With Britain’s EU exit, open skies have become partly cloudy

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If the U.K. tips into a recession, British Airways is vulnerable and so is transatlantic partner American Airlines.
If the U.K. tips into a recession, British Airways is vulnerable and so is transatlantic partner American Airlines.

Great Britain’s pending exit from the EU creates new challenges in international aviation. But it’s far too soon to say what impact Brexit will ultimately have on U.S. air travel.

“This is all going to take a long time. The immediate impact is it just got a little cheaper to go to Europe a lot cheaper to go to the U.K.,” said Seth Kaplan, managing partner of the newsletter Airline Weekly.

Indeed, data on Monday showed that following Great Britain’s June 23 Brexit vote, which sent the pound sterling to a 31-year low, airfares had dropped as much as 6% between U.S. hubs and London, according to the website FareCompare.

That’s good news for U.S. travelers, of course, but Brexit has been bad news for stockholders. Shares at American, Delta and United were all down at least 5% Monday following even steeper declines on Friday. The airlines aren’t yet speculating on how Brexit will impact them over the long run. United, Delta and American played it safe in statements they issued.

“It is too early to say what the results of the vote mean for aviation in the U.K., one of the world’s leading air markets, in the long term,” Delta said. “It’s business as usual for the foreseeable future for Delta's flights between the U.S. and Britain. Delta remains committed to the U.K. market.”

Analysts expect the airlines will wait until their second-quarter earnings calls next month to offer more insight on Brexit. Still, conventional wisdom is that American could be the most affected among the three legacy U.S. carriers. American operates 25 flights per day between the U.S. and the UK, more than its competitors. And American’s extended route network is tied into a joint venture with British Airways, the U.K.’s largest carrier. 

“American Airlines relies on British Airways connections via London Heathrow to countries such as India, South Africa and Sweden that American Airlines does not serve directly from the United States,” wrote analyst West Coast Growth Picks in a column for the website Seeking Alpha.

“The vast majority of these flights are targeted at British traveling between the U.K. and these countries with some seats sold to American Airlines passengers looking to connect to these countries via London. If a U.K. recession caused British Airways to either reduce or eliminate service to some of these destinations, it would affect the network that American Airlines is able to offer its customers.”

Delta is also closely tied into the U.K. The Atlanta-based carrier has a joint venture with Virgin Atlantic, of which it owns 49%.

What impact Brexit has long-term on aviation will in significant part be determined by how the U.K. negotiates new aviation agreements with the U.S. and European Union. Under the current open skies agreement between the U.S. and EU, U.S. and British carriers can fly freely between the U.S. and any country in the Eurozone. Kaplan said that such rules could very well remain in place under a deal with Great Britain. But he noted that there are scenarios in which U.K. carriers would end up with more limited access to EU skies.

“There are already voices in Europe saying they should punish the U.K. to show that they can’t have the milk without buying the cow,” he said.

Under a worst-case scenario, Kaplan said, the U.K. could return to 2008, before the U.S. and Europe completed their open skies agreement, when only four carriers were allowed to fly between Heathrow in the U.S.

Complexities could also remain even if Great Britain successfully negotiates a deal in which it retains full open skies benefits within the U.S. and Eurozone. For example, Norwegian Air Group, which is fighting for a controversial permit to fly to the U.S. from an Ireland-based subsidiary, says it needs the Irish entity to more easily expand its route network beyond the U.S. and Europe to South America, Asia and Africa than it can from its Norway-based Norwegian Air Shuttle.

The reason is because while Norway is a signatory to the EU open skies agreement, it, unlike Ireland, is not a member of the EU.

Barry Humphreys, a U.K.-based aviation analyst, said he doesn’t see extended route networks being a significant issue for U.K. airlines and their partners due to the extensive bilateral agreements Great Britain already has in place with nations outside the EU.

But he said one impact Brexit could have is on the European open skies debate regarding the Gulf carriers Emirates, Qatar and Etihad. As in the U.S., those rapidly expanding carriers have drawn criticism from some European airlines for allegedly accepting government subsidies in violation of aviation agreements. However, while powerhouses Lufthansa and Air France are pushing the EU to get tough on the Gulf carriers, International Airline Group, which includes British Airways, has vocally supported open markets.

“If the U.K. exits that debate, the conversation is going to swing very strongly,” Humphreys said.

Increased restrictions on the Gulf carriers at their European hubs could impact their route networks into the U.S.

Drawbacks aside, Brexit isn’t without potential silver linings when it comes to U.S. aviation, according to a note prepared June 24 by Hunter Keay of Wolf Research.

Keay wrote that if Great Britain’s exit from the EU portends an increase in nationalistic policies, it could lead to Heathrow being closed off to rapidly growing Middle Eastern airlines — for example, Emirates, Etihad and Turkish. It might also raise more questions about Norwegian’s plan to use the Irish entity to operate cheap transatlantic flights.

“Thinking two steps down the road, we see scenarios that could very easily result in clear positives for U.S. airlines at [Heathrow],” Keay wrote. 
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Correction: Delta owns 49% of Virgin Atlantic. A previous version of this report said in error that Delta owns a stake in Virgin America.

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