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Brexit follow-up 1: airlines' ASK exposure today, and the possible changes to market access

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.

See related reports:

Three market segments potentially threatened: domestic UK, UK-ECAA, intra-ECAA

Depending on the nationality of each airline, the short/medium haul market that could potentially be affected by regulatory change with respect to market access and traffic rights has three elements: the UK domestic market; the market between the UK and the single aviation market created by the European Union; and the market within the single market.

This single market is not only composed of EU member states but also extends to the European Common Aviation Area (ECAA), which includes Norway, Iceland, Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Kosovo.

In addition, the single aviation market also effectively includes Switzerland. Although not a member of the ECAA, Switzerland has a bilateral agreement with the EU on air transport, which provides mutual market access for airlines of both parties.

So, the relevant gross market for the purposes of this analysis is the UK and the ECAA plus Switzerland. The leading airlines by total ASKs in the three parts of this market in the 12-month period to the end of the summer 2016 schedule season are shown in the chart below (data source: OAG Schedules Analyser). This does not include capacity that operates to destinations outside the UK/ECAA/Switzerland.

LCCs and airlines owned by leisure groups feature strongly

Ryanair is the biggest, with 144 billion ASKs, followed by easyJet (82 billion), Lufthansa (44 billion), Norwegian (39 billion), British Airways (36 billion), Wizz Air (32 billion) and Vueling (32 billion).

The top 10 are completed by three others with more than 20 billion ASKs in this market: SAS, Air France and Thomson Airways.

Leading airlines by ASKs between UK and European Common Aviation Area*: 2016**

Non-UK airlines: domestic UK and UK-ECAA potentially affected

The impact of any regulatory change to market access rules will affect non-UK airlines differently from UK airlines. For non-UK airlines there will be no change to their access to intra-ECAA markets excluding the UK.

The two elements of the market where non-UK airlines could potentially be affected are the UK domestic market and the market between the UK and the rest of the single aviation market. The chart below shows the leading non-UK airlines by aggregated ASKs in the domestic UK market, and on routes between UK and the ECAA (including Switzerland).

Leading non-UK airlines by ASKs between UK and European Common Aviation Area*: 2016**

Non-UK airlines: by %age of ASKs, CityJet, Ryanair, Wizz Air, Air Malta have highest potential exposure

Although Ryanair has the highest absolute number of ASKs in the potentially affected market segments, it is not the most exposed airline as a percentage of its total network capacity.

As a proportion of total ASKs, among non-UK airlines the regional airline City Jet has the highest potential exposure to changes in market access rules, with 99% (even though, in absolute terms, it ranks near the bottom of the list).

For Ryanair the total potential exposure is 37% of its ASKs, while the figure is 33% for Wizz Air. Air Malta also has 33% of ASKs exposed, followed by Blue Air (21%), Norwegian (13%), Aegean (12%) and Aer Lingus (12%).

Leading non-UK airlines between UK and European Common Aviation Area*: ASKs as a percentage of their total capacity, 2016**

Non-UK airlines: it is likely that UK-ECAA rights will remain, but – not guaranteed

The degree of risk for non-UK airlines is not the same for the two market elements that could be exposed to changes in market access rules.

It seems highly likely that traffic rights for routes between the UK and the rest of the European single aviation market will be negotiated on a bilateral basis between the UK and the EU on an "Open Skies" basis. This would mean that the UK and EU would allow each other's airlines to operate between the two territories without restriction.

Such a bilateral would not necessarily automatically extend to all ECAA countries and Switzerland, but their inclusion (whether as part of the UK-EU bilateral, or through separate agreements) also seems highly likely.

Traffic between the UK and the 27 remaining EU member states dwarfs that between the UK and the additional members of the single aviation market and so, even if they were not included, it would not have a very significant impact on our analysis (even for SWISS, for whom UK-Switzerland is less than 4% of ASKs).

Although the strong likelihood is that existing UK-ECAA rights (including Switzerland) will be maintained for both UK and non-UK airlines, this part of their capacity is potentially exposed to the risk of restrictions on market access until a new agreement (or new agreements) can be concluded. The timing of this remains unknown.

