The UK's vote to leave the European Union continues to generate more questions than answers, even as the initial impact begins to be reflected in airline performance and strategy.
The closest thing to an industry consensus view on post-Brexit Britain is that while there will be uncertainties and challenges over the next few years, the long-term impact should be manageable.
But despite myriad uncertainties, some things are clear: the UK is unlikely to see extra investment or route growth from airlines until the challenges raised by the vote – political, economic and regulatory – are resolved. That could take a long time.
"A pall of uncertainty will hang over the UK airline business for a number of years," says Peter Morris, chief economist at Flight Ascend Consultancy. "That will mean higher prices for consumers, risk aversion by both UK and European operators regarding investment and services, and a continuing uncertainty about the reference regulatory framework both within Europe and between UK/Europe and other countries."
In the shorter term, the initial, significant impact on UK airline share prices had reversed, to an extent, by early August. IAG, for example, had recovered some of the near-30% drop in its price immediately after the vote. But recovering from the initial shock does not necessarily indicate an easier path ahead.
And beyond the Brexit vote, that path is further muddied by other negative factors and events from the past few months, even as most carriers remain in the black.
The airline industry was already facing overcapacity, further weakening the yield environment. Combined with the terror attacks in continental Europe and North Africa, the attempted coup in Turkey and air traffic control strikes in France, it is difficult to establish with any certainty where the effects of Brexit begin and end for carriers.
This makes it even less surprising that there are significant variations between airlines' views on the impact of the Brexit vote.
At one end of the Brexit-impact spectrum sit UK-based carriers, which are naturally most vulnerable to negative consequences from the vote.
Regarding UK-based regional carrier Flybe, HSBC says in a July equity research note: "It is hard to imagine a business more exposed to the current portfolio of adverse developments."
Flybe's performance is heavily reliant on UK consumer and business sentiment, says HSBC. At a time when both have been shaken by the Brexit vote, the airline is due to receive 15 Bombardier Q400s as part of capacity expansion plans.
Flybe acknowledges that Brexit will have a "materially adverse" impact in the short term. "Travel demand may weaken further if consumer and business confidence suffers," it says in its recent earnings filing, but it remains unconcerned by the long-term impacts.
UK-based EasyJet in its third-quarter earnings cited falling consumer confidence as a result of Brexit. But the carrier's biggest concern appears to be ensuring that its route network can be maintained should post-Brexit UK fail to secure a place in the EU's liberalised air market.
The low-cost carrier has a contingency plan to obtain an EU air operator's certificate in such a scenario, but it denies media reports that it is planning to move its headquarters out of the UK.
In line with many other carriers, EasyJet highlights wavering consumer confidence and currency fluctuations as being immediate concerns in the Brexit vote aftermath. However, ratings agency S&P showed confidence in EasyJet's prospects in late July, suggesting that the airline has the financial clout to get through difficult times: "We believe EasyJet presents a healthy balance sheet with ample cushion on its financial metrics to underperform in periods of stress. However, the airline has less headroom than we previously expected."
British Airways and Iberia parent IAG, meanwhile, had immediately after the vote scaled back its profit hopes for this year, partly as a result of the referendum result, although it does not expect the decision to have a long-term material impact on its business. In July, in disclosing increased first-half operating profits, it cited several external factors for the softer-than-expected trading environment, including Brexit.
"The group experienced weak trading conditions in June leading up to and following the vote, with an emphasis in our premium cabins. The weak trading conditions together with the foreign-exchange impacts have impacted the group's profitability for quarter two," the airline says.
IAG chief executive Willie Walsh says the group has adopted a cautious approach to Brexit. "We think that UK corporate point-of-sale will recover; the question for us is: when? But we've not factored in a recovery in the second half of this year," he says.
Neither does he see any regulatory issues for the group from post-Brexit arrangements, noting that its structure has already been tested in creating the European group in line with existing bilateral air service agreements.
"Clearly, the environment is changing, but based on conversations and discussions we've had with relevant authorities, we are not concerned," says Walsh. "We believe any of the issues that may present themselves are issues we can deal with and we have experience dealing with, because we had to when we created IAG."
In the leisure sector, UK-based package holiday company Thomas Cook Group was relatively quiet on Brexit in its earnings for the quarter ending 30 June, reserving its biggest concerns for the impact of recent events in Brussels and Turkey.
Thomas Cook's chief executive, Peter Fankhauser, says that while the vote has not had an impact on bookings, "it has added to a general sense of uncertainty – for our business and our customers alike".
Aviation analyst Chris Tarry says the impact on leisure travel demand could take some time to filter through, however: "The UK outbound market is likely to weaken into 2017 and by more than had maybe been anticipated," he says.
This lag in impact highlights an immediate and significant consequence of the Brexit vote: the weakening of the UK's currency against the euro and US dollar. The effect this has had on demand – particularly for leisure carriers – may be delayed because most summer 2016 holiday bookings were likely to have been made before the vote. The fallout is only likely to become clearer as UK consumers adapt to a world where holidays abroad are significantly more expensive.
Another UK-based leisure carrier, Jet2, still sounds confident, despite currency concerns. Philip Meeson, chairman of parent company Dart Group, says he was "disappointed" with the result of the referendum, but is confident that foreign holiday demand "from our rainy islands" will remain buoyant.
Meanwhile, at the other end of the Brexit-impact spectrum sit non-UK carriers that fly within or to the country.
While all airlines, regardless of base country, accept that economic downturn in the UK as a result of the Brexit vote is bad news, non-UK carriers face uncertainties far less fundamental to their operations than British carriers. They are most concerned by the viability of current routes and the potential impact on growth plans from the economic downturn and regulatory uncertainties.
On the latter point, pan-European low-cost carrier Ryanair, for example, faces the hardly earth-shattering prospect of closing three domestic UK routes if there is a failure to satisfactorily establish the country's post-Brexit position in the EU's liberalised air market.
But carriers are rethinking UK capacity as well, in most cases choosing to focus expansion elsewhere while Brexit uncertainty persists. US carriers Delta and United both referenced Brexit while announcing cutbacks on UK routes in the coming winter, while Ryanair has said it will reduce frequencies from its biggest airport, London Stansted, and focus expansion efforts elsewhere in the EU.
These developments and others reflect the fact that no airline type will be immune from the impacts. "It's not only leisure demand which could be affected but adverse business sentiment post-Brexit could have an ongoing depressing impact on premium demand, a particular concern for legacy carriers," says aviation analyst John Strickland.
Inevitably, the weaker UK currency is also affecting strategy at some non-UK carriers. Central European budget airline Wizz Air, for example, cited weakness in euro-based fares on UK routes as it revealed plans to shift expansion away from the country in the second half of the year.
On a more positive note, a caveat with currency concerns is that a falling pound makes the UK more attractive to incoming passengers, potentially creating an upside for airlines.
Overall, for both UK-based airlines and overseas carriers with UK interests, uncertainties will remain a frustrating theme for some time to come. "At the moment it is not even possible to calculate the economic damage from such a decision in detail, or how it affects travel demand, other than the UK will be the worst-hit," says Morris.
Source: Cirium Dashboard