How will Brexit impact airlines and the wider aviation industry?

UK aviation is built around major EU agencies

Agency	Main duties
European Common Aviation Area (ECAA)	The single market for aviation within 36 nations
European Aviation Safety Agency (EASA)	Managing safety standards within 32 nations
Open Skies Policy	External EU aviation policy signed with likes of US
Single European Sky ATM Research (SESAR)	Public/private project modernising air traffic
European Court of Justice (ECJ)	Enforces legislation of ECAA and Open Skies
International Civil Aviation Organisation (ICAO)	UN agency managing international civil aviation
UK Civil Aviation Authority (CAA)	UK's specialist aviation regulator

The UK plays an outsized role within the EU aviation industry, accounting for over a quarter of all passenger travel within the bloc each year. Globally, the UK boasts the third largest aviation sector, behind only the US and China.

This is reflected by figures that show that around 54 million round trips are made from the UK to the EU each year, more than double the 26 million round trips made by EU nationals to the UK. Over 75% of all UK holidaymakers and 66% of business travellers go to the EU each year, and 63% of all tourists and 73% of all business travellers visiting the UK come from EU states.

The European airline industry built on three principles

With the role of globalisation being heavily debated in some parts of the world and an apparent rise in protectionist policy, it is worth remembering how the aviation industry worked before the EU started to liberalise air travel.

Most airlines were state-owned national carriers, and cross-border flights were facilitated by bilateral air service agreements (ASAs) which generally saw nations provide reciprocal flying rights to one another. This monopolised much of the industry, as the agreements gave rights to each country’s flag carrier while preventing other airlines from providing competition.

The European Court of Justice (an institution that the UK government is determined to free itself from after Brexit) found that the deals signed between eight EU member states and the US had contravened EU law, prompting a reform to the system based around three pillars, which have created the framework that exists today.

The first aim was to align the existing ASAs with EU law. The second was to expand aviation agreements with key strategic partners, which led to the EU-US Open Skies deal being signed in 2007, which allowed airlines on both sides of the Atlantic to have unfettered access to each other’s markets. This led to an 18% rise in transatlantic traffic in the following nine years.

To this day, the UK and US operate flights to one another through this arrangement, meaning Brexit risks much more than just access to European territories for the UK.

The third pillar was achieved when the European Common Aviation Area (ECAA) was created in 2006, extending the liberalised air transport markets from EU member states to other nations that are not part of the bloc, like Norway and Iceland. This also allowed any airline involved to operate domestic flights in another country, like a British airline operating flights between Munich and Berlin, for example.

The importance of aviation to the UK economy

‘Aviation is a UK success story. We have the biggest aviation network in Europe and the third largest in the world, while London has the busiest airport system of any city in the world. We fly directly to over 370 destinations in more than 100 countries worldwide. We also have the second largest aerospace sector in the world. Aviation creates jobs in the UK, encourages our economy to grow and connects us with the rest of the world as a dynamic trading nation,’ – UK aviation minister Liz Sugg.

The UK has over 50 airports providing commercial flights and even more airfields serving freight and other aviation services. Total passenger numbers climbed to record highs in 2015, 2016 and again in 2017, and more records were broken at sites like Stansted, Edinburgh, Leeds-Bradford and Glasgow.

Facts about UK airports and tourism

1. UK has the busiest airport system in the world, serving 360 destinations in 100 countries
2. Record passenger numbers were achieved in 2015, 2016 and 2017
3. UK served 268 million terminal passengers in 2016, eight times more than in 1970
4. UK airports handled 2.4 million tonnes of freight, four times more than in 1970
5. There were 2.2 million air transport movements in 2016, 3.5 times more than in 1970
6. Air transport and aerospace is worth £22 billion to UK economy and employs 240,000 people
7. Over 80% of all spending by tourists in the UK each year travel by air
8. Tourism is worth £54 billion to UK economy annually
9. Travel and tourism has accounted for 10% of UK gross domestic product (GDP) and 12% of employment over last decade

How might changes to aviation after Brexit impact the UK and Europe?

With so much at stake and such little insight into how aviation will work, the implications of Brexit on the industry have the potential to provide a devastating hit to the UK economy, which could then spread to Europe.

Find out about the wider potential economic impact of Brexit.

The travel and tourism industry has already had to respond to one consequence of the EU referendum that immediately occurred after the result was declared: the dramatic drop in sterling. The pound has managed to recover the majority of losses and has been steadily strengthening against the dollar, but it ultimately remains below pre-referendum levels.