Non-UK airlines: domestic UK rights more at risk, but very little capacity

Assuming that traffic rights between the UK and ECAA plus Switzerland are renegotiated to preserve the existing situation, the remaining risk for non-UK airlines is their access to the domestic UK market. However, this represents only a tiny proportion of total ASKs for three non-UK airlines: 1% for Aer Lingus, 0.6% for Ryanair and 0.1% for Germania.

Non-UK airlines: domestic UK ASKs as a percentage of their total capacity, 2016**

UK airlines: UK-ECAA and intra-ECAA are potentially affected

For UK airlines there will be no change to their access to the UK domestic market, but they could be affected by any change to traffic rights in the other two elements of the market.

As with non-UK airlines, UK carriers could potentially be affected by any changes to traffic rights on routes between the UK and the rest of the single aviation market. More particularly, UK airlines are exposed to changes in market access in intra-ECAA markets excluding the UK.

The chart below shows the leading UK airlines on routes between the UK and the ECAA and in intra-ECAA markets (ECAA including Switzerland in both cases), by aggregated ASKs.

Leading UK airlines: number of ASKs in UK-European Common Aviation Area and ECAA-ECAA*, 2016**

UK airlines: by %age of ASKs, Jet2.com, bmi regional, easyJet, Monarch have the highest potential exposure

In absolute ASK terms, easyJet is the most exposed to these two elements of the market. However, as a percentage of total network ASKs, the most exposed is Jet2.com – with 94% of its capacity between the UK and the ECAA.

See related reports:

Next come bmi regional, with 89% of its ASKs exposed to the two market segments, and easyJet with 87% (in both cases, this exposure is divided between both the UK-ECAA market and the intra-ECAA market). Monarch also has 87% of its ASKs potentially at risk (but none of this is intra-ECAA).

See related reports:

For Thomson Airways the total potential exposure is 57% of its ASKs, while the figure is 49% for both Thomas Cook Airlines and Flybe. For British Airways, the figure is 17%, while only 3% of Eastern Airways' and 1% of Aurigny Air Services' ASKs are at risk.

Leading UK airlines: ASKs in UK-European Common Aviation Area and ECAA-ECAA* as percentage of their total capacity: 2016**

UK airlines: UK-ECAA rights likely to remain but again – not guaranteed

As noted above, it is very likely that existing UK-ECAA rights (including Switzerland) will be maintained for both UK and non-UK airlines, although this remains at least somewhat uncertain until a new agreement is concluded.

If existing traffic rights between the UK and ECAA plus Switzerland are preserved, the remaining risk for UK airlines will be their access to the intra-ECAA market (excluding UK, but including Switzerland).

This mirrors the risk to non-UK airlines in their access to the UK domestic market (discussed above), but represents a much higher proportion of total ASKs for some UK carriers.

UK airlines: easyJet and bmi regional most exposed to ECAA-ECAA

The most exposed to the internal single European aviation market (ex UK) is easyJet, for whom this market segment represents 35% of ASKs. It is closely followed by bmi regional, which has 33% of ASKs on non-UK intra-ECAA/Switzerland routes.

See related report: bmi regional: Munich to be biggest base in summer 2016 as growth-fuelled transformation continues

A handful of other UK airlines have a very small proportion of their total ASKs in this market, including Eastern Airways (2%) and Thomson Airways (1%). Flybe currently has an exposure of only 0.4% of its ASKs, but plans to increase its presence in the intra-ECAA markets outside the UK.

Leading UK airlines: ASKs in ECAA-ECAA* as percentage of their total capacity, 2016**

Long haul: market access depends on whether UK ends up part of an EU-level agreement

The short haul markets examined in this report provide the main area of potential traffic rights risk to airlines based in the ECAA and Switzerland. As a percentage of their total ASKs, UK airlines easyJet and bmi regional have the biggest exposure to possible loss of market access, through their operations within the European single market outside the UK.

