Air transport will become more important than ever to the United Kingdom following its decision to opt out of the European Union. But what exactly lies in store for the aviation value chain?

The United Kingdom’s vote to leave the European Union—so-called Brexit—has highlighted the value of air connectivity.

Now, more than ever, “the world needs to see that Britain is a truly global nation,” says John Holland-Kaye, Chief Executive of Heathrow Airport. “We need to stand confident on the world stage, showing what we have to offer to far flung corners of the globe.”

The nature of future air services arrangements between the United Kingdom and Europe will be central to the success of such a policy. As it stands, a completely open market exists with UK carriers able to operate as they see fit within Europe. A key question is whether the Brexit negotiations will allow this state of play to continue. 

If not, a separate bilateral arrangement between the UK and the EU may be necessary. Moreover, new agreements with such other major aviation markets as the United States and Canada—covered at the moment by EU-level policy—would also be needed. 

The EU has seven comprehensive, multilateral, air transport agreements in place with Third Countries. And it has already started working on EU-wide bilaterals with China and the ASEAN states. Re-negotiating all these agreements as an individual country would involve a host of factors and could have far-reaching effects on UK carriers as well as carriers that rely heavily on the UK market like Ryanair. The end result could push up prices and pull down the shutter on airline connectivity.

An alternative to new bilateral arrangements would be UK membership of the European Common Aviation Area (ECAA). This extends beyond EU borders to countries such as Norway and Iceland. In total, it covers 36 countries and 500 million people.

While the United Kingdom would have no problem in meeting ECAA requirements, membership does require a broad acceptance of EU policy and close economic cooperation.

A potential spanner in the works is the forthcoming new EU Aviation Strategy. Accepting it would be essential to joining ECAA but only EU countries are allowed input into its final form. Should the United Kingdom authorities feel there is a misalignment with its 
own aviation policy, there is little recourse but to refrain from joining ECAA.

In short, given that the United Kingdom has voted to leave Europe, how likely is it to accept EU aviation laws and broader EU policy over which it has no influence?

The timing must also be a consideration. Legal uncertainty—which may dampen the expansion of air services—will doubtless result if arrangements are not concluded before the United Kingdom leaves the EU.

Brexit predictions

The airline response to date has been a mixed bag. IAG is reported as saying Brexit is not expected to have a long-term impact on its business, while easyJet noted that there had been “no noticeable change in passenger booking behavior” in the aftermath of the referendum.

Delta Air Lines, on the other hand, said in a statement: “With the additional foreign currency pressure from the steep drop in 
the British pound and the economic uncertainty from Brexit, Delta has decided to reduce six points of US-UK capacity from its winter schedule.”

Whatever happens, the full effects of Brexit will take time to materialize. Preliminary estimates, however, suggest that the number of UK air passengers could be 3%-5% lower by 2020, driven by the fall in the sterling exchange rate and the expected slowdown in economic activity relative to a no-Brexit scenario. The scale of any impact on passenger demand will, of course, depend on the shape of future arrangements between the United Kingdom and the EU as well as other trading partners.

Regular connectivity

Meanwhile, Heathrow’s Holland-Kaye has used Brexit to call once again for Heathrow expansion. “Our next Prime Minister can 
send the strongest possible signal that Brexit Britain is open for business and confident in its future by expanding Heathrow,” he says.
He believes that Brexit success will rely on a rebalance of the UK economy toward exports and the entire United Kingdom having the ability to trade globally.

“You may be surprised to learn that the biggest export through Heathrow by volume is high quality salmon, worth £280 million to the Scottish economy,” he reveals. “Regular connections from Heathrow mean fresh salmon can get from the farm in Scotland to the seafood market in Tokyo within 24 hours. Think how much more could we export, with more flights from Scottish cities to Heathrow, connecting to 40 new long-haul destinations.”

Similarly, Miller Manufacturing, based in the UK’s northeast, export their specialist construction equipment via Heathrow to Australia, China, India, and the Middle East. Six flights a day connect Newcastle to Heathrow and from there to every corner of the world.

It’s not just exports either. Holland-Kaye cites the example of Jacobite Cruises, which has been running tourist cruises on Loch Ness in Scotland for 40 years. It has increased passenger numbers 12% since British Airways reinstated the Inverness route to Heathrow earlier in 2016. 

Engine of Brexit growth

If this utopia of trading greatness is to be built on air travel, airport expansion becomes critical. The debate rumbles on, but should a UK Government find the political will to push a project through, it’s a straight shootout between Heathrow and Gatwick.

Both sides are fighting their corner furiously. A report by the Centre for Economic and Business Research (Cebr) has been hailed by Heathrow as it notes that an expanded Heathrow Airport will be an “engine of Brexit growth, driving opportunity up and down the United Kingdom.”

“If we are to succeed outside of the European Union, every choice the government makes must aim to deliver a stronger, more competitive economy and seek to encourage growth in the regions, as well as in London,” says Vicky Pryce, Cebr’s Chief Economic Adviser. “On both those measures, this report shows Heathrow’s future will be crucial in reducing the uncertainties of a post-Brexit world.”

Using the Government’s own independent Airports Commission figures, the Cebr report also found that Heathrow expansion could boost the UK economy by as much as £24,500 of GDP per family. By 2030, a third runway could provide enough additional tax revenue to allow the government to hire 68,000 police officers or over 76,000 secondary school teachers.  Alternatively, the extra revenue by 2060 could be used for a 2.5% cut in value-added tax. 

Gatwick is arguing its case strongly. Following the Brexit vote, Stewart Wingate, Gatwick CEO, said: “It is now clearer than ever that only Gatwick can deliver the new runway Britain needs, to provide the direct connections to North America, South America, Europe, the Middle East, and Asia that we all want, because only Gatwick can balance the economy and the environment. 

“In these uncertain times that means Gatwick can give the country certainty of delivery,” he added. “And Britain cannot afford yet more delay.”

He believes that the airport, situated to the south of London, would help improve the United Kingdom’s international competitive position by offering the fastest possible improvement to its trading links at a time when it is most necessary.

 

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