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Blue-sky thinking needed as Brexit begins its final approach

The aviation industry will be challenged but not grounded by the UK’s departure from EU

UK airlines account for a relatively small proportion of the overall aircraft leasing market, so negative fallout from Brexit, while unwanted, should not significantly impact lessors. Photograph: iStock

UK airlines account for a relatively small proportion of the overall aircraft leasing market, so negative fallout from Brexit, while unwanted, should not significantly impact lessors. Photograph: iStock

 

The UK has the largest aviation network in Europe and the third-largest in the world, after the US and China. Under the EU’s common rules for aviation, airlines that are owned and controlled by more than 50 per cent of EU investors can fly freely within the EU under an EU air operating licence.

“Following Brexit, as the UK would no longer be in the EU, and if no deal addressing the shareholding requirements is reached, this access would fall away. As there is no World Trade Organisation framework to fall back on for aviation, access to the EU market would be severely restricted,” says Tom Woods, head of aviation finance and leasing, KPMG Ireland.

“In addition, aviation access to other countries would be affected, as agreements reached between the EU and such countries would no longer apply. For example, losing access to the open-skies agreement between the EU and US could severely impact the UK’s access to the US. Because of these consequences, some airlines are looking at removing voting rights from non-EU shareholders to retain such freedoms and access. We have also seen some airlines apply to the UK regulator for operating licences in order to continue to operate from UK bases.”

The UK will naturally be seeking to retain what it currently has. “As the UK has stated that they are not prepared to be subject to EU law post-Brexit in any area, they will be looking for a new agreement that will likely include some or many aspects of the current agreement,” says Woods. “This, however, will take time to agree. Absent a new agreement, the UK could agree to remain subject to EU aviation law and regulation until a new agreement is reached.”

Well positioned

Airlines started preparing early and are generally well positioned to handle the changes, including using more than one Air Operator Certificate (AOC) such as that recently announced by Ryanair, according to Rob Murphy, co-chair, Aviation Group at Arthur Cox.

“The possibility of legal challenge around ownership rule compliance cannot be ruled out. Impacts at airports are also relevant in terms of the ease of people moving through airports and the likelihood of congestion and delays. Some aviation sector industrials are also affected, such as where you have UK and EU plant or multi-jurisdictional entities in your supply or distribution channels – increasing stress on logistics, manufacturing and operating costs,” says Murphy.

A big part of the problem is that even this close to the date, it is not completely clear what the rules will be

For aircraft lessors, the impact of Brexit relates to the viability and credit-worthiness of the impacted airlines that they have aircraft leased to, according to KPMG’s Woods. “UK airlines account for a relatively small proportion of the overall aircraft leasing market, so negative fallout from Brexit, while unwanted, should not significantly impact lessors. As the assets are movable, lessors will take back aircraft, where necessary, and remarket them to airlines that have demand for them,” says Woods.

As for so many sectors, “a big part of the problem is that even this close to the date, it is not completely clear what the rules will be,” said Cathal Guiomard, assistant professor aviation at Dublin City University.

Mitigate the risk

To mitigate the risk of a cliff edge, the European Commission published a document in November outlining provisional arrangements it would make in the event of a no-deal Brexit for an interim period. These would see British airlines flying into but having to turn around and fly out of the EU again. “It would be highly undesirable, but at least would not see things come to a complete halt,” says Guiomard.

Brexit may well see the question arise as to whether EU ownership rules, which date back to the end of the second World War, even make any sense anymore, he suggests.

For many lessors Brexit is just one more geopolitical issue to be dealt with. “This is a global business. From New Zealand to Alaska there are hundreds of airlines around the world, and there are always going to be geopolitical issues arising, whether it’s Zika virus, or political unrest in the Middle East,” says David Swan, chief operating officer at SMBC Aviation Capital and chair of ALI (Aircraft Leasing Ireland), a representative group.

“On one level Brexit is just another of those which, like those, will have a temporary impact. In as far as it affects economic growth, that can have an impact too, on air traffic. But people will still want to travel and reality and rationality will prevail for both the UK and the EU to support that.”

European aircraft maker Airbus has centres all around the UK, and makes about 1,000 wings near Chester alone. “In terms of the continuity of goods and services, there will be factors that need to be sorted out, but it’s too important to the economies of both for them not to find a solution,” says Swan.