Behind Brexit, is the UK market already failing to deliver profitable returns for LCCs?

18 September, 2017

While we continue to have no idea how Brexit will impact the relationship between the United Kingdom (UK) and the European Union (EU) states or how this will impact the aviation industry, a data study released this summer by aviation economic experts RDC has highlighted that the UK’s value within the networks of the increasing low-cost carriers (LCCs) operating across the Continent is actually decreasing.

Using information in the public domain and data from the profitability module from its Apex next generation airline route analysis and market intelligence platform, RDC says the UK is falling in terms of profitability for LCCs. The fall in value of Sterling has clearly adversely impacted the revenues earned by non-UK based airlines on their UK routes and for UK based airlines. It notes that though UK revenues are not impacted, and non-Sterling revenues enhanced, UK airlines are adversely impacted by the higher US dollar costs for fuel and aircraft ownership.

The table below shows data from Apex showing average one way departing intra-EU fares for 2016 from a sample of 35 European countries, for both the gross fare and the net fare after APD and other government taxes. “While the UK market looks strong versus some other markets, once APD has been taken into account, average fare levels look less attractive, especially considering the Sterling devaluation impact for non-UK based airlines,” says Tim Coombs, managing director of RDC’s Aviation Economics consultancy brand.

CHART - Average One Way Departing Intra-EU Fares (2016)Source: RDC

The UK ranks 14th in terms of gross fares in this sample, but only 26th in terms of net fares. “It seems likely that for some regional airports the threat of losing routes would seem a strong possibility if airlines are struggling to make profits in the UK market,” adds Mr Coombs. And Brexit could be the tool that delivers that final blow.

The impacts of Brexit for Europe’s two largest LCCs is very different, as one is a UK permit holder and the other isn’t. But, both have a significant presence in the UK market offering over one million system seats, only slightly less than national carrier British Airways, part of IAG.

CHART - Largest Airlines in the UK (weekly seats)Source: CAPA - Centre for Aviation and OAG

While easyJet has historically held two air operator certificates (AOC) the UK’s departure from the EU means that neither of them will be domiciled in a member state (Switzerland and UK will both be non-members of the EU). Meanwhile, Ryanair through its Irish AOC will still be able to fly in and out of the UK from member states, albeit it would be unable to operate intra-UK services, but these account for just 2.9% of its total system seats.

easyJet has now added an European AOC in Austria and has therefore secured the flying rights of the 30% of the network that remains wholly within and between EU states after March 2019. Ryanair has been out-spoken about how Brexit could ultimately impact its summer 2019 schedule and has warned that some flights may have to be suspended due to its long-term network planning strategy. Its network will be less impacted by Brexit but could need a UK AOC to maintain its domestic flights.

British Airways says it will “have no problem from a flying perspective” and with multiple AOCs within the IAG framework it will have scope for whatever format a post-Brexit UK aviation policy presents itself. IAG’s chief executive officer, Willie Walsh, also recently noted that Ryanair’s own doomsday prediction has been exaggerated.

Speaking at the IATA AGM he said that strong words from Ryanair chief executive officer, Michael O’Leary on the likely repercussions of the UK’s decision to leave the EU have no substance. “I firmly believe that there will be no disruption on flights between UK and Europe due to Brexit. Michael [O’Leary] likes to take the extreme view and gains the publicity because of that. If he stops selling seats due to this then you can phone me up and say ‘what the hell has happened’,” he said.

Analysis by The Blue Swan Daily of easyJet and Ryanair flight schedules for summer 2017 show their strong dependency on the UK market. The data from OAG shows that around a third of easyJet’s flight departures are from the UK (33.1% share), meaning that two in every three of its flights touch the UK market. Meanwhile, almost one in five Ryanair departures are from the UK with a 18.7% share of its full schedule. This is its second largest country market behind Italy (19.1% share) and just ahead of Spain (18.7% share).