In long haul markets the UK will continue unchanged where its airlines still operate under its own bilateral agreements with other countries. Where EU-level agreements have taken over from individual EU member states' bilaterals, the UK will need to negotiate new agreements of its own with the relevant counterparty nations.

There is no obvious reason that it should not be able to agree terms that replicate the existing traffic rights environment for routes between the UK and those countries.

However, EU-level open skies-style agreements currently allow all EU airlines to operate from any EU member state to the counterparty nation. This aspect is less likely to be replicated in any future UK-specific bilaterals.

EU-US open skies agreement is the most important EU-level agreement

The most important EU-level open skies agreement is that in place between the US and the EU (the non-EU countries Norway and Iceland are also parties to this agreement).

If the UK could not negotiate to become a party to the EU-US open skies agreement following its departure from the EU it would probably be able to negotiate a UK-US open skies deal.

This would be preferable to the default position of reverting to the previous UK-US bilateral (known as Bermuda II), which was far from open – it contained a number of restrictions, most notably limiting UK-US flights to/from London Heathrow only to BA, Virgin Atlantic, United and American.

The granting of antitrust immunity by the US authorities for joint ventures between US airlines and foreign partners has always been conditional on the existence of an open skies agreement. Without such an agreement between the UK and the US there could potentially be question marks surrounding the trans-Atlantic JVs involving UK airlines – BA/Iberia/Finnair/American and Virgin Atlantic/Delta.

No significant UK airline operations to the US from other EU countries

Under a new UK-US bilateral, it is highly likely that airlines from the EU/Norway/Iceland would lose their rights to fly to the US from the UK and UK airlines would lose their rights to fly there from other EU countries.

In practice, the only UK airlines flying to the US from elsewhere in the EU are British Airways (through its Paris-based subsidiary Openskies) and Thomson Airways. These operations represent only 0.6% of BA's ASKs and 0.01% of Thomson's and so the threat is negligible.

Norwegian and La Compagnie are only European airlines to fly to US from UK

The only European airlines flying from the UK to the US are Norwegian and La Compagnie.

For Norwegian the UK-US accounts for 7% of its total ASKs, which is not negligible, but is nevertheless a low exposure. The business class-only French operator La Compagnie (formerly Dreamjet) operates London Luton-New York Newark, which currently represents around two thirds of its capacity (its only other route is Paris CDG-Newark).

This is a significant exposure for La Compagnie, but it is a very small player in the overall trans-Atlantic market.

See related report: All-business class North Atlantic airlines: Dreamjet seeks to avoid L'Avion's Paris-NYC nightmare

Summary: if UK-ECAA rights can be preserved, greatest exposure will be for UK airlines in intra-ECAA markets

Among non-UK airlines, those with the greatest exposure to market segments that could potentially have changes to their market access rules post-Brexit are: CityJet, Ryanair, Wizz Air and Air Malta.

However, the vast majority of this exposure is through their operations on routes between the UK and ECAA/Switzerland, where the likelihood is high that traffic rights will be preserved. Their remaining exposure, via UK domestic operations, is negligible.

Among UK airlines, Jet2.com, bmi regional, easyJet, Monarch have the greatest overall exposure to market segments that could possibly undergo changes in market access rules. Thomson Airways, Thomas Cook Airlines and Flybe also have a fairly high overall exposure to these segments.

If, as seems most likely, traffic rights on UK-ECAA/Switzerland routes are secured post-Brexit, the UK airlines with the greatest exposure to the possible market access changes will then be those with the highest proportion of their capacity in intra-ECAA/Switzerland markets – namely easyJet and bmi regional.

On routes to the US, La Compagnie and Norwegian could potentially lose existing rights to fly from the UK.

The purpose of this report is to place some numerical parameters around the capacity exposure of individual airlines from the UK and from other European nations to market segments that could potentially undergo changes to existing traffic rights rules once the UK finally leaves the European Union.

A second report will review recent comments by Europe's leading listed airlines on how they see the impact of Brexit.

Most of them combine an acknowledgement of the considerable uncertainties ahead with an almost blind faith that they will not be significantly affected in the long run.

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