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Leeham News and Analysis
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Brexit special: analyst reaction
Source unknown. Via Twitter.
June 27, 2016: Aerospace and airline analysts are reacting to Thursday’s vote in Britain to leave the European Union. Below is a synopsis of some of the analyst notes we receive.
Credit Suisse
We are forwarding the analysis our European Transports team put out this morning on Brexit and have a few observations as it relates to US Airlines.
- GBP Exposure: For the US network carriers (UAL, DAL, AAL), GBP exposure averages ~2-3% of total revenues with overall UK exposed revenues ranging 4-6%.
- Impact to High Yield Transatlantic Traffic Primary Concern: For US network carriers, we see the primary concerns post-Brexit on the demand implications on the Transatlantic. Last week IAG issued a profit warning which worries us on corporate demand weakness. Given scheduled seat growth in the Transatlantic continues to outpace demand (H2 seat growth US-EU scheduled at 8.6%), capacity cuts are needed to stabilize pricing particularly since UK GDP is likely to slow even further. We look to Q2 earnings calls next month for additional color from carriers.
- AAL Viewed Most at Risk Given Partnership with IAG, but Our Team Believes IAG is Least at Risk [among EU airlines] from Future UK-EU Air Service Negotiations: Our European analyst believes IAG’s airlines would see limited effect from the UK exiting the EU Open Skies agreement as long as renegotiated UK-EU bilaterals do not limit service levels. This suggests that AAL’s relative underperformance was overdone on Friday; however, we expect Brexit-related uncertainty to continue to weigh on network carriers, and reiterate our confidence in domestic carriers (Outperform on LUV & SAVE).
ECAA seems the most likely route for the UK
We make the following points with respect to the UK’s impending exit from EU OpenSkies:
- The EU Third Package of air transport liberalisation measures was introduced in 1996, creating EU Open Skies and following on from an increasingly liberal position on air services within the EU.
- The European Common Aviation Area (ECAA) was created in 2006 with a view to opening up markets between Europe and its neighbours. It includes Norway, Iceland and the Balkan states.
- Henrik Hololei, European Commission Directorate-General for Mobility and Transport, at an International Aviation Club address on 13 June 2016, implored the US to consider further air service liberalisation measures including cabotage (domestic ops) and the relaxation of foreign ownership caps. Additionally the EC is currently reviewing foreign ownership caps and EU-level opposition to UK carriers flying intra-EU routes would represent a significant shift in positioning.
- EU US Open Skies, agreed in 2007 and implemented from 2008, came with a promise of a phase two of further liberalisation measures which has not materialised yet. The original agreement was heavily influenced by the opening up of Heathrow to unlimited competition (subject to slot procurement), removing the cap of two US airlines operating to the airport. In our view, it is in the US’s interest for the EU to agree a new open skies agreement with the UK such as the UK joining the ECAA.
- The UK will have 2+ years to renegotiate pre-existing bilateral air service agreements with EU nations or join the ECAA. This may be done at an EU level in the spirit of the EU Open Skies agreement.
Given the aforementioned points, we consider it likely that the UK will join the ECAA or agree a different, but liberalised, air service agreement with the EU. However, we acknowledge a high level of uncertainty over the potential for the EU to take a more restrictive approach to air service levels with UK airlines, and contemplate scenarios as follows:
- Were easyJet prevented from operating intra-EU services, this would impact near to half of EZJ routes, accordingly posing the risk of a significant reduction in the size of its business. Absent a satisfactory UK-EU agreement, EZJ would be required to obtain an air operator certificate (AOC) in an EU country to preserve its existing intra-EU footprint – however this may be politically difficult given, in essence, such a move would be designed to over-ride EU-UK agreements.
- Were Ryanair prevented from operating UK-EU services, this would impact broadly one quarter of its routes.
- Beyond BA’s Open Skies airline, which operates a couple of aircraft between Paris and New York / Newark, IAG airlines would see limited effect from the UK exiting EU Open Skies as long as renegotiated UK-EU bilaterals do not limit service levels.
In summary, the starkest scenario of an end to intra-EU services for UK airlines suggests most risk to easyJet and is likely to weigh most on its multiple. Ryanair’s regulatory risk is also high given its reliance on UK-EU operations. However, IAG is least at risk from future UK-EU air service agreement negotiations.
CanaccordGenuity
The surprise vote by the UK to leave the European Union in the long-term should have minimal impact on the global Aerospace and Defense sector. Near term, there is risk around just how the UK will start to unwind it relationship with the European Union, and what will the impact be on financial markets, currencies, trade arrangements and the global economy. We do not expect the vote to push the US or other major economies into a recession, but we will be very focused on the impact on passenger travel, which has been one of the key pillars of strength for the commercial aerospace cycle.
For the commercial aerospace cycle, remember that the UK and Europe represent relatively smaller markets in terms of aircraft orders and deliveries, especially as the growth has been concentrated largely in emerging markets. For example, in 2000, Europe (including the UK) accounted for 20% of the commercial backlog and 36% of the annual deliveries, while during 2015 represented 22% of the backlog but only 18% of deliveries. Europe accounts for about 26% of total air traffic, with the UK accounting for less than 5%.
Cowen and Co.
We had numerous questions about the financial impact on the airlines with the UK decision to exit the EU. While nothing happens this week, American Airlines has the largest direct exposure to the UK with 6% of their trailing 12 month capacity as of June in the market (according to Diio Mi), while United is at 5% and Delta is ~3%. Air Canada also has exposure to the UK with ~9% of their capacity in the market. The exposures are amplified when taking alliances into account. It will take time for this to play out, but we suspect the UK will need to renegotiate bilateral agreements with the EU. We expect airlines to reduce capacity to the UK as UK outbound traffic is likely to decline by as much as 5%, according to IATA.
