Airlines counting the Brexit cost may opt for Ireland

Airlines with high exposure to the UK have taken a bashing due to worries by investors about the threat to the airline membership of the single European aviation market following the Brexit vote.

Airlines counting the Brexit cost may opt for Ireland

Ryanair’s shares plunged and shares in EasyJet dropped by almost a fifth at one stage.

Adding to the market turmoil, shares in IAG - the Aer Lingus, British Airways and Iberian group - also shed 20% of their value, in an initial sell-off that marked one of the steepest fallers on the London stock market.

Ryanair Europe’s largest budget airline and EasyJet the second-largest budget airline both grew their businesses by capitalising on the creation of a single EU aviation market in the 1990s, which allows EU airlines to operate services freely on any route within the bloc.

International Airlines Group - IAG - warned about the risk that any economic slowdown stemming from Britain’s vote to leave the EU will significantly reduce air travel.

The immediate impact on the sector is associated with the fall in sterling against the dollar, as fuel, leasing and maintenance costs for airlines are all denominated in the US currency.

The dramatic plunge in the value of sterling will push up costs for UK-based carriers.

However, according to IATA - the International Air Transport Association - the big issue in the longer term is aviation regulation.

The UK faces a trade-off between accessing the European single aviation market and having the policy freedom to set its own regulations .

IATA went on to warn that “market access considerations go beyond the UK-EU routes”. The UK’s routes to the rest of the world will also be affected.

The most high-profile of these is the EU-US so-called Open Skies agreement which entered into force in 2008.

Depending on the terms of exit, bilateral agreements with the EU and the other major trading blocs such as the US could be negotiated, but IATA warns that in these negotiations “the UK would lack the bargaining power of a 500 million population trade bloc such as the EU”.

A key feature of these agreements is they apply to those airlines registered in the country signing the bilateral agreement.

There is potentially a way open for IAG and EasyJet to side-step the regulatory uncertainty and business disruption by moving their head office operations and aircraft registrations to Dublin, or Madrid or another EU member state.

Availing of access to the European single aviation market in this way opens up the associated bilateral agreements with the rest of the world.

For IAG, which has only 17% of its total capacity exposed to the intra-EU passenger market, the issue is the continued easy access to the global markets beyond Europe.

Prolonged negotiations by UK officials with all the other countries in which British Airways operates would have profound implications for customers and shareholders.

A shift in headquarters and aircraft registration could be an economic imperative for IAG chief executive Willie Walsh and his team of advisers.

For Michael O Leary and the team at Ryanair, the issue is all about the EU where 58% of its capacity excepting the UK is anchored.

“Ryanair’s widespread operations from the UK are reliant on the UK’s membership of the single aviation area,” said HSBC analyst Andrew Lobbenberg.

“We estimate 30% of Ryanair’s capacity would be uncertain,” he said. Lack of easy access to the European single aviation market will inevitably hit their trading in the short term. Depending on the terms of the UK’s exit agreement, it may also seriously affect long-term prospects.

Already, Ryanair has indicated its next new aircraft purchase will be allocated to non-UK routes, which one can take a code for development of other hubs in major population centres in Poland, Germany, France, Italy or Spain and therefore reducings its UK exposure.

EasyJet, which has 24% of its capacity tied up with flights across the EU, has warned of the impact on its business, and may also have to consider its options to relocate its business registration.

Carolyn McCall, the chief executive, wrote earlier in the week to the UK government and the European Commission requesting an early lifting of the uncertainty.

John Whelan is a leading international trade consultant.

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