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Conversation turbulence for airlines

Comment: Why Brexit spells turbulence for airlines

Published on: 7 June 2016

Writing for The Conversation, Dr Volodymyr Bilotkach analyses what impact a Brexit might have on the airline industry.

Volodymyr Bilotkach, Newcastle University

The creation of a common airline market in the 1990s is one of the European Union’s most significant achievements. It has allowed for unfettered competition throughout the European Economic Area, or EEA and opened the door to low cost carriers such as Ryanair and easyJet.

You might have your own opinions about these airlines (and their customer service), but one thing is undeniable: they have made air travel affordable to millions of people who had never flown before.

The liberalisation of the airline market, as a result of the EU, was also an important precursor to the establishment of the Transatlantic Open Aviation Area. In operation since 2008, it removed all entry barriers for US and EEA airlines wishing to fly across the Atlantic. And it allows airliners such as Norwegian to fly nonstop between London and various US airports – this service would not have been possible under the previous regulatory regime on the transatlantic market.

As with many other industries, the effect of Brexit on air travel to and from the UK will depend on what Brexit will actually look like and what trade deals the UK negotiates with the EU after leaving. If the UK remains in the common European market, nothing will change. If it does not, however, much may.

Bad news for Ryanair?

The UK’s departure from Europe’s common market will, in the worst case scenario, mean a return to having numerous bilateral agreements between the UK and each individual country it has flights to. These agreements are unlikely to be as restrictive as in the 1960s or 1970s, when they meticulously specified which airlines could fly on which routes between the two countries, how frequently and using which aircraft. This was an era when airfares were often set at cartel-like conferences run by the IATA, the trade association of the world’s airlines, resulting in expensive air travel for customers.

These days, more liberal agreements are the norm. Fares can be as low as the market can bear and most airlines can service routes so long as there is an agreement in place between the two countries in question. The only rule that remains is that an airline flying between two countries cannot typically be based in a third country – what’s known as the “nationality clause”.

Grounded. Pauls Imaging Photography/flickr, CC BY

This means, for instance, that if we move away from a single European airline market to a series of UK-country agreements with nationality clauses wired into them, Ryanair may not necessarily be allowed to fly directly from the UK to countries other than Ireland.

EasyJet will not be affected on routes to and from the UK, as it is a UK-based airline. But it will likely be banned from flying within the EEA, unless it is via the UK. Airlines outside the EEA are not granted access to the single European airline market.

Such a regulatory arrangement can significantly disrupt air travel not only to/from the UK, but also on the continent. However, I think that such an apocalyptic scenario is unlikely to materialise. First, both Ryanair and easyJet could relatively easily avoid the likely new restrictions by setting up subsidiaries in the UK and the EU respectively.

Second, we cannot exclude the possibility of a liberal UK-EU air services agreement, similar to a deal the EU currently has with Morocco and the US. Given what is at stake (over 140m passengers per year travel between the UK and the rest of the EU) both the UK and the “new” EU would likely be interested in ensuring the deal goes through.

Transatlantic trouble

The transatlantic market is more likely to be disrupted in the case of a Brexit. I am pessimistic that a free market US-UK deal can be reached here, as access to London’s Heathrow airport was the main hurdle at the time the Open Aviation Area between the US and Europe was negotiated (a deal that took years to seal). Analysis of the US Department of Transportation data that I’ve been working on clearly shows that Heathrow is the most important gateway in the transatlantic market, with over a quarter of all passengers crossing the pond landing there.

Prior to this, there was a UK-US agreement which imposed that transatlantic flights out of Heathrow could only be performed by two UK and two US airlines. Other carriers (mostly US-based ones) had to use Gatwick for their transatlantic services to London. Research I carried out at the time showed that carriers flying into Heathrow charged up to 8% more than the airlines that had to use Gatwick. So a post-Brexit deal could lead to higher prices.

Outside of the current US-EU treaty there has never been a truly liberal UK-US air services agreement. The treaty opened up the market, allowing any EEA based airline to fly nonstop across the ocean from countries other than the ones in which they are based.

Admittedly, few carriers were successful in establishing such services. Some did try – for instance, Air France opened nonstop flights between Los Angeles and London around 2009, but did not last long on this route. But more recently, Norwegian has worked to build a transatlantic network out of Gatwick. This could stop in the event of Brexit, as such services will not conform to the old UK-US agreement.

Ready for take off.

Plus, Brexit will likely create an uneven playing field for British Airways. Looking at the data, BA appears to be the biggest winner from the transatlantic market liberalisation. My analysis of the US Department of Transportation data shows that from 2008 to 2013, BA’s market share (as measured by the total passengers carried across the Atlantic) increased by nearly 2% – a larger increase than for any other major market player. Return to the more restrictive regulatory environment cannot be good news for it.

So Brexit could have a big effect on both UK-EU and UK-US air travel. Flights will of course continue, but do not be surprised if more restrictions are put in place and prices go up as a result, especially if no agreement is reached to join the common market.

The Conversation

Volodymyr Bilotkach, Senior Lecturer in Economics, Newcastle University

This article was originally published on The Conversation. Read the original article.


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