Brexit has proved much more difficult to navigate than its proponents indicated in marketing it to the British public. For the aviation industry, the challenges that Brexit presents are especially complex, with issues ranging from operator certificates to ownership thresholds.
But perhaps the indirect threat for aviation – with implications for both the airline and consumer – is the forex effect.
A weak pound not only impacts hedging policy and unavoidable airline expenses such as fuel costs, but also may influence that most vital factor of all – passenger behaviour.
A WEAKENED POUND
Since the result of the Brexit referendum, sterling has for a long time – albeit with a few mini-rallies – weakened compared with other currencies, including the euro and US dollar.
However, the pound has strengthened against the dollar in recent times, standing at $1.42 on March 26, according to Bloomberg data. The pound's pre-Brexit high was around $1.49.
However, Barclays forex analysts recently argued that sterling's strengthening would pause in the short term.
Danske Bank senior analyst Mikael Olai Milhoj has been quoted by PoundSterlingLive.com as saying that the recent Brexit transition deal was not the "game changer" required for the pound to become significantly stronger.
AIRLINE IMPACT
So, what does this mean for airlines?
For UK-based airlines, or those carriers heavily reliant on UK revenue streams, the most crucial FX exchange will be sterling versus the US dollar, given that aircraft debt and fuel are all valued in the greenback.
A significant weakening of the sterling against the dollar – even with hedging – could seriously impact how airlines manage those costs, ultimately hitting the bottom line.
Yet one aviation equity analyst tells FlightGlobal that airlines seem to be past the worst of any US dollar exchange rate impact on their costs, thanks to the relative strengthening in 2018.
So from a cost perspective, the worst-case scenario may be be in the rear-view mirror. Effective hedging will also help mitigate any flash crashes in sterling if Brexit talks once again hit roadblocks and spook the markets.
However, passenger demand for UK-based carriers could be depressed by any shocks that send the pound spiralling again.
This is because when the pound is strong, consumer spending power strengthens abroad, making holidays a more attractive option. The inverse, of course, is also true.
While some may argue that airlines may be able to reverse-market routes to attract people to fly to the UK on holiday, the likelihood is that many will prefer Capri over Cardiff for a fortnight's holiday.
Source: Cirium Dashboard
