ireland border dilemma before the politicians do. Government granted competition privileges will be “legislatively adjusted” and remain in place. Brussels realises three competing anti-trust immunized alliances are better than two.

On a less serious note, I summed the Olympic medals earned by EU nations, and the EU easily won this relatively unimportant but “news worthy” competition. I then subtracted the UK’s medal count - which ranked number one among EU countries, and second overall in gold medals.

This could very well be the first tangible, quantifiable, and indisputably painful Brexit impact! Forever more, the EU’s Olympic medal count will be significantly less. While Britain’s gold, silver, and bronze will shine independently, sending a clear message to the world: Keep Calm, Our Medal Count is Strong.

If only Mr. Cameron had presciently made Olympic medal prowess a Remain campaign plank.

Yolanta

Yolanta Strikitsa

Director
Strikitsa Consulting

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Possible long-term impact of Brexit to British airlines (and airports) is strong shortage of pilots, especially in low-cost carriers. At present, budget airlines largely employ pilots of EU. Unless the government reach an agreement where citizens of EU will have the right to work in the UK without restrictions, airlines like any other local companies will need to apply for Work Permits to employ foreigners.  It is costly and lengthy process and has restrictions.  One of possible solutions of how to avoid large shortage of piloting crews in frames of Brexit is to rapidly increase ratio of women pilots (UK citizens).  However, it takes a long time to for an individual to get educated, trained and reaches necessary level of professionalism to be able to fly a commercial aircraft…

Nigel Mayes

Nigel Mayes

Senior Vice President, Consulting & Product Development
ASM Global 

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The initial news of Brexit sent a shockwave not only through Europe, but also the wider global economy.  For the UK the outlook was bleak, the value of the Pound against the Dollar dropped immediately 11 percent (and has broadly stayed there), a number of airline share prices tumbled easyJet 28 percent and British Airways 30 percent, some European carriers have experienced a significant fall in revenues, and IATA talked about the long term impact of Brexit to UK passenger numbers being 3-5 percent by 2020. 

However three months on and the UK economy has recovered from the early shock and showing signs of stability, employment and consumer confidence bounced back for August.  The question is does this send a more positive message to the global economy, that global consumer demand and the demand for air travel can withstand these shocks. It certainly appears that the demand for air travel will continue to grow unabated and any impact of Brexit will only be realised in the long term; we might never be able to understand the true implications given the other factors at play.



John Grant

John Grant

Director
JG Consulting

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There is some real irony in all of the discussion around Brexit and its impact on the aviation industry and personally it feels like a bit of a “so what” event rather than something earth shattering.

Any impact is at least two years away, and in reality probably longer than that; although it may be quicker than any decision of a new runway in the South East of England. In those two years we could reasonably expect at least two “Zika like incidents”, one airline merger, one airline failure and ten start up carriers to launch and England win one football match.

Short-term clearly the reaction of the currency markets has been a bit jittery or perhaps short term profiteering but was Sterling in need on a slight readjustment anyway? Overseas holidays are more expensive for sure but we are already seeing more tourist visiting the UK and export opportunities appear to be growing for UK based companies which will stimulate some travel. And yes some airlines are seeing an impact on profitability but as much of that impact is driven by the sad terrorism attacks in Europe, pandemic events and lower cost carriers taking a greater share of markets; both short and long-haul. I think that’s called competition and external factors.

Ultimately the impact of Brexit may be a lot less than the hysteria presented to the public when voting; from both sides. And much of that has to do with the market maturity that we have in Europe. In a market of many established routes, pan-European carriers and ownership it would seem that most airlines will be able to find a solution to any ownership issues that may get discussed. With liberalized air service agreements with most major markets via the EU already in place trying to annex the UK and re-negotiate those agreements is a bit like bolting the stable door after the horse has bolted. There will of course need to be new agreements prepared which will be great for the civil servants and lawyers but I can’t really see anything significant changing.

With nearly 210 million commercial passengers to and from the UK in 2015 it’s hard to believe that Brexit will make a real dent in the numbers; indeed, it might just lead to a short term jump in growth if the UK continues its cost advantage over other markets.

So business as usual for me, let’s just all look forward to the next challenge that the industry has to face rather than worry about what’s some way away from happening.


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