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Blue sky between airlines on Brexit

By Tom Mcenaney –

There was a very curious contrast between the positions adopted last week by IAG’s Willie Walsh and Ryanair’s Michael O’Leary on the question of Brexit. Both of them operate two of the largest airlines in the world. Each has very significant operations in the UK and in the rest of the EU and yet there was a remarkable amount of blue sky between their respective views on how airlines flying in and out of the UK would be affected after March 2019.

Mr O’Leary has for the past 12 months been warning of catastrophe post Brexit, even holding out the possibility of UK flights being grounded en masse. Although he is no longer preaching Armageddon, nor has he been lulled into any sense of security.

“We see no progress toward a solution that will address either the flight rights or the ownership rules,” Mr O’Leary told the Airlines for Europe conference. “The first industry over the cliff will be flights. And I think maybe that’s the way you bring about the crisis that gets everybody in Britain to say ‘well, maybe let’s look at this again’.”

Mr Walsh, whose IAG is the parent company of Aer Lingus, British Airways and Iberia, was sanguine: “I am completely relaxed. I am confident that we’ll be able to comply with whatever regulations are put in place.”

You’d be forgiven for thinking they were talking about different Brexits. The reality is that each was talking to their shareholder base. Mr Walsh has assured investors that IAG has trust structures in place that will insulate it from the effects of Brexit.

The first issue affecting airlines is ownership. If they want to be part of the EU club and subject to its existing arrangements they must have majority EU ownership. Spanish-based IAG believes it has trust structures that will protect it.

Ryanair, according to Stephen Furlong, an analyst with Davy stockbrokers, is not convinced that trust structures will work. Some 60 per cent of its shareholders hail from the EU. Ryanair’s issue is that one in three of those are from the UK and so its EU-ownership level will fall below the magic 50 per cent after April of next year.

There has been speculation that Ryanair might be forced to buy out its UK shareholder base but it would seem the airline has a different plan.

According to Mr Furlong, Ryanair is looking at a new ownership structure involving “limited voting rights for UK shareholders” that will allow it to continue to be classified as an airline that is majority-owned by EU investors. Ryanair is expected to present the new arrangements to shareholders in September.

The other major airline that is likely to be seriously affected is Easyjet. Its response has been to set up a new headquarters in Austria.

Mr O’Leary is right to assert that few industries will be as affected by Brexit as aviation. The UK accounts for one in four of the one billion flyers within the EU every year, making it the world’s third largest aviation market after the US and China. Separating from the EU means the UK will be forced to negotiate an estimated 65 different international aviation agreements. Mr Walsh has said that anybody who does not believe there will be a comprehensive open skies agreement for the UK is living in “cloud-cuckoo-land”. In theory it is difficult to fault his logic.

Spain and Italy in particular are likely to be loath to cut themselves off from millions of British holidaymakers. Moreover, British politicians will be well aware that whatever the finer point of post-Brexit trade agreements, telling voters that they cannot have their holiday in the sun is not a fast track to re-election. Assuming Britain does renegotiate its deals, and given its history with Brexit negotiations so far you can forgive Mr O’Leary his scepticism, the question is what will those deals look like.

Leaks from the negotiations with the US last week suggested that the Trump administration was taking a hard line and any UK deal will not be as favourable as was previously agreed with the EU. Similarly, documents leaked before Christmas suggest the EU is also no pushover when it comes to negotiating a new free-skies agreement with the UK.

One of the key issues is whether airlines operating from the UK will continue to be subject to the European Court of Justice (ECJ). Theresa May, the UK prime minister, has consistently ruled out an ECJ role in British affairs post Brexit.

Assuming Mr Walsh’s optimism is justified even when the UK does get agreements with the EU and the US across the line, Britain still has 63 agreements left to negotiate.

Mr O’Leary is right to be worried. Some of its big European competitors, including Air France and Lufthansa, are said to be using Brexit negotiations as a means of squeezing the Irish carrier.

Even assuming the UK does come to an aviation agreement with the EU it is likely to be restrictive for UK airlines or airlines such as Ryanair which because of their UK investor base may not be classified as majority-EU-owned. Take Swiss airlines for instance. It enjoys only seven of the nine so-called “freedoms of the air” which means that Swiss carriers must begin or end their flight in a Swiss airport.

It is no wonder that the Ryanair chief executive is trying his best to concentrate the minds of politicians across Europe on this issue. If it works then Ryanair’s move to restrict the voting rights of UK shareholders is a clever stratagem.

In the meantime Ryanair is taking the possibility of having to cancel flights very seriously. In the event no transition deal is signed by this September, Ryanair will add the following warning to each ticket it sells: “This flight is subject to the regulatory environment allowing the flight to take place.” Truer words were never spoken.

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