Troubles for European Aviation to Mount in No-Deal Brexit

However, this is not a base-case scenario that we incorporate in our ratings and we still expect the parties to make basic arrangements to maintain connectivity, followed by a comprehensive long-term agreement. Slower demand recovery than assumed in our base (rating) case due to potential national or extensive regional lockdowns remains the key rating risk for airlines and airports.

The UK Transport Secretary confirmed last week that should UK-EU negotiations to replace the existing Comprehensive Air Transport Agreement (CATA; expiring on 31 December 2020) fail, he expects the EU to bring forward contingency measures that the UK would reciprocate. The existing CATA allows UK airlines to access 27 EU states and 17 other countries.

The UK has already made bilateral agreements with some of these countries, including Canada, the US, Israel, Norway and Switzerland. In addition, the UK has traffic rights under bilateral agreements with more than 100 other countries, including Brazil, China and India, to which the EU is not party.

A failure to reach a new agreement or implement contingency measures may result in grounding of UK-EU flights and exacerbate troubles in the air transportation and infrastructure sectors. These sectors are already suffering from significantly decreased traffic due to the pandemic. Airlines with high exposure to or from the UK, such as British Airways (BA) and EasyJet, are at higher risk from uncertainties over connectivity arrangements. In 2019, around 50% of BA's passengers travelled to and from the European Economic Area.

EU-based carriers, especially those low-cost carriers (LCCs) whose operations are largely reliant on intra-European traffic, would also be affected, albeit to a lesser extent. LCCs serving traditionally popular routes, such as between the UK and Spain, Italy, Germany or Ireland, would be most affected. In 2019, 48% of intra-Europe passengers travelled to or from the UK, the biggest intra-European market. Ryanair and Wizz Air have multiple country bases and are less concentrated on routes to and from the UK than EasyJet, partially mitigating potential pressures.

UK airports' revenues could temporarily come under further pressure in the event of air traffic coming to a standstill, especially if such a scenario were to last into the summer of 2021. EU airports should fare better due to their lower reliance on UK-EU traffic. However, London is among the top 10 destinations for the majority of Fitch-rated European airports.

Access to adequate liquidity would be key to withstanding short-term operational disruption. Some airports have started preparing for potential disruption. London Heathrow has recently issued three multi-currency bond tranches amounting to GBP1.4 billion, citing its aim to reinforce its liquidity position.

Although the grounding of UK-EU flights would have a significant impact on some issuers' operations, this is not our base case. We expect the counterparties in Brexit negotiations to secure continuation of basic connectivity followed by a long-term agreement. Our view is supported by the Political Declaration agreed by the EU and UK in October 2019, which acknowledges the priority of ensuring passenger and cargo air connectivity through a new CATA. However, it could take time to agree a new CATA.

In our base-case scenario that assumes at least basic international service between two countries, airports (such as Gatwick, Stansted and Manchester) that rely on origin and destination flights are better-positioned to maintain their air traffic than those relying on connection flights (such as Heathrow). This is because some connectivity with third countries could be lost under basic arrangements.