This has had multiple implications for the UK. A weaker pound has attracted more visitors to the country and increased tourist spending, with international tax free shopping rising 7% year-on-year in the UK during the month after the referendum thanks to the likes of Asian and US visitors. However, British holidaymakers have seen their spending power reduce, demonstrated by the rise in domestic holidays since the vote, as trips to the eurozone and the US became more expensive.

While the UK is forecast to continue growing after Brexit, albeit at a lower expected rate than if it stayed in the EU, the UK travel sector and other industries may see a substantial drop in activity if the country lags behind the EU and other nations in terms of growth over the longer term. This would not be limited to the UK, as the effect could be felt in the EU too.

The biggest threat over the medium term, the effects of which have already started to materialise, is stalling corporate investment, not just for airlines but the wider aviation and aerospace industries. If this continues for too long, these bellwether industries could start to stagnate.

Facts about UK aerospace and aviation

1. The UK has the second largest aerospace market in the world, behind the US
2. The majority of UK aerospace revenue is from exports, accounting for £30 billion of £32 billion in total
3. Over 2000 aerospace businesses currently operate in the UK
4. The UK has the third largest aviation market in the world behind US and China
5. Demand for UK aviation is forecast to double from current levels by 2050

The International Air Transport Association (IATA), representing some 280 airlines, believes the picture for airlines after Brexit, whatever the outcome, will be similar to the expected impact on the wider UK economy, anticipating lower growth in terms of passenger numbers than if the status quo was maintained.

According to the IATA, the UK air passenger market is forecast to be over 45% larger in 2035 than it is now, even under a so-called ‘hard Brexit’, which would see the UK make a clean break from the EU. That estimate is even more prominent when you consider aviation has nothing to fall back on if the UK has to turn to World Trade Organisation (WTO) rules after the divorce, as there is no framework in place.

IATA forecasts for UK passenger market under different Brexit scenarios

	UK passengers in 2015	2035 forecast	% change	CAGR
Soft	199.9m	309.3m	55.2​%	2.2%
Moderate	199.3m	301.0m	51.0%	2.1%
Hard	199.3m	290.0m	45.5%	1.9​%

Discover how to trade a hard Brexit.

What are the potential options for the aviation industry post-Brexit?

Theoretically, the possible scenarios for the UK-EU airline industry are endless, but in reality there are only three outcomes that look viable:

1. No agreement between the UK and the EU
2. Bi-lateral trade agreement between the UK and the EU
3. UK membership of the European Common Aviation Area

If no agreement is struck at all, then the UK will revert to WTO policies after Brexit, with standard ICAO rules coming into force. This would be the most harmful option for both sides and, with the UK’s sector completely aligned with the EU’s, the most illogical choice.

The second option of a bi-lateral trade deal is best demonstrated by the existing arrangements between the EU and Switzerland, which sits landlocked in the middle of Europe, but is still not an EU member.

A new deal of this nature provides the most flexibility, as both sides can negotiate what they want to include or exclude, which could prove attractive to the UK government. However, this is likely to be the most time-consuming option, and the UK may lose influence over the industry and have to provide concessions in order to strike a deal.

However, the third choice is the one favoured by business and the best way to minimise disruption. By retaining membership to ECAA. Norway (although not an EU member) has full access to the aviation market, but has little to no say on policy and all EU regulation is imposed on the nation.

The UK’s position on aviation amid Brexit

‘The Article 50 taskforce in the European Commission published a paper noting that, in the event of an overall ‘no deal’ scenario, it would be essential to agree a deal to ensure flights continue. This shows how important it is for both sides to ensure aviation market access continues uninterrupted. And the demands of airlines across Europe to access Heathrow means we have strong cards in our hand for the negotiations,’ – UK transport secretary Chris Grayling.

The UK government has not laid out a detailed position on how to tackle aviation during Brexit negotiations, but Prime Minister Theresa May does want ‘associate membership’ of EASA (for example). While this could suggest the UK may also try to secure a membership to the all-important ECAA, there are reasons why this would prove problematic.

Any country joining ECAA, as stated by the rules, must comply with EU aviation law and establish a framework for ‘close economic co-operation’ with the EU. In addition, this could require UK firms to resolve any issues through the ECJ rather than UK courts – a very sensitive point that the UK government would find hard to swallow given it is adamant of freeing itself from European courts.

