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Home » Aviation News » IATA on Brexit: 3-5% Reduction in Passengers, Fate of EU/US Open Skies Agreements TBD

IATA on Brexit: 3-5% Reduction in Passengers, Fate of EU/US Open Skies Agreements TBD

The International Air Transport Association (IATA) has released a “preliminary analysis” of the impact to the air transport industry of the UK’s EU Referendum decision.

The association acknowledges a generalised uncertainty, estimates the impact to UK passenger numbers, and addresses questions on policy and regulations going forward.

“A big issue is with aviation regulation. The UK faces a trade-off between accessing the European Single Aviation Market and having the policy freedom to set its own regulations,” IATA states.

Tony Tyler, IATA’s Director General and CEO said of the result: “The Brexit vote has triggered much uncertainty—financial and otherwise.”

“As leaders in the UK and the EU work to establish a new framework for their relationship, one certainty to guide them is the need and desire of people on both sides of that relationship to travel and trade

“Air transport plays a major role in making that possible. There were 117 million air passenger journeys between the UK and the EU in 2015. Air links facilitate business, support jobs and build prosperity.

“It is critical that whatever form the new UK-EU relationship takes, it must continue to ensure the common interests of safe, secure, efficient and sustainable air connectivity.”

Depending on the Details

While sharing perspectives on the potential ramifications of the vote, IATA emphasised that the “details are critical” therefore its review of Brexit ramifications is only preliminary.

“It could be 2 years or more before these issues are fully resolved; prolonged uncertainty will influence both the magnitude and persistence of the economic impacts,” IATA states.

Crises Past

IATA compared the potential financial impact from the Brexit to previous economic crises the industry has previously faced, suggesting that recovery might be a long process.

Source: IATA Brexit Report

“The expected GDP shock associated with Brexit is broadly comparable to that which followed the ERM exit, with a similarly-sized fall in the sterling exchange rate expected too. But whereas real GDP had recovered to its pre-recession peak within 11 quarters in the early-1990s, the recovery following Brexit is estimated to be longer and shallower.
As such, we would expect the impact on air passenger demand to be somewhat of a mix of the post-ERM and GFC experiences,” IATA states.

The Weight of Sterling

One of the immediate aftermaths of the Leave vote—visible in the markets even before the final votes were tallied—has been the drop in the value of the UK’s pound sterling. IATA points out that currency volatility had been expected.

Source: IATA Brexit Report

“The general view amongst analysts is that it will recover somewhat over the medium to longer term,” IATA states. “Nonetheless, the currency is expected to remain weaker than otherwise would have been the case under a no Brexit scenario (in the region of 10-15%).”

The real question for the aviation sector is what weaker sterling might mean for passenger numbers. IATA describes this as “more clear-cut” than the economic effects of the vote.

The association considers that while there are drawbacks to travel trends from the Brexit decision, the weaker sterling might yield some offset. While those in the UK may have less to spend on travel, larger numbers of overseas passengers may be eager to visit the UK now that their local-currency buys more.

Passengers: 2 Scenarios

IATA projects two possible scenarios of traffic flow. The first (A) based on price elasticity of -0.7 and the second (B) characterised as “more in keeping with what we would expect” considers elasticity for inbound passengers his higher than for outbound (-1.0 versus -0.7).

Source: IATA Brexit Report

IATA says Case A dominates because “the market is weighted towards outbound” and expects a net reduction in traffic of around 3% will result. In Case B, IATA states, “inbound demand is encouraged more than outbound is deterred.”

When factoring in long-term economic impact of the Brexit—an expected downturn in economic activity and the drop in the sterling combined—the airline association projects a reduction in UK air passengers between 3-5% by 2020.

“The direct economic impact is likely to see the UK air passenger market be 3-5% lower by 2020 than the no Brexit baseline. In other words, the outcome of yesterday’s referendum could reduce air passenger growth by 1.0-1.5 percentage points each year over the near term,” IATA states.

Source: IATA Brexit Report

Who Holidays Where Now?

