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What Does Brexit Mean for Commercial Aviation?

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What Does Brexit Mean for Commercial Aviation?

What Does Brexit Mean for Commercial Aviation?
June 24
03:00 2016

MIAMI — The United Kingdom (UK) has voted to leave the European Union (EU). The so-called “Brexit” is the culmination of years of building anti-European sentiment in the UK, and it will immediately trigger a two-year negotiated exit from the EU once the Prime Minister formally invokes Article 50 of the Treaty on European Union (TEU). While the consequences of this decision naturally have a major impact across Britain’s society and economy, the impact on aviation will be particularly acute.

Access to European market


The gating question for how large the impact of Brexit will be on British aviation is whether UK will remain a part of the European Common Aviation Area (ECAA), which includes all of the EU member states as well as Norway, Iceland, Bosnia and Herzegovina, Croatia, Macedonia, Montenegro, Serbia, and Kosovo. Right now, as an EU member, British carriers may fly any route to and from any country in the ECAA (e.g. London – Athens), any route between two separate countries in the ECAA (e.g. Paris – Milan), and even domestic routes within any country in the ECAA (e.g. Berlin – Munich). Of course the same right applies to other European airlines (hence Ryanair’s massive operation at London Stansted).

Europe is by far the largest market for most UK airlines, whether through routes to and from the UK for the likes of British Airways and Monarch, or from bases in Europe for low-cost carriers (LCCs) like EasyJet. This makes maintaining access to the ECAA absolutely critical, and there is certainly a precedent for non-EU members to gain access to the ECAA. As long as Britain maintains access to the ECAA, the overall effects of Brexit would be muted, though the question of outside bilateral agreements would be solved separately. Moreover, the ECAA would require Britain to continue complying, to a certain extent, with EU aviation law.

Non-EU bilaterals independent of ECAA membership


While the EU is the primary market for UK airlines, it is by no means the only one, and right now the UK latches onto several open skies and bilateral agreements that the EU has signed with other countries, including notably the United States and Canada, with initiatives underway to expand access to Turkey, China, Brazil, and ASEAN (a conglomerate of Southeast Asian countries). With or without access to the ECAA under Brexit, the UK would likely need to either negotiate continued access to these bilaterals via negotiation with the EU, or enact its own bilateral agreements with these countries.

Low-cost carriers the big losers


As now the UK has voted Brexit, here is some risk of losing access to the ECAA. In particular, a precursor to participating in the ECAA is “close economic cooperation” with the EU, which means a rather broad alignment with EU economic policy (including regulations). One of the big selling point for voters who supported the “leave” option is the potential for eliminating the most cumbersome of EU economic regulations, and indeed this is where a large part of the case for Brexit boosting long run economic growth. If Britain holds its ground on regulatory matters and negotiations with the EU turn acrimonious, its airlines could find themselves unceremoniously booted from the ECAA altogether.

The biggest losers in such a scenario would be the UK’s Low-cost carriers, particularly EasyJet, which has bases and routes all throughout Europe, the majority of which do not touch the UK at all. Without a strong bilateral access, it would be unclear whether EasyJet would be allowed to persist as an entity (in all likelihood its UK entity and European entities would have to be spun off from each other, with the latter transferred to new, European ownership). This would be a disastrous scenario for EasyJet, particularly if accompanied by bilateral uncertainty.

Net negative for British Airways/Virgin Atlantic well


The effects are likely to be more mixed for the UK’s primary full service carrier, British Airways, as its focus is more on longer distance routes from its London Heathrow hub that would likely be maintained outside of the ECAA. Virgin Atlantic, without a short haul network in Europe at all, would be even more insulated. The flip side is that British Airways is more dependent on business travel, which would suffer in the wake of a likely post-Brexit recession (particularly on its European network), and Virgin Atlantic would see similar effects.

For British Airways, the other risk comes in the form of its parent company, International Airlines Group (IAG), which now includes Spain’s Iberia, low-cost carrier Vueling, and Ireland’s Aer Lingus. IAG’s transnational holdings structure is only allowed as a result of the EU’s existence. IAG has generated significant benefits for British Airways, many of which would disappear if British Airways was forcibly spun off in the wake of Brexit.
 
In general terms, Brexit would cause plenty of harm to Britain’s full service carriers. The one saving grace for the airlines (though certainly not one for consumers), is that Britain might be able to negotiate more aggressive bilateral agreements that curtailed access for the so-called Middle East Big 3 (or perhaps for all but IAG investor Qatar Airways). Perhaps of more interest would be restricting LCC Norwegian Air Shuttle from flying long-haul, low-cost routes at London Gatwick. The long arc of protectionism would be an easy temptation for a Britain without the shackles of the EU (fitting tonally with “Leave”proponents,) but would be a disaster for consumers.

Range of outcomes is vast


Beyond the airline industry, there are also aerospace considerations from Brexit, in particular the British operations of Airbus and the entirety of Rolls-Royce. These would be affected less by the specifics of the ECAA and more so by whether Britain remains a part of the European common market. As long as it remains, the impact on British aerospace industry would be limited. But if Britain exits the common market, it could wreak on Airbus for a while, and push the European airframer to shift jobs back to the continent.
 
The overall question of Brexit’s impact on British aviation and aerospace really depends on how severe Brexit actually is. If Brexit is more bark than bite, and the UK complies with the provisions to remain in the ECAA and common market, there will be almost no effect (perhaps a marginal decline in tourism as a result of having to obtain a visa). Conversely, if Britain is booted from the ECAA and common market, it would mean a massive upheaval for its airlines and aerospace companies.
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About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. vinay@airwaysmag.com @TheABVinay

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3 Comments

  1. Thomas
    Thomas June 24, 08:55

    “Voting in favor of Brexit would immediately trigger a two-year negotiated exit from the EU”
    Not true, most legal experts agree that the Prime Minister needs to formally invoke Article 50 of the Treaty on European Union (TEU) and then it triggers the ‘two-year period’ (although this can be extended by a unanimous decision of the EU Member States)
    “Betfair, an online prediction market”
    No, it’s a betting site

  2. Gayle
    Gayle October 11, 06:57

    The ECCA have no control over which airliners use its airspace which means potential jihadis will be able to cross borders at will. This will give them easier access to terrorist bases in Syria and Iraq, potentially putting the lives of MILLIONS of air travellers at risk of suicide bomb attacks on aircraft & airports along with hijackings. Britain will be much better off and safer OUT of the ECAA, return to the pre-1994 bilateral restrictions, and all airports returned to being state-controlled because I believe our government needs to take back control over who is/is not allowed to enter our airspace and it’s they who should decide what airliners are/are not allowed to use our airports. Also ABSOLUTELY NO non-UK nationals, REGARDLESS of where they come from, should be allowed to enter our country without a FULL visa REGARDLESS of the reason of visit and length of stay. If all this means reduced competition, reduced flight routes and the EU introducing reciprocal measures which may make holidays more expensive then SO BE IT. Our safety and security MUST take precedence over everything and that includes where to go on holiday. For example, I’d rather go to the likes of Spain and Italy multiple times rather than go once to the likes of Egypt where there have been multiple terrorist attacks.

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