With the EU steadfast that the UK cannot ‘cherry-pick’ a deal, May was probably right to concede that access to markets in general after Brexit will be ‘less than it is now’.

The UK will also drop out of arrangements agreed by the EU and other nations like the US and Canada, adding another task to the UK’s already long to-do list. Grayling has said he is working to quickly replace these types of deals, and has said discussions have already started, adding that his department is also looking at opening up more long-haul routes to the likes of China, India, and South America.

It may seem sensible that the UK is drawing up a new aviation policy setting out its strategy for the industry out to 2050 – but this fails to address the problem that airlines have bemoaned about the most since negotiations began.

Airlines stressed that they ideally needed an arrangement in place 18 months in advance of the divorce, with some already selling tickets for flights after March 2019, despite not knowing what the environment will be like.

With the UK not aiming to publish its new aviation strategy until late this year, airlines could be left with a very short period of time to adjust, which would be difficult for an industry that sells tickets up to 12 months in advance. However, despite the importance of future UK-EU relations to any new aviation strategy being drawn-up, Grayling has made it clear that securing a deal “will be separate from the aviation strategy”.

While the strategy will address internal issues such as a third runway at Heathrow, and expanding other airports like Manchester, it is hard to see how the UK could even start to formulate an aviation strategy without knowing how the industry will operate post-Brexit. Capacity at Heathrow has been under immense stress for years, but how does one decide to expand an airport without knowing whether or not it will be crippled after Brexit?

The EU’s position on aviation amid Brexit

‘I am determined to avoid that particularly absurd consequence of Brexit. To do so, we must start discussions on this issue as soon as possible,’ - EU president Donald Tusk speaking in March about UK-EU flight rights collapsing the day after Brexit.

The EU, which sees it as the UK’s responsibility to suggest post-Brexit relations with the bloc rather than its own, sent out a clear letter in January to airlines operating within the EU, warning them of the consequences of Brexit.

It outlined that airlines within EU operating licenses, and those operating intra-EU flights must comply with all regulations, including ‘the need to have one’s principal place of business within an EU member state, and to be majority owned and effectively controlled by EU member states and/or nationals of EU member states.’ It also clarifies that UK operating licenses will no longer be valid, and that EU and UK carriers will lose access to each other’s markets.

European airlines have also backed the EU in ensuring the UK doesn’t get an overly favourable deal. Deutsche Lufthansa AG’s chief executive Carsten Spohr has said ‘Brexit means Brexit’ and that aviation ‘won’t be exempt’, adding it will be ‘virtually impossible’ for a deal to be reached during the remaining negotiating time.

Meanwhile, Air France-KLM chief executive Jean-Marc Janaillac has said UK airlines must be subject to the same legislation imposed on the operators in the bloc. ‘Seems fair, same rights means same obligations: the rules toward consumers, the rules toward safety. We must have a level playing field.’ he said earlier this year.

The European Commission negotiating on behalf of the bloc has said, based on the UK’s ‘red lines’, the most likely outcome is that the UK will have no more access than the US currently enjoys.

How are airlines responding to the challenges posed by Brexit?

As airlines cannot afford to wait for the UK and EU to reach an agreement, many have already taken steps to ensure they are ready, if the worst case scenario of a no deal comes to fruition.

For example, Ireland-based Ryanair has applied for a UK licence in an attempt to secure UK access after Brexit, as has low-cost carrier Wizz Air, which is looking expand its operations at Luton airport. Meanwhile, International Consolidated Airlines Group (IAG) already has European licenses for its continental arms like Spain’s Iberia, UK-based EasyJet has applied for EU licenses, while committing that its headquarters will remain in the UK.

Most of the airlines have not published the cost of such exercises, apart from EasyJet which said setting up an EU subsidiary and licence would cost about £10 million, a price worth paying to retain about 40% of its traffic.

Ryanair has also pledged to take additional cautionary measures by warning that, unless the outlook becomes clearer, tickets sold from September this year will come with a caveat stating flights are ‘subject to the regulatory environment allowing the flight to take place,’ further emphasising the importance and broad support from the wider industry that a transition deal is integral if airlines are to prepare effectively.

