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IAG Faces Brexit Conundrum

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IAG Faces Brexit Conundrum

IAG Faces Brexit Conundrum
August 11
09:18 2017

MIAMI – As the UK prepares to exit the European Union (EU) in March 2019 (‘Brexit’), concerns are rising over what happens to the airline industry – particularly to UK players such as British Airways.

Currently, there is an Open Skies agreement in the 28 EU states, where any EU-owned airline has the right to operate flights between any two states (or within a state other than its own). Ireland’s Ryanair, for example, operates domestic Italian flights, while UK carrier Flybe regional operates intra-Scandinavian flights on behalf of SAS.

Theoretically, that all changes when the UK leaves. If no suitable arrangements are made, the EU treaties lapse and what Ryanair CEO, Michael O’Leary, calls ‘the cliff-edge scenario’ comes into play: potentially a period when all flights between the UK and the other 27 EU nations would cease because they would no longer be covered by international agreements.

Arguably, the company most at risk is International Airlines Group (IAG); the parent group for British Airways (BA), the Spanish flag-carrier Iberia, Ireland’s Aer Lingus and the Spanish low-cost airline Vueling.

Another EU rule states that all EU airlines must be majority-owned by EU shareholders. Although IAG is a Madrid-registered company, the dominant partner is British Airways. Come March 2019, therefore, IAG as it currently stands will not be able to own Iberia, Aer Lingus or Vueling.

Indeed, says O’Leary, he has seen documents from several major European airlines urging EU negotiators to ‘punish’ UK airlines for pulling out of the EU.

According to Ryanair:

There is a distinct and noticeable lobbying effort by French and German airlines in particular to disrupt all flights between the UK and the EU-27, as this business accounts for a very small (under 5%) of their capacity whereas it will significantly disrupt substantial portions of the capacity and flight schedules of competitor airlines including IAG, EasyJet, Ryanair and the UK charter carriers.

Ryanair is an EU airline, but its largest operational base is London Stansted, where it bases up to 80 Boeing 737-800s. EU airlines that have come under severe pressure from low-cost carriers like Ryanair would be very happy to mess up their schedules for an indefinite period, said O’Leary.

Both Air France and Scandinavian Airlines (SAS) denied the accusations that they want to inflict damage on UK carriers: “These allegations are wrong,” said SAS. “On the contrary, SAS is interested in a solution that avoids any interference of the traffic between the EU and the UK. In fact, SAS would advocate a status quo situation of today’s conditions where all participants are subject to the same terms.”

An Air France spokeswoman commented that it merely wanted equal conditions for all airlines:

Ryanair’s allegations do not reflect the reality. Our position is to ask the European Commission to ensure that the access to the single European air transport market is conditional on the acceptance by the UK carriers of its rules. They cannot claim more advantageous or different rules than those applicable to the European carriers. Air France-KLM is in favor of the UK and the EU agreeing on an aviation deal which is FAIR FOR BOTH SIDES, instead of favorable for just one side.

In response to Airways’ questions on the shareholding issue, IAG issued a brief statement, saying merely: “We will continue to comply with the relevant ownership and control regulations.”

It added: “We’re confident that a comprehensive air transport agreement between the EU and the UK will be reached. It’s in Europe’s interest to have a fully liberalized aviation agreement. 900 million travelers each year have benefitted from open skies in Europe. That not only benefits customers but creates jobs and wealth across the continent.”

Analysts reckon that, despite O’Leary’s forebodings, the doomsday scenario will not arrive. Saj Ahmad, lead researcher at UK-based StrategicAero Research said:

I believe that whatever agreements are in place, the status quo will continue. The Open Skies agreement will continue. Europe has a lot more to lose than the UK.

Nobody has got down to the nitty-gritty of what’s going to happen to ownership where the majority shareholder is a UK entity. In any case, because of IAG being registered in Madrid, there’s nothing to stop to stop them turning British Airways ownership into Spanish ownership. There’s nothing stopping IAG from shifting their shareholding to 51% EU ownership, or putting BA into a holding company and Iberia into another holding company and listing both under another IAG banner. There are all sorts of options.

Similarly cautious is UK air transport consultant John Strickland, Director of JLS Consulting. He agreed that some EU airlines and politician would not be keen to allow carriers like British Airways and easyJet to keep certain rights if they were no longer part of the EU.

But a breakdown in UK-EU flights would hurt carriers on both sides, he noted: “KLM, for example, get more than 20% of their business out of the UK; it’s one of their biggest sources of feed for their long-haul network. And I’m sure that a lot of Lufthansa’s [UK] business travelers go to Frankfurt and Munich to connect.”

“I’m sure there’s going to be brinkmanship,” said Strickland. He recalled that, during the UK-US Bermuda II negotiations in the 1970s, British Airways placed newspaper advertisements saying that if matters were not resolved imminently, some of the following day’s US-bound flights would instead land in Canada.

Strickland noted that IAG CEO Willie Walsh has for some time been urging a relaxation of the rules governing share ownership of airlines. Even if that did not happen before Brexit occurred, however, he felt that a break-up of IAG was unlikely.

Everyone involved in the Brexit negotiations – which have not even cleared the first hurdle of agreeing how much the UK will pay as a ‘divorce settlement’ – agrees they will be immensely complex and that the aviation sector will form just a small part of those.

And although, theoretically, everyone is working to a March 2019 deadline, there are several ways in which that could be averted. In previous sets of negotiations, such as adopting airline emission schemes, for example, the EU has agreed to ‘stop the clock’ – effectively suspending a previously- agreed deadline – until a solution can be agreed.

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About Author

Alan Dron

Alan Dron

Old-school scribe who now is fortunate enough to earn a fair percentage of his income by writing about aviation. Still laments the passing of Concorde and has been known to take a day trip to the Middle East to interview an airline executive.

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