Why Brexit Will Eventually Catch Up With Airlines

18/10/2016 12:08

The pound is getting weaker by the day. While Brexiters are quick to defend its volatility, it's important to remember that Britain's exit from the EU hasn't actually happened. While a weaker pound does have its benefits, namely by boosting exports, such drastic short-term changes can place considerable strain on resources and labour - that's why economic stability is so important. Imports also become more expensive, which drives up the price of oil and harms exchange rates, both of which will have a significant impact on air fares.

While we're starting to see minor increases in the price of consumer goods, the implications of Brexit haven't caught up with airlines yet; ticket prices have remained the same and EU aviation laws are still valid. Many of the Leave camp have shrugged off the currency damage as an expected repercussion, but again Brexit hasn't happened. Besides, due to the way aviation companies operate, it will take at least one year from the date of the referendum (when the pound started to rapidly slide) before we notice a major difference. Here are three reasons why the worst is still to come...

Fuel is Priced in US Dollars

Fuel prices are directly related to the price of crude oil, which is traded in US dollars. A drop in the USD-GBP exchange rate, which is currently down almost 20 percent (not including the pre-referendum drop), will mean greater fuel expenditure for airlines. And with greater expenditure generally comes higher ticket prices.

This hasn't made a major short-term impact. However, that doesn't mean it won't make an impact at all. Airlines hedge their fuel, which fixes or caps the cost they pay for at least one year in advance. This provides short-term protection against market volatility. Therefore, prices are unlikely to fluctuate until the summer of 2017. Any changes in the immediate one-year anniversary of the referendum will likely be because of the poorly performing pound. The following months and years will follow the same pattern if the downward trend continues.

European Aviation Market Agreements Need to be Reassessed

This unified internal market established common aviation guidelines throughout the European Union. If the UK negotiates access to the Single Market, the current legislation will likely remain the same and little (if anything) will change. However, if the UK opts out of the Single Market it could apply to join the ECAA and would, therefore, still have to adhere to EU aviation laws, but without any influence over future legislation, and with possible limitations.

London is a major international hub; therefore, it's almost guaranteed that ECAA status would be granted. However, this could not only make the UK more susceptible to high-taxation, but could place limits on flight paths. For example, it's highly probably that British airlines would be permitted to fly to and from European destinations, but not between European destinations. Fundamentally, new air service agreements will have to be negotiated from scratch if no-frills airlines, such as easyJet, are to continue operating throughout EU member states.

European Airlines Report in Euros

Even our flagship airline, British Airways, is owned by the International Airlines Group (IAG), which is registered in Spain. Customers on BA flights primarily pay in pounds; however, IAG reports in euros. In the same way we have to convert our currency at a bureau de change, IAG has to covert their pounds to euros. A weaker pound means that they get less for their money, which reduces profits, net assets and other reserves.

To compensate for this loss, British Airways will have to raise their prices. With pressure from low-cost airlines such as Ryanair, Whizzair and EasyJet, this could significantly hinder their position in the European marketplace. According to complaints representatives at Contact Telephone Numbers, BA have already started combating losses by ditching meals on flights under five hours and adding a virtual check in system for a fee of £40; once again, it's the general consumers that suffer.

Brexit will inevitably affect profit margins, accessibility and air fares. Nobody said it would take immediate affect after the referendum, it's been a slow and often jolty decline, but it will only get worse. In order to limit damage we can only hope for a soft Brexit with access to the Single Market, but with that privilege comes Freedom of Movement. It may not seem like these two factors have much to do with aviation, but in the European Union they are not mutually exclusive, a point Donald Tusk (President of the European Council) made abundantly clear at recent speech in Brussels: "That was pure illusion, that one can have the EU cake and eat it too. To all who believe in it, I propose a simple experiment. Buy a cake, eat it, and see if it is still there on the plate."