In October, easyJet began exploring the formal process by which it could obtain an Air Operator Certificate (AOC) to fly within the EU. It was not something its founder, Sir Stelios Haji-Ioannou, had likely anticipated when he started the budget airline in 1998. His business model, providing cheap flights to hitherto obscure destinations up and down the Continent, was predicated on the assumption that the firm’s UK AOC automatically granted access to the vast common aviation market of the EU. Brexit has endangered all of that.
According to Sophie Dekkers, easyJet’s commercial director, the firm was hopeful that the final deal reached between the UK and the EU would largely preserve the status quo. In the same conversation, Dekkers admitted that establishing separate AOCs was effectively a backstop, since – absent of any deal reached – the default rules of the World Trade Organization (WTO) wouldn’t cover the UK aviation industry if divorce proceedings became acrimonious. Obtaining dual AOCs would ease the airline’s ability to operate within the single market, but it would be up to the negotiators to guarantee a square deal for UK airlines within the EU in the long term.
In the meantime, the uncertainty brooked by the vote has forced airlines, airports and passengers on both sides of the Channel to rethink their priorities within a system that, for the most part, has functioned very well over the past two decades. “I would say that the view from the inside, as far as I’m concerned, was that there were lots of questions when the Brexit vote happened,” says Charlie Leocha, the chairman and founder of consumer advocacy group Travellers United. “All of a sudden, everyone went: ‘Whoa. This is reality.’ The aviation industry was surprised, although I think that, since then, things have settled down and there’s no sense of disaster.”
The greatest impact, it seems, will fall on UK-based budget airlines. Previously, these firms thrived on their legal right to unimpeded access to the EU’s common aviation market. “To move people efficiently within Europe, we really require airlines, and that’s why the low-cost carriers have had such an incredible explosion,” explains Leocha. “They definitely fill a niche that trains don’t fill and the old legacy carriers weren’t filling, and that was to move people at a very low cost over long distances across Europe.”
In the medium term, there are solutions to this problem. “There are some airlines, like easyJet, that are surely going to start looking for other places to set up subsidiaries over in the EU,” explains Leocha. “Others, such as Ryanair, will be okay, because it’s [already based] in Ireland. The change is going to come in the background, and it’s going to have to do with the mechanics, taxation and regulations that are put into effect after an agreement is reached.”
Change in this respect has already arrived for the owner of one major UK airline. While few imagine British Airways will follow the example of Norwegian Air International and move its headquarters to the single market, the stock of its owner, International Airlines Group (IAG), plummeted upon news of the referendum result. Although IAG’s stock in Aer Lingus, Vueling and Iberia will probably remain unaffected since all of these companies are registered within the EU, it may have to divest its holdings in British Airways (BA) if the UK decides to impose foreign ownership rules on British companies.
“There are a lot of different scenarios that can play out with this,” says Leocha. “It’s a totally merged operation now, and that throws another wrinkle into what’s going to happen with Brexit. Then again, it adds a question as to whether or not BA is even going to be affected that much because of [IAG’s] giant stake in Iberia and other smaller European airlines.”
Flying visit
Another uncertainty concerns consumer protection. According to a joint report by Deloitte and the Association of British Travel Agents, current EU regulations stipulate “consumer protection in cases of insolvency or where there is a failure to perform contracted services” on the part of the booking agency or airline. While a form of these regulations will likely remain in place in the short term, a lack of oversight from Brussels would mean an easier deregulation process, should the British Government consider the rules to err too much in favour of passengers.
“The whole reason for Brexit was that the UK was feeling that it was being imposed upon by the EU, and that they were forcing them into a regulatory regime that they didn’t like,” he explains. “That’s exactly the kind of sentiment that may work against consumer regulations in the future. I just don’t know where the chips are going to fall: whether the UK will move more towards the US model or whether it’s going to stay with the EU model. I don’t know because there is also the question of self-interest, and consumers like the fact that they have some rights under the EU system, whereas they have virtually no rights under the US versions.”
In the airport itself, however, Leocha is more confident that the experience for European passengers at UK airports is far more likely to resemble the US experience. UK citizens, however, are less likely to suffer seemingly endless queues to passport control. “Anyone who is a UK citizen will probably have a separate line now” in EU airports, says Leocha. “However, EU travellers are now going to have to be treated just like everybody else, just like passengers coming in from the US. Anyone who has come into London recently knows the EU lines are relatively short going through customs and border protection, while the US lines seem to snake all the way back to that giant arrivals hall at Heathrow.”
That doesn’t mean the UK as a whole will not be impacted by these changes. According to a survey conducted by Deloitte in March, 63% of inbound tourists originate from the EU. There are additional attractions to visiting the UK since the Brexit vote, primarily the increased spending power of tourists from all countries after the pound sterling crashed following the announcement of the referendum result. This lure may disappear, however, if the UK decides to increase levels of air passenger duty (APD) upon European citizens, something that it is currently prohibited from doing under current EU rules governing freedom of movement across the bloc.
However, any hopes or fears surrounding fluctuations in another important tax is something Leocha believes is largely unfounded. “The whole question of duty-free, when we look at it in terms other than airport income, is not a giant money-maker one way or the other,” says Leocha. “It’s not a make-or-break situation. If we look at a country like Switzerland, which is always held up as the example of what will happen to the UK after Brexit, the difference to the actual people who are doing the buying and selling, I think, is really limited. The prices are going to shift a little bit, but people who use the duty-free stores are barely getting a bargain today.”
Nevertheless, if the experience for travellers at airports ends up becoming particularly dire, Leocha believes tourism will inevitably suffer: “I just think that if that happens, and if the UK doesn’t come up with some sort of compromise, travel and tourism, which is so important between Europe and the UK, will start to suffer.”
Zero-sum game
With so much dependent on the fine details to be reached between the UK and the EU in the final divorce agreement, predictions can often prove to be fraught undertakings, influenced by the politics of the day, and of the person looking into the crystal ball. Leocha’s answer to the question of what the best-case scenario for passengers and the travel industry will be vis-à-vis Brexit is unambiguous.
“If there is a UK line at customs and border protection [on the EU side] and some sort of EU line at customers and border protection [in the UK], that arrangement will allow the authorities to separate out different categories of passenger,” says Leocha. “And in terms of routes within Europe, the closer we can stay to what’s already there, I think the better off we’ll all be. I’m hoping for as little change as possible.”
Leocha predicts that the biggest changes are likely to come in the way larger airlines such as British Airways will operate in Europe in the future, not least in the evolution of their relationship with their continental subsidiaries. In fact, the biggest problem he foresees doesn’t have its origins in the affair at all: the lack of spare capacity at London’s orbital airports. However, in the wake of the government’s latest announcement in favour of expanding Heathrow, even that problem looks likely to be solved in the next few years. Added to that, in October, industry body IATA predicted that UK air traffic will probably begin to taper off within the next 20 years.
Ultimately, Leocha believes the travel industry on both sides of the Channel is best served if logic wins the day: “Whatever happens behind the scenes needs to be negotiated carefully, to make sure that we don’t ruin what is, right now, an amazingly lucrative trade between the EU and the UK in terms of travel and tourism.”