Holiday choices will continue to be important factors to passenger numbers, with currency and economic conditions perhaps shifting the dynamic, IATA suggests.

Source: IATA Brexit Report


“Taken as a whole, the EU is easily the single biggest destination market from the UK, accounting for 49% of passengers and 54% of scheduled commercial flights. Taking into account those countries that have access to the Single Aviation Market as members of the European Common Aviation Area (ECAA) which includes Iceland, Norway and a number of Balkan countries, the importance of market access becomes even more significant.” IATA states.

“Of course, the importance of the issue is not just relevant to UK consumers and airlines; the UK is also a very important destination market for air travellers across Europe and is an important source of business for all major European airlines.”

What Now for Open Skies

IATA also says that questions on market access will extend beyond routes between the UK and EU routes to destinations around the world, with a potential impact to existing open skies agreements with foreign carriers, including U.S. airlines.

IATA points out that a Single Aviation Market has led to the negotiation of horizontal agreements with global carriers–as a single trading bloc. With the UK’s exit from that trading bloc, it would need to negotiate individual agreements.

One of the key agreements in question is the Open Skies agreement with between Europe and the U.S. which became effective in 2008.

“Depending on the terms of exit, these horizontal agreements would potentially cease to apply to the UK, possibly requiring the UK to negotiate a whole raft of separate bilateral agreements,” IATA states.

“In theory, this could be a positive in some cases, giving the UK greater flexibility to negotiate agreements suited to the best interests of UK consumers. However, as a single country the UK would lack the bargaining power of a 500-million population trading bloc such as the EU.

“Negotiating an air services agreement can be a time-consuming process and this would coincide with a time when UK Government officials will be busy amending a wide range of legislation. In the interim therefore, it is possible that provisions would revert to the last agreement that was in force prior to the horizontal agreement, for example Bermuda II in the case of air services between the UK and US. Such a situation would have profound implications for airlines and their customers, no matter how unlikely.”

But IATA also suggests that Memorandums of Understanding could be signed to maintain the agreements in place from the Single European Market “pending negotiation of a new bilateral agreement.” IATA also points out that existing horizontal agreements are limited to “around 45 countries.”

Out of Brussels Cuts Both Ways

One of the complaints the Leave campaign has had of the European Union are the policies and regulations from Brussels which the campaign stated had a detrimental impact on UK businesses.

With the Leave vote, the UK expects to regain full sovereignty on these matters, setting its own policies. But with the voice, IATA points out, the UK also forfeits any influence it might have had over decisions made in Brussels, had the Remain vote won the referendum.

This puts the UK in an awkward position going forward as it attempts to negotiate fresh aviation agreements with the European Union.

“Depending on the nature of future UK-EU arrangements, it may still be subject to most or all European legislation affecting the aviation sector,” IATA states.

However, the UK would no longer have a vote to influence those legislations up-front.

Short Term Losses, Long Term Questions

As IATA points out, while the UK’s decision to leave the European Union has immediate repercussions—such as currency volatility and its effect on the cost of travel—other impacts might be longer lasting and will be determined in part by “the precise terms negotiated as part of the exit agreement.”

ERA Commits to Member Support

Additionally today, the UK-based European Regional Airline Association has committed to supporting its members as they grapple with Brexit repercussions.

Simon McNamara, Director General of the European Regions Airline Association (ERA), which represents 53 member airlines in Europe, with global affiliate airlines, said:

“Time will tell what this vote will mean for the UK and wider European aviation sector.”

Adding, “Our airlines face similar challenges and ERA protects and safeguards their interests..ERA will continue to support our members flying to, from and within the UK as it becomes clearer what the implications of the vote are for the aviation industry.”

A4E Has No Statement Yet

I reached out to Airlines for Europe (A4E) this morning—an association which includes both British Airways and easyJet—and was told there was no formal statement on the repercussions of the Brexit yet.

However, the association had convened a CEO Summit in Brussels for this Tuesday the 28th, even before the results of the UK Referendum were known. A4E’s representative said we should expect statements to follow those discussions.

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