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The United Kingdom of Great Britain and Northern Island spans an archipelago including Great Britain, the northeastern part of the island of Ireland, and many small islands. Aviation is a major UK industry, carrying over 180 million passengers a year and over 2.1 million tonnes of freight. England’s domestic airlines include British Airways (the nation’s flag carrier), Virgin Atlantic, BMI Regional, Flybe, EasyJet and Ryanair. The British capital, London is a global transport hub. In recent years, the massive growth of LCCs has increased the number of routes and reduced the fares between the UK and continental Europe. London’s main airports for international flights are Heathrow and Gatwick. Luton and Stansted airports deal largely with charter and budget European flights, and London City Airport specialises in business flights.
The Civil Aviation Authority is the UK's independent specialist aviation regulator. Its activities include economic regulation, airspace policy, safety regulation and consumer protection. Unlike many countries, there is no direct Government funding of the CAA - its costs are met entirely from charges levied on those whom it regulates. Under the EU’s Single European Sky initiative the design, management and regulation of airspace will be coordinated throughout the European Union with the aim of using air traffic management that is more closely based on desired flight patterns leading to greater safety, efficiency and capacity.
Airports in United Kingdom
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Part 1 of CAPA's Brexit follow-up report assessed the ASK exposure of UK and non-UK airlines to market segments where existing traffic rights could potentially change once the UK finally leaves the European Union. This second part reviews recent comments by leading European-listed airlines on how they see the impact of Brexit, both in the short term and in the longer term. Most of them acknowledge that there are considerable uncertainties, while simultaneously insisting that they will not be significantly affected in the long run.
There have been two initial impacts on airlines. First, Brexit has added to economic uncertainty, thereby muting demand and lowering yields. The magnitude and duration of this impact is unpredictable. Secondly, the consequent weakening of the GBP has made outbound international travel from the UK more expensive and less appealing, and lowered the value of GBP revenue earned by airlines.
The longer term impact will depend on whatever new traffic rights regime is negotiated between the UK and the EU. As a number of the airlines have acknowledged, this remains unknown and is, indeed, unknowable until the UK formally triggers its exit from the EU and then completes its two-year exit negotiations.
CAPA's previous analytical coverage of the UK referendum vote to leave the European Union flagged several questions surrounding UK airlines' future access to the European single aviation market. Traffic rights post-Brexit will depend heavily on the wider relationship between the UK and the EU and its markets. In turn, this may depend on how far the UK is prepared to go in embracing the EU's four key freedoms: the movement of capital, goods, services and people.
The UK has not yet triggered its formal two-year exit negotiation period and all aspects of its future relationship with the EU remain unknown. However, politicians in the UK are very reluctant to accept the continued freedom of movement of people, so existing airline market access is likely to be compromised in some way.
Rather than speculate on how negotiations might proceed, this report identifies the main market segments that could be affected by changes to the traffic rights regime, and evaluates the ASK exposure of airlines from the UK and from countries in Europe's single aviation market to these segments. A further report will review recent comments by Europe's leading listed airlines on how they see the impact of Brexit.
The strongly seasonal nature of Jet2.com's schedule and the financial performance of the airline and its parent Dart Group were examined in a Jul-2016 analysis report by CAPA. That report also noted that all of the increase in passenger numbers since the year to Mar-2013 was attributable to traffic booked via Dart Group's package holidays business – Jet2holidays.com.
This report looks in some detail at Jet2.com's network and how it has changed in the three years since summer 2013.
Over the past three years Jet2.com has increased its peak summer weekly seat capacity by one third. By airport, the biggest share of this incremental capacity has been at Manchester. By destination, the lion's share of its growth has been to Spain, where there is now a capacity glut. Its markets have become increasingly competitive – not only due to other LCCs, but also because of the growth of airlines owned by integrated leisure groups such as TUI and Thomas Cook.
IAG increased its 2Q2016 operating profit modestly, but only because Aer Lingus boosted this year's numbers (it was not in the group in 2Q2015). The quarter was affected by externalities: negative currency impacts and softer demand conditions resulting from terrorism, the Brexit vote, macroeconomic weakness in Latin America and air traffic control strikes in Europe. The resultant deteriorating unit revenue trend was offset by lower unit costs, mainly due to lower fuel prices.
Three of IAG's four operating airlines improved their margin in 1H2016 but Vueling's declined, since the external disruption affected it the most. Vueling's operating margin has been on a downward trend since its acquisition by IAG in 2013. Its capacity growth plans for FY2016 have now been trimmed, also scaling back the group's growth for the year.
IAG now expects 2016 operating profit growth of a low single-digit percentage, much less than the 40% increase previously anticipated but still an increase. This outlook is more positive than that given recently by Lufthansa, which expects a fall in profit this year. Moreover, IAG remains a higher margin group than either of Lufthansa or Air France-KLM, and should be better placed if there is to be a full-scale downturn.
Jet2.com is more summer-biased than almost any European airline, in spite of a capacity cut last summer. This reflects its strong leisure focus and its interdependence with the tour operator Jet2holidays. In the year to Mar-2016 Jet2holidays supplied 40% of the UK LCC's passengers, up from 17% in FY2013, since when it has been responsible for all of the airline's traffic growth.
Dart Group owns and runs both Jet2.com and Jet2holidays as the single business segment Leisure Travel (95% of group operating profit). The underlying operating profit of the Leisure Travel segment more than doubled for the year to Mar-2016, reaching the highest margin since FY2009, thanks to yield growth and increased sales of higher-end package holidays.
Strong advance sales insulate Jet2.com and Jet2holidays from the impact of Brexit in the short term. Nevertheless, their strong dependence on summer leisure demand exposes them to any volatility that may result from growing geopolitical and macroeconomic risks. Moreover, an order for 30 new Boeing 737-800s marks a departure from Jet2.com's strategy of buying and operating old aircraft that are close to being fully depreciated. This may increase the pressure on the airline to deploy its assets on a more year-round basis.
Following easyJet's fall back into loss in 1H2016 (six months to Mar-2016), it still expected that the summer months would more than offset this, allowing another year of profit growth. A profit warning after the UK's Brexit vote dashed this hope in late Jun-2016. EasyJet's 3Q2016 (April to June) trading statement casts a bigger shadow over its outlook, as weak unit revenue is not being offset by unit cost reduction. According to CAPA calculations, easyJet's 3Q2016 pre-tax profit fell by 59% year on year.
European LCCs Norwegian and Wizz Air have reported improved profits for the same quarter and are on track to achieve stronger full year results, but easyJet is not alone among European airlines in lowering earnings expectations in recent weeks. IAG and Lufthansa have also issued profit warnings. Growing macroeconomic and geopolitical uncertainties are weighing on unit revenue. For some, there is no longer a sufficient release coming from lower fuel prices, which also contribute to unit revenue weakness by encouraging additional capacity.
The majority of European airlines have yet to report April-June results, most notably Ryanair, Air France-KLM and IAG. Nevertheless, the reporting season seems likely to herald a more cautious phase of the airline cycle.