Bracing for Brexit & Turbulences Ahead for EU’s Aviation Industry

After passengers were left stranded by the collapse of Primera airlines earlier this month, more stormy weather might be ahead for Europe’s aviation industry: With less than six months to go until the Brexit deadline and no deal in sight, the International Air Transport Association (IATA) is warning of a ‘nightmare’ scenario hitting the industry.

“A backstop contingency plan to keep planes flying after March must be published, and quickly”, urged Alexandre de Juniac, IATA’s Director General and CEO, in a press release published this Wednesday. “With the possibility of a ‘no deal’ Brexit still on the table this late in the game, it is now essential that the EU and UK civil aviation authorities plan for contingency arrangements to maintain a minimum level of connectivity, which is vital for people and for business.”

The collapse of the routes to the UK are not only a concern for the close to 80,000 people working in airlines and airports across the UK. It will also affect Europe’s wider airlines, as well as European business in general –  notably the mobility of the  more than 4,000 tech-based startups lured to base themselves in the entrepreneurial hub London.

“Interference with the movement of people and goods will have a major and immediate knock-on impact to economic activity in both the UK and the EU”, warned De Juniac.

In theory, the aviation industry could be a booming sector: More than 2,6 billion passengers pass through Europe’s airports every year, while global traffic of air passengers has been growing between 7-8% over the last years.

However,  the salient concerns over Brexit is not the only headache troubling European airlines: Rising oil prices and a new surge of employee strikes are accelerating costs.

With the price crude and jet oil price rising since the beginning of 2016, profit margins are getting tighter. In July, Michael O’Leary, CEO of Ryanair announced that he expected “a significant shakeout in the industry as early as this winter“. While airlines normally hedge against short-term fluctuations in oil prices, this long-term trend can create a risk for their business.

On the side of human resources, things are not looking much brighter: After thousands of flights because of strikes of air traffic controllers in the first quarter of 2018, Europe’s low-cost carriers announced to take legal action.  A joint complaint of British Airways owner IAG and low-cost carriers easyJet, Ryanair and Wizz Air was brought to the European Commission in July.

Especially low-cost carriers with tight profit margin are put financially at risk, as competitive pressure is pushing them to descend just on minimum altitude above the red numbers.

Earlier this month, Danish low-cost carrier Primera tanked and left passengers stranded up to New York and Toronto. The company blamed failure to secure a financing deal, but industry analysts are also questioning the sustainability of their business model, and their ability to compete on crowded transatlantic routes with Norwegian, WOW, and other established players.

When Ryanair and Easyjet opened the low-cost carrier market decades ago, they were able to disrupt a sector that was traditionally thought to be solely governed by the scale – large aircraft fleet of well-established state airlines.

But this is 2018, and flying no-frills service from out-of-town airports is no longer a new strategy. “A new entrant has no cost advantages at all. Its aircraft will cost more to buy or lease, and they cannot negotiate lower airport charges or bulk fuel discounts”, explains Industry Expert Jonathan Breeze of AardvarkCompare.com. “Building a new airline to compete in a congested commercial environment is an expensive fantasy, that fails almost every time.”

However, opportunities may arise, he explains, if some established players are shaken out of the industry, such as in the rare event of a collapsing state airline.

It is still too early to say how hard Europe’s aviation industry will be hit, and how the established airlines will compete in this environment going forward. But with the uncertainty of Brexit, the frictions with employee unions and rising oil prices, the industry should better listen to the advice from the cockpit: Return to your seats, and prepare for turbulences.

*Disclaimer: This article contains comments from an Espacio portfolio company.