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Tricky flightpath ahead for UK aviation industry

The legislative runway has been cleared, Royal Assent has been granted and the UK Government flight to the unchartered destination of post-Brexit Britain has now taken off. Where this journey will lead us to is anyone’s guess. Will we end up in an economic backwater hamstrung by trade barriers and inflated costs of doing business with our continental neighbours or will we end up in a utopian powerhouse which thrives off stronger links with a much larger network of free-trading global partners?

 

The simple truth is that we do know at this stage. The range of views being voiced about where our withdrawal from the EU could take the UK certainly reflects that broad spectrum of opinion and all points in between. What is clear is that now Article 50 has been triggered, there will be some tough negotiations ahead.

 

I think it’s fair to say (and it has been said in numerous discussions and debates since the EU referendum result) that Brexit will offer opportunities. It also presents real threats to important business sectors, including the UK aviation industry.

 

The impact of leaving the EU has the potential to help or hinder the sector. Given the important contribution aviation businesses make to the nation’s prosperity, it’s vital that withdrawal negotiations are conducted with careful consideration of the affect they could have upon the industry.

 

UK aviation is significant in terms of size and stature, ranking third in the world behind only the USA and China. According to Sustainable Aviation, the industry has an annual turnover of £60 billion and contributes £52 billion to UK gross domestic product (GDP). It also accounts for around £8.7 billion per year in tax revenues to the Treasury.

 

The sector is responsible for nearly one million direct and indirect jobs here and accounts for over 3,500 apprenticeships every year. One of the real benefits it brings to our economy is through its prominent level of research and development activity, with the industry contributing around £1.7 billion in this area annually.

 

Along with the UK’s status as the world’s second largest aerospace manufacturer with exports totalling approximately £27 billion annually, airlines and airports also make a huge economic impact. According to a 2014 report from Oxford Economics, some 197 million passengers and two million tonnes of freight travel to, from and within the UK in a year. These passengers, the report stated, paid around £71.5 billion (inclusive of tax), with UK residents accounting for around £44.4 billion of this.

 

Given the impressive levels of wealth it generates for the economy, it is vital that the UK aviation sector maintains its performance in a post-Brexit world – but is that likely to happen?

 

Without applauding or condemning the logic of Brexit and what it might lead to in the longer term, there is no doubt that what now lies ahead presents a huge question mark for the whole aviation industry in the UK, not least its airlines.

 

There have already been some eyebrow-raising statements from a number of key airlines since the referendum, suggesting their future plans may be more focused on the EU rather than the UK with potential to relocate headquarters and investment. Low cost carrier Ryanair’s chief executive Michael O’Leary has already stated that he intends to ‘pivot’ investment away from the UK domestic market, which makes up 1.67 per cent of its overall network capacity, following the Brexit vote.

 

In the short term, the weak Pound is likely to have a more immediate impact on UK airlines as this is likely to restrict holidaymakers’ plans with many set to put off overseas travel until it becomes more affordable. This is especially true when it comes to destinations like the US where the Pound is particularly vulnerable against the Dollar following its 20 per cent depreciation since last June. Airlines, including Virgin and BA, which have a greater focus on long-haul travel, are expected to feel the impact most.

 

Some analysts are predicting a double-whammy effect for both outgoing as well as incoming UK air traffic, despite the fact that a weaker Pound makes the UK a more attractive holiday destination. Moody’s research suggests that Britain may not benefit from a significant influx of tourists as recent bouts of terrorism activities, including last month’s attack on Westminster as well as other incidents across Europe, are expected to limit the number of Americans heading overseas this year.

 

The dramatic slump endured by the Pound since the pro-Brexit outcome of the referendum is also impacting on many airlines’ financial status. This includes a number of European airlines operating across the UK, including Spanish-owned British Airways, which report their financials in Euros. Because their extensive UK customer base transacts with them in Sterling, the lower value currency is resulting in less profits for these businesses. Going forward airlines will either have to live with these reduced margins or will need to consider raising prices, which could lead to them losing passengers in a competitive market with many low cost carriers operating on tight margins.

 

The Pound is unlikely to recover from its currently weak position anytime soon. While the UK is facing further currency uncertainties on the back of Brexit negotiations, the wider Euro zone could also have a few of its own problems depending on the outcome of key elections in France and then Germany in the year ahead. For airline companies, it will be more important than ever to ensure they are protected from such potential threats by adopting foreign exchange strategies which can help mitigate the effect of the fluctuations that usually accompany a volatile market.

 

There has been much discourse and debate since the referendum result but now that Article 50 has been triggered the real journey is underway. We know that what lies ahead is unchartered territory which makes contingency planning such a challenge for all UK businesses, especially those in global-facing sectors like airlines and the wider UK aviation industry.

 

The initial signs here are that life may get tougher, at least in the short term. We are now en route towards Brexit and there’s little doubt that the flight path ahead is going to be an extremely tricky one. Whether UK airlines and other aviation businesses will thrive or flounder once we’ve arrived at the final destination remains to be seen.

 

In this current period of uncertainty, UK-based airlines will need a flexible structure which enables them to take a longer term strategic view on running their business but also allows them to respond quickly to embrace and adapt to change when it happens.

 

Greg Smith, Head of Trading at foreign exchange specialists Global Reach Partners

 

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