Airlines are united in what they want from Brexit, but some are much more anxious than others. While Ryanair’s chief executive Michael O’Leary has been by far the most outspoken critic of Brexit and the company has issued multiple warnings, including the possibility that flights will be temporarily grounded, the likes of International Airlines Group (IAG) CEO Willie Walsh has been more optimistic and relaxed, and does not believe the whole saga will impact the fundamentals of the business over the longer term.

Let’s have a brief look at the view of some major airlines on Brexit and the impact on their businesses.

Ryanair and Brexit

‘We remain concerned at the continuing uncertainty surrounding the terms of the UK’s proposed departure from the EU in March 2019. There remains a worrying risk of serious disruption to UK-EU flights from April 2019 unless a UK-EU bilateral (or transitional arrangement) is agreed in advance of September 2018. We, like other airlines, need clarity on this issue before we publish our summer 2019 schedules in mid-2018 and time is running out for the UK to develop and agree these solutions. We believe the UK government continues to under-estimate the likelihood of flight disruptions to/from the UK. We have applied to the UK CAA for a UK air operator’s certificate as part of our Brexit contingency planning. We expect this process to take several months but to be complete well in advance of September 2018,’ – Ryanair, February 2018.

Ryanair has been very vocal on Brexit. The airline has already urged analysts and investors to take ‘extreme caution’ when forecasting fares for 2019, and has started to pivot its growth away from the UK and toward continental Europe.

Earlier this year, Ryanair stated: ‘Our initial discussions with the UK government do not suggest that they realise the urgency of this problem. Airlines would like clarity on this issue before we publish S19 schedules in the second quarter of 2018, but if we do not have certainty as to the legal basis for the operation of flights between the UK and the EU by September or October 2018, then we will have no choice but to begin cancelling flights to and from the UK (and moving some or all of our UK-based aircraft to Continental Europe) from April 2019 onwards.’

IAG and Brexit

‘There will be a comprehensive open skies agreement. Anybody who doesn’t believe that is living in cloud cuckoo land. It is absolute madness. The UK government is determined to reach an agreement with the US and with the EU. That is what will happen,’ – Willie Walsh.

One of the problems Brexit poses for airlines like IAG and Ryanair is over ownership. Without an arrangement in place, airlines accessing Europe would need to be majority-owned by EU member states or EU nationals. But, confident a deal will be struck and adding the airline is ‘flying today in countries that do not even recognise this issue of ownership’ Walsh is more relaxed than his peers.

That confidence remains, despite IAG issuing a profit warning the day after the Brexit vote. ‘The Brexit vote has created uncertainty and uncertainty is never welcome. But longer-term we do not think it will undermine the fundamental strength of our business,’ IAG stated in February.

Flybe and Brexit

‘It is difficult to plan as a business when the regulatory environment is so uncertain. However, the predominance of our business in UK domestic routes provides some protection,’ – Flybe.

Flybe has discontinued all its intra-European routes as a precautionary measure, and has said the situation remains unclear on its codeshare (when airlines share the same flight) and white label arrangements, as well as any regulatory and supply chain impacts on the Flybe Aviation Services operations.

The company has said that looking beyond the UK at this stage is not worthwhile, stating it is not the right moment and that the market does not support expanding intra-European activity, regardless of Brexit. Flybe has set up an internal working group which is reviewing all operations, but does believe the UK will strike an agreement to remain a member of the likes of EASA.

Wizz Air and Brexit

‘Whatever the outcome, and while we continue to have a strong United Kingdom business, we have always believed that diversification of our network and our customers is a key part of a sustainable business. That remains the case, and we are confident that there remains a large addressable market in central and eastern Europe which will continue to provide opportunities for profitable growth should our UK business be adversely affected,’ – Wizz Air.

Wizz Air has pledged its commitment to Luton, where it wants to expand its operations, despite Brexit, and has said it should be able to continue flying between the UK and a number of non-EU countries after applying for a UK licence.

Thomas Cook and Brexit

‘Having already begun the sale of flights and holidays in the post-Brexit era, we now require urgent clarity from the UK government and EU institutions on a transitionary agreement. We continue to make the case for a comprehensive EUUK air transport agreement in the longer-term,’ – Thomas Cook.

Thomas Cook, which has an airline as well as a holiday business, has warned it may not be able to fly to the EU or the US without a Brexit deal in place, and has also warned about the effect on employment, as it may no longer be able to place temporary workers in EU states without facing additional barriers.

Thomas Cook has a Brexit Working Group, encompassing all parts of its business and is currently implementing contingency plans ‘for every eventuality’.