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NEWS Last modified on September 17, 2018

Blog: Brexit – the elephant on the runway

An agreement about the nature of air travel between the UK and the EU post-Brexit has yet to be reached. Beata Sperling-Tyler, associate director at S&P Global Ratings, explores the increasing risks for British airports as the countdown to Brexit begins.

Travel between UK and EU airports could be markedly different from March 2019, when Brexit is scheduled for arrival.

The UK aviation industry’s main concern is renegotiating access to the European Common Aviation Area (ECAA), the world’s most liberalised aviation market. Such discussions are yet to be finalised.

The effects are already evident: uncertainty has stunted air traffic growth across many UK airports in recent months. And, while a very low likelihood scenario, if negotiations for continued access fail to materialise the ramifications for UK airports could be substantial. For the time being at least, Brexit is the elephant on the runway.

Truncated growth

Since the referendum, traffic at UK airports experienced its strongest growth in years. Largely, this was down to luck. This period has coincided with an economic uptick across the eurozone.

What’s more, sterling depreciation has rendered the UK a more attractive destination, which has also been positive for inbound traffic.

Outbound traffic has kept strong, too. British holidaymakers, it seems, would rather choose shorter trips and downgraded hotels than give up their trips abroad.

However, with Brexit looming and concerns rising, this grace period may be ending.
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In 2017, the eurozone grew by 2.5% − its largest expansion in a decade. But, as the region glides towards recovery, UK economic growth is beginning to stall – with S&P Global Ratings forecasting GDP growth to slow to 1.2% this year.

Given that air traffic volume often correlates with GDP, it is probable that airport performances will also hold back.

In fact, during the first half of 2018, average air traffic growth flat-lined – and noticeable declines occurred in airports outside London, such as Glasgow and Birmingham.

Outside the ECAA

ECAA uncertainties have been central to the downturn in traffic growth. Due to the EU’s horizontal agreements with a further 17 non-ECAA countries including the US and Canada, the EU governs the UK's flight access to 44 countries, equal to approximately 85% of the country’s international air traffic.

Yet the UK's vote to leave the EU was, by extension, a vote to leave the ECAA – necessitating a re-negotiation of the UK’s terms of access. For the UK's aviation industry, concerns around Brexit are starting to bite.

Leaving the ECAA has the potential to reduce air traffic or, in a “doomsday” scenario, even ground planes.
pax pier
Because the EU accounts for 63% of its outbound traffic, the UK cannot afford to operate outside the ECAA for long.

S&P Global Ratings recently ran a 15-day to three-month sensitivity analysis to discern the impact of “no UK-EU traffic” scenarios on Heathrow, Gatwick, and the Dublin Airport Authority (DAA).

The analysis showed that the airport most affected would be Gatwick due to its higher dependency on EU air traffic (68%). Though Heathrow has a lower exposure to EU traffic, at 34.4%, this fact will likely be outweighed by its negative cash flow generation.

Consequently, in an extended disruption scenario and absent of mitigating action by management – Gatwick’s and Heathrow’s ratings could be negatively affected.

The extent of possible ratings actions would vary from revising the outlook to negative to a potential downgrade. Further, should the fall in air traffic be more than temporary the DAA may have outlook on its rating revised to stable from currently positive.
Dublin busy
In all cases, the extent of the rating impact would depend on a multitude of factors: the length of disruption; mitigating actions undertaken by the airports; and traffic assumptions after initial disruption.

Yet the current stable outlooks on the ratings of Heathrow and Gatwick and the positive outlook on DAA PLC reflect S&P Global Ratings’ view that firstly, such a scenario appears unlikely, and secondly, that airports are expected to take a number of actions to minimise the potential consequences.

 A successful landing?

More probable than the “doomsday scenario”, however, is a compromise. For example, the UK could remain within the ECAA, but without the privilege of cabotage.

This means that UK airlines would no longer be able to operate in the domestic borders of EU countries. In preparation for this scenario, many UK-based airlines have established EU subsidiaries in order to continue operating under the Open Skies agreement

Some EU airlines have followed suit, too. Wizz Air, one of Europe’s largest low-cost carriers, has announced its intention to accelerate contingency plans; while Ryanair, the Irish airline, has applied for an air operator’s licence with the Civil Aviation Authority, the UK regulator.
plane night
Despite these preparations, the current practice of establishing flight schedules months in advance means that some existing routes might still be disrupted.

The probability of grounded planes immediately following Brexit – and the subsequent triggering of negative ratings actions – appears low. The more likely scenario is that, due to a potential UK slowdown combined with flight schedule disruption, British airports could face see traffic growth fall, while risks heighten.

Ultimately, the good performance of UK airports, to date, may be giving false hopes. With March 2019 looming closer, the threat of future disruption appears to be intensifying.

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