Thursday, June 23, 2016

What Would Brexit Mean for Commercial Aviation? • Airways Magazine



MIAMI — The United Kingdom (UK) is set to vote later today on a referendum over whether to leave the European Union (EU). The so-called “Brexit” vote is the culmination of years of building anti-European sentiment in the UK, and presents voters with two simple options: remain in the EU or leave it. Voting in favor of Brexit would immediately trigger a two-year negotiated exit from the EU, and while this would naturally have a major impact across Britain’s society and economy, the impact on aviation would be particularly acute. Now it is not necessarily clear that Brexit is a certain, or even likely outcome. At the time of writing, the odds for “Remain” on Betfair, an online prediction market, were at better than 76%. But the potential upheaval from a “Leave” vote is large enough to justify a careful consideration.

Biggest question is 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. And the ECAA would require Britain to continue complying, more or less, with EU aviation law, removing the ability for the UK to set its own, less cumbersome civil aviation policy.

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.

LCCs, the big losers


Assuming Brexit occurs, there is some risk of Britain losing access to the ECAA. In particular, a precursor to participating in the ECAA is “close economic cooperation” with the EU, which means more or less broad alignment with EU economic policy (including regulations). A big selling point for “leave” voters 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 LCCs, particularly EasyJet, which has bases and routes all throughout Europe, the majority of which do not touch the UK at all. Without 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 evaporate 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 (which would require such strict adherence to European regulations so as to render the “Leave” vote toothless). 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.

What Would Brexit Mean for Commercial Aviation? • Airways Magazine

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