We Don’t Know What Brexit Means for Airlines, But It’s Not Good

Brexit! I apologize to all my British readers for showing so much excitement, but please know that I did restrain myself from adding a second exclamation point. Still, if anything is worth two exclamation points, it’s the fact that you all in the United Kingdom (not just Great Britain, despite the Brexit name) have decided to leave the European Union (EU) and take your talents to South Beach. Wait, that’s not right. You’re not taking your talents anywhere. You’re keeping them where they are and building a virtual wall around them. I’m like everyone else in wondering what exactly this means for the world, and of course, I want to know specifically want it means for the airline industry. It’s too early to know, but there isn’t a scenario I see where things come out better for you than they are today. And yes, it could get worse.

Brexit Airline Industry

From an economic perspective, there’s one thing we do know for sure… it is really cheap to visit the UK right now. With the British Pound tanking to levels vs the US Dollar we haven’t seen in 30 years, now is the time to go to the UK and get a great deal. This sounds great for tourism, so huzzah for that. But let’s temper that enthusiasm. Inbound arrivals only account for about a third of all UK air travel. Those other two-thirds are outbound travel, and things just got a lot more expensive for those trips. Even worse, this move is expected to reduce economic output and could push us all into a recession, in theory. That’s not good news for air travel.

Talking about the money isn’t nearly as much fun as toying with the idea of how this will go from a regulatory perspective. We really know absolutely nothing about that. When the UK officially files the paperwork to pull out of the EU (probably later this year, assuming the then-primer minister doesn’t get cold feet), there will then be a 2 year process to get the country out. It’s going to make a lot of lawyers rich, I’m sure. What we don’t know is what the terms of this divorce will be, and that’s what really matters to the airline industry.

Today the UK is part of the European Common Aviation Area (CAA). That means that UK-based airlines can fly anywhere within Europe they want, just as if they were based in any of those other European countries. The same goes for European airlines flying within the UK. It also means that bilateral agreements negotiated by the EU with third parties outside the EU apply to the UK. And there are a host of European aviation regulations that govern air travel in the UK as well. Some or all of this may go away completely when the break-up occurs. That is to be determined by those negotiating the terms.

The big issues fall into two categories.

Air Travel Between the UK and the EU/Within the UK/Within the EU
Today the UK is in the EU and therefore part of the CAA. There are no foreign ownership rules restricting who can own what when it comes to flying around Europe. You would think the UK would like to maintain this going forward, and there is precedent. Norway is one of several non-EU countries that are a part of the CAA, so you’d think the UK might be able to remain. Or could it?

Many of those voting “leave” had this sense that the EU was telling the UK what to do and how to do it. There were all these absurd examples showing how the EU over-regulates everything. Well, guess what? If you want to be a part of the CAA, then you have to abide by EU aviation rules. That’s the way it works. Will the UK be willing to make itself subservient to those rules in order to retain the existing air service situation?

More importantly, will the EU allow it? The EU has made it clear that with this vote having been finished, it wants to get the UK out quickly to reduce uncertainty. But an even bigger concern is that other nations follow in the UK’s footsteps. To prevent that from happening, the EU may decide it doesn’t want the UK in the CAA anymore. That would be quite the blow to the UK, but it would be a warning shot for anyone else contemplating the same thing. I keep coming back to that castle scene in Monty Python and the Holy Grail.

That would mean that the UK and the EU would need to set up a more traditional bilateral agreement. It would be shocking if those restrictions didn’t include a ban on UK-based airlines from flying within the EU. That would mean foreign ownership rules would apply. For EU-based airlines this wouldn’t be a huge issue. They’d probably lose the ability to fly domestically within the UK and they couldn’t be majority-owned by a UK shareholder anymore. That’s not really an issue.

For the UK, however, it’s bad news. Think about easyJet, a UK-based airline that criss-crosses the EU all day every day. It would no longer be able to do that. Instead it would be forced to create an EU-based subsidiary, of which it could presumably only own 49 percent, and then have that company handle the intra-EU flying. Half the profits of that company would go into the EU instead of to the UK as they do today. The airline is already investigating this possibility. This wouldn’t hurt easyJet other than adding a little more complexity, but it would hurt the UK.

Then there’s IAG, the parent of British Airways, Iberia, Vueling, and Aer Lingus. This one is a tough one. See, IAG is technically a European company so Iberia, Vueling, and Aer Lingus wouldn’t have any issues, particularly since I don’t think they do much, if any, flying within the UK today. But British Airways, technically being a European company, wouldn’t be able to fly within its homeland. There are ways to solve this. BA could be spun off into a separate company that’s half-owned within the UK. Maybe a new BA UK subsidiary could be set up that would just operate the domestic routes with the rest remaining in Europe.

Either way, the EU doesn’t stand to lose anything significant by refusing to allow the UK to remain in the CAA. Further, it would send that important message to other countries not to think about leaving.

Air Travel Between the UK and the non-EU Countries
As if flying within Europe isn’t a big enough issue, then there’s the issue of flying from the UK to other places around the world. The EU has taken over the process of negotiating bilateral agreements. With the US, for example, it’s the open skies agreement with the EU that governs all. That agreement does have some signatories who aren’t EU members. Again, Norway is a good example. But this could be another place where the EU tells the UK to go pound sand. If the UK isn’t allowed to stay in the agreement, then it gets interesting.

That means the UK would need to negotiate bilateral agreements with all the countries that fall under EU agreements today. Considering the EU wants the UK to get out quickly and the UK would be busy writing its own regulations to replace those from the EU, it’s not hard to imagine that the UK would be unable to negotiate new agreements with these other countries before it leaves the EU. Then what?

If the EU won’t let the UK in on its agreements, then presumably the UK would fall back on the last agreement it had with each country until it could negotiate new ones. With the US, this would be a complete disaster. The last round of agreements had Heathrow heavily restricted with only American, United, BA, and Virgin Atlantic allowed to serve the airport. There is no way that the UK can go back to this without causing complete and total chaos. It would be so bad I just can’t imagine it happening, but with the UK needing to do so many things before exiting the EU, it’s hard to know what will take priority. There are so many places where things can go wrong.

In the best case scenario, things stay as they are. Let’s all hope calmer heads prevail and that’s what happens. But in the end, there is only downside potential here. The people of the UK have voted to build virtual walls around the country. While I can understand the sentiment that leads to a vote like this, it’s bad for air travel (and yes it’s bad overall as well). Let’s hope other countries around the world (or, say, in North America somewhere between Canada and México) don’t make similar mistakes.

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