Moody's: Pound drop from Brexit will shake UK airlines; Airports can withstand short term impact

London, 03 February 2017 — People’s revised travel choices and operating dollar costs could see UK airlines’ revenues take a hit, with airports’ passenger growth likely to halve over the next two years due to the resulting macroeconomic landscape following the Brexit vote, says Moody’s Investors Service in a report published today.

Moody’s expects that demand for air travel will be driven by weaker economic sentiment as a result of uncertainty over the shape of the UK’s future trading arrangements with the EU, as well as with other major economies with which the UK has trade arrangements in place by virtue of its current membership of the EU.

Moody’s report, titled “Impact of Brexit vote on UK airports and airlines: Airports to Withstand Short Term Impacts but Airlines Weakened by Fall in Sterling”, is available on www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release.

Overall, in the short term, passenger numbers will continue to grow, albeit at a slower rate, enabling UK airports to withstand the immediate impact of the Brexit vote. This benefit will however not be felt evenly across the UK. Manchester, Luton and Birmingham airports which are dominated by outbound traffic are more exposed to weaker domestic economic prospects and sterling’s depreciation, while others like Heathrow, and to a certain extent Stansted airport, are better insulated from UK economic conditions because of their higher proportion of inbound traffic. The last two also serve London, a major tourist destination so a weaker pound benefits tourists.

UK airlines will be weakened by the sterling’s depreciation against the dollar, as a significant proportion of their costs are denominated in US dollars while sterling revenue is a high percentage of the total.

UK airlines will continue to suffer in 2017 on the back of a slowdown in outbound leisure travel, particularly to the US, as UK residents’ put travel plans on hold as the pound’s depreciation makes the cost of holidaying abroad more expensive. Also, weaker economic prospects and concerns over terrorism threats in Europe will continue to put off many US tourists from flying to the UK to benefit from the weaker pound. Long-haul carriers, such as British Airways, Plc (Baa3 stable) and Virgin Atlantic (unrated), which traditionally carry British-based leisure passengers to the US will be particularly impacted.

Post-Brexit, the UK’s continued membership of the European Common Aviation Area (ECAA) is possible but cannot be taken for granted. “An exit from this single aviation market would severely disrupt UK airports and airlines, with far-reaching ramifications, including for UK-US aviation agreements. Transitional arrangements will likely be needed to avoid a sudden loss of air travel rights,” says Xavier Lopez del Rincon a Moody’s Vice President—Senior Credit Officer and the report’s author.

Future trade and immigration arrangements between the UK, the EU and the rest of the world could also give rise to more generic risks to airports and airlines. For example, an impairment of the UK’s economic growth potential would dampen outbound demand for air travel. More restrictive immigration policies could affect demand at airports, and lead to inflationary impacts on the aviation industry. London airports are also exposed to scenarios that have a substantive negative impact on the UK’s financial services industry.