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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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Opinion polls are notoriously volatile and unreliable predictors. Nevertheless, a recent opinion poll* in the UK has indicated that voters favouring a British exit from the European Union now number more than those favouring the status quo. Whether or not the poll is totally accurate, it indicates that a so-called "Brexit" is a serious possibility.
UK Prime Minister David Cameron's Conservative government has promised UK citizens a referendum on this before the end of 2017. Meanwhile, he is attempting to renegotiate the UK's membership, so that he can then back a campaign to stay in the EU. He is now hopeful of securing a deal with the UK's European partners at EU summits in Feb-2016 or Mar-2016. This could pave the way for a referendum as soon as Jun-2016.
This Jan-2016 report considered the possible implications of a Brexit on the aviation industry in the UK and Europe, with a particular focus on airline traffic rights. Much will depend on how, and to what extent, a post-EU Britain chooses to replicate its existing access to the EU single market in aviation (and in other sectors). Suffice it to say - the situation is uncertain.
Flybe returned to profit in FY2016 – according to its latest definition of adjusted pre-tax profit, this was its first positive result since before its stock market flotation in 2010. Quibbles over profit definitions aside, it is apparent that Flybe's restructuring under CEO Saad Hammad since 2013 is continuing to make progress. Nevertheless, with an operating profit margin of just 1.4%, Flybe was one of the least profitable listed European airlines in 2015 (or nearest financial year).
Flybe is now into what Mr Hammad calls the 'Profitable Growth' phase of its turnaround. In FY2016 it returned to capacity and revenue growth after declines in the previous year. In FY2017 it is accelerating its capacity growth at a time when market conditions are producing very soft yields, but Flybe is determined to maintain cost discipline.
Of course, the achievement of profitability is only the first step in profitable growth. FY2016 will benefit from fuel cost tailwinds and this should help it to take the next step – even if it faces unit revenue headwinds.
Most airlines in Europe make losses in the winter. It was a sign of the strength of easyJet's business model and the success of CEO Dame Carolyn McCall's leadership that its 1H loss (Oct to Mar, coinciding with the winter) narrowed every year from FY2011 until it made a profit in 1H2015. Alas, its return to loss in 1H2016 puts it back among most airlines in this respect.
The airline's FY2016 outlook is slightly more positive; all its profits come in 2H, the summer, and modest earnings growth is expected. Moreover, its high margins set it apart from most airlines, as does its plan to pay 50% of net profit as dividends to shareholders.
The deterioration in easyJet's 1H result was due to falling unit revenue – a persistent problem. In spite of lower fuel prices, cost per seat did not fall fast enough in 1H to offset this. Revenue per seat was adversely affected by geopolitical events and currency movements, but it is becoming increasingly apparent that easyJet faces a challenge to grow its revenue per seat. Its load factor is already about as high as it can get, and easyJet is currently unable to drive pricing up.
IAG's financial results for 1Q2016 are the first indication from a leading European legacy airline group of how this year is working out financially. For IAG the seasonally weak first quarter went well, with operating profit increasing by more than six times and the net result recording a rare positive figure.
Unit revenue weakness, seen in 2015, continued into 1Q2016 and accelerated its fall after the Brussels terrorist attacks. Coming relatively soon after the Paris attacks, this event may have a slightly longer impact than previous incidents of this nature. IAG's unit cost fell more rapidly than unit revenue, thanks to lower fuel prices. With pricing expected to remain a little softer than previously anticipated, IAG is accelerating cost measures and expects underlying ex fuel unit cost to fall by 1% in FY2016.
IAG still expects more than EUR900 million of year-on-year operating profit improvement in 2016, with a further margin increase. The IAG group is already the most profitable of Europe's three leading legacy airline groups, and the gap looks set to widen this year.
bmi regional is launching four new routes from Munich, doubling the number of routes that it operates there and making the airport its biggest base this summer. This is part of an ongoing transformation of bmi regional, which will become Germany's number three commuter/regional airline by seats, in addition to holding the same position in the UK.
For a small airline, bmi regional is handling quite radical change. Half of its 22 routes this summer are new since early 2015. After bmi's capacity cut and trimming of the network in 2014, 2016 will be the airline's second successive year of double-digit growth, data from OAG suggest. Its network has changed greatly since its years as a Lufthansa-owned Star hub feeder, although it retains important codeshare relationships with Lufthansa.
In Apr-2015 bmi regional was acquired by Airline Investments Limited, which also owns the Scotland-based regional airline Loganair. Bmi's results for the financial year to Mar-2016, its first under this new owner, are not yet available, but the airline did manage to narrow its loss in the previous year. Analysis of bmi regional's financial progress will be the subject of a future CAPA report, while this one focuses on its route network.
Virgin Atlantic and Flybe, both back into profit after periods of losses, will launch a new codeshare from 2-April-2016. The agreement involves 19 short haul routes operated by Flybe, both domestic UK and international. These will connect into 15 Virgin routes from the UK to the US and Caribbean at all three UK airports outside Virgin's main Heathrow hub, namely Manchester, Glasgow and Gatwick.
The deal gives Virgin access to feed from 12 UK domestic routes and seven UK-Europe routes. This helps it to address its lack of short haul feed, albeit in a different way from the now defunct Little Red operation that only brought domestic traffic into Heathrow. Virgin's Delta relationship has changed its priorities in this regard. The codeshare also offers Flybe, which has gradually expanded its codeshare strategy in recent years, the potential for additional demand from passengers connecting to long haul leisure destinations.
Not long after Saad Hammad joined Flybe as CEO in 2013 he launched a restructuring and rebranding that he called the 'purple way'. Virgin Atlantic will be hoping that purple is a better colour than red for its short haul needs.