By Chris Chalk, Global Aviation Leader, Mott MacDonald

 

The aviation industry has overcome significant swings in oil prices, major security issues and no €y zones in the past, so will Brexit be a little bump in the road compared to these other events? With Article 50 triggered there is a two-year period to negotiate the exit of the UK from the EU. These are uncharted waters for the EU where no one can predict what the outcome will look like. The EU’s position of “an exit without a shopping list of benefits” suggests that getting some form of integration of the aviation sector, which many in the industry would like to see, is going to be a challenge. This is not made easier given differing opinions amongst aviation stakeholders. For ACI World Business Partners (WBPs) around the world, the stability and prosperity of the airlines and airports are two critical ingredients, followed by macroeconomics of growth, foreign exchange (f/x), interest rates and trade agreements. Airports and airlines need certainty of supply, both in availability and pricing from their supply chain, including the ACI WBPs.  For the next two years, there will be uncertainties as to what settlement will be reached between the UK and the EU, on top of which there will be speculation on future trading relationships. In modern day parlance, this is heading for a messy divorce with lots of property and dependents to be argued over. So why does this matter to ACI WBPs?

Direct opportunities for WBPs into the UK

The UK handles over 250 million passengers through its airports— ranked 4th busiest in the world— and includes Heathrow, which is the busiest airport in Europe. The largest airport project in the western hemisphere, at £16 billion, Heathrow’s Runway 3 is likely to start construction around the time of the UK exit. Other UK airports have ambitious plans. A significant amount of the supply chain will need to be imported, and this provides interesting opportunities to WBPs. A hard Brexit with the potential of reversion to World Trade Organisation (WTO) rules and tariffs, together with f/x uncertainties, will both increase costs for airport buyers and add significant costs and risks on selling into the UK supply chain. This is not just a Eurocentric matter as it would affect much of the supply chain.

Impact on WBPs exporting from the UK

Reversion to WTO rules with Europe would increase costs through increased tariffs, although f/x changes could offset this if the Sterling devalues. More of an issue will be the supply chain that relies on the UK being within the customs union and the ability to source, ship and assemble business

from around the EU. These tariff changes would also affect European suppliers who use UK components. Trade tariffs are anticipated to be a significant issue for the aerospace and automotive industries and any bilateral trade negotiations are likely to be driven by those industries. Being outside the customs union could, of course, provide opportunities for duty and tax free sales at UK airports with significant traffic to EU destinations and for EU airports with traffic to the UK.

Employment and movement of people around Europe

A polarisation of employment could create significant dislocation for airlines, airports and the supply chain. Apart from the impact of EU nationals working and living in the UK and vice versa providing services across wide spectrums of society, there is the accompanying visiting friends and relatives traffic on which quite a few smaller airports have come to depend. The UK economy has a high service component that has benefited from the ability to employ skilled staff from across Europe. The flexibility of employment has also enabled skilled people to follow the employment opportunities around Europe to the benefit of airports and their stakeholders. If Brexit creates employment restrictions, employers will either need to endure the inflexibility of new migration rules or to grow their service and manufacturing centres outside Europe, potentially leading to labour shortages and price inflation. 

General impact of European airport facilities

Whilst the UK is not part of Schengen and therefore border controls exist for those travelling between the UK and EU Member States, the current checks are focussed on criminals and not on rights of abode. Changes to immigration and customs controls on EU/UK traffic, representing some 8% of overall passenger traffic, will make changes to airports inevitable through automation and technologies, reconfiguration of terminal space and equipment—all providing up-side opportunities for WBPs. 

Membership to the European Common Aviation Area (ECAA)

The growth of European air traffic over the past 20 years has been driven by the low-cost carriers through the introduction of the EU Third Aviation Liberalisation Package. This has led to more choice, more competition, increased efficiency and lower fares, making air travel more accessible to a wider population. The ability of EU airlines to have a single Airline Operational Certificate across Europe increases flexibility, which in turn leads to higher utilisation and lower operational costs. Airlines pass on these savings to their passengers through lower fares, which in turn stimulates demand that, down the line, increases demand for WBP services and products. Withdrawal of the UK from the ECAA is likely to have a direct impact not only on three of the five largest airlines in Europe, but also on a significant number of airports across Europe as routes are pulled and charges increased. The outcome of Brexit negotiations is likely to affect all ACI members (airports and WBPs), particularly those of us in Europe. Now is not the time to sit and watch what happens, but rather be a part of the evolution, working with your governments and ACI. Hopefully the outcome will be a stable transition over the coming years, keeping our airports safe, secure, affordable and an increasing pleasure to use.

 

Find the article here: https://issuu.com/aciworld/docs/aci_world_report_april_2017_issuu

 Brexit- Why it matters to ACI World Business Partner- Chris Chalk.pdf (204 KB)