IATA
While not an aerospace analyst, IATA—the International Air Transport Assn.—published a six page report about its assessment of the impact of Brexit on the UK. The report may be accessed here.
Crédit Suisse: “In summary, the starkest scenario of an end to intra-EU services for UK airlines suggests most risk to easyJet and is likely to weigh most on its multiple. Ryanair’s regulatory risk is also high given its reliance on UK-EU operations.”
– EasyJet and Ryanair are good examples of the immediate impact this referendum will have on business: who in his right mind will want to invest in these two airlines, whose future in so seriously compromised?
Canaccord: “We do not expect the vote to push the US or other major economies into a recession, but we will be very focused on the impact on passenger travel, which has been one of the key pillars of strength for the commercial aerospace cycle.”
– Passenger travel around the world will certainly be affected by this vote. And it could impact the commercial aerospace sector, because the period of uncertainty will likely last a long time. Long enough to affect the present aerospace cycle, even if these cycles normally last for relatively long periods of time. It won’t have an immediate impact like it would if the price of oil suddenly went up beyond $200, but over the medium term we might see a decline in air travel. How severe this decline will be remains to be seen however.
Cowen: “It will take time for this to play out, but we suspect the UK will need to renegotiate bilateral agreements with the EU.”
– Yes, but this situation will also have worldwide repercussions, and likely for an extended period of time.
IATA: “The so-called ‘Brexit’ scenario has become reality. This decision has wide- ranging impacts throughout the UK and, to a lesser extent, more broadly through Europe and beyond. This note focusses on the implications for the UK air transport sector, considering both the economic and regulatory impacts in turn.”
– I think IATA will soon need to take a closer look at this from a more global perspective, as this situation will likely impact negatively the world economy, which was already showing signs of weakness.
Ryanair is based in Ireland. Air travel and airline agreements are likely to negotiated to maintain status quo. Remember tourists are a valuable source of income for most cities and Britain ( along with Ireland ) were outside the passport free travel zone anyway.
Interesting fact : Air France has a regular flight Heathrow- New York but no British Airways flights originate in France to a 3rd country
“Air travel and airline agreements are likely to negotiated to maintain status quo”
will they? what is Europe’s incentive to be so gracious?
and GB might not be in Shengen – and no airtravel is passport free, even in Shengne, but they are part of the free trade zone. You’ll see a lot of redistributors, anyone than exports to the EU (including international tourists) choose a different hub than London.
Britain can decide to be ‘ungracious’ too, but wont. Thats how these things work, they wont be too different to how Norway and Switzerland are treated now. Britain is too large to be kicked around like Greece
Little Britain will be treated very different to Norway and Switzerland to avoid other countries following the British example. So the Brexit has to hurt Britain even if it hurts the EU too.
The referendum about Scotland’s independence failed due to the point Scotland would have also left the EU. That is different now.
The conflict in Northern Irland was settled with help from the EU. Now they also want a referendum to leave Britain.
I thought it was the US that got NI settled down?
“I thought it was the US that got NI settled down?”
Actually, it was the UK and their decision to share power with Sinn Fein (because all that PIRA damage to The City was becoming bad for business).
You have to wonder if these are the same analysts that failed to assess the vote?
And maybe we should see where it goes before we start analyzing it. Sort of like analysis of a football game in the first 3 minutes. Ok, Team A (US of course) scored 7 points in the first 3 minutes, Team B scored no points. Based on that we can expect the score to be 140 to 0 at the end.
Keep calm, move on.
England voted to leave.
England lost 1:2 against Iceland (the land with vulcano hard to pronounce).
For the record, its Eyjafjallajökull
Can I buy a vowel?
I will also note the comment “surprise vote”
Hm, I believe it was well known the vote would occur for some time?
The result maybe have been a surprise (to analysts that do not know how to pole )
note to self: Do not use analysts for poles, they don’t know what they are doing.
The brits really shot themselves in the foot this time. See how eager Boris Johnson,one of the “leave” leaders is to respect the democratic wishes of his own followers…
I hope they’ll actually do what they said they wanted, But I suspect there will be some rabbit produced from somewhere. A few politicians change seats, the EU formally declares the UK will be allowed the Pound and Queen for eternity and we all shake hands. “‘t was but an advisory referendum”
I believe they had the pound already.
Agreed the final solution is going to be something no one forecast with a lot of hems and haws involved.
EU unwinding like USSR is obviously a huge negative for Airbus.
Supply chain issues with Brexit will be a tremendous challenge.
I don’t think so, business as usual.
The insanity is starting subside.
Lot of PR whig out
Not its not.
Airbus has opened up to the US suppliers for its planes as well as some wing boxes in China.
So they have got outside EU suppliers ( engines obviously) and will probably have more in the future
Yep, works fine, last long time.
No different.
But isn’t there a risk they might move wing development and production out of the UK?
Why?
Boris just wanted a better deal for Brittain.
Not really UK leave the EC and Scottland breaking away.
Fear, flagwaving and ill informed voters made another victim..
Yesterday on BBC, wealthy old folks on a country club explaining their Brexit vote, the problems with the foreighners, Brussels, taxes..
Looking at them, their club and their 50 years of peaceful European based wellfare you wonder..
Oh yes we do.
You have to remember its all about the ego and nothing to do with impacts.
If I punched a flight attendant on a UK airline, I would expect for that UK airline to ban me for life.
In bringing about Brexit based on a series of well-documented lies and outright racism, Boris Johnson, Michael Gove, Ian Duncan Smith and especially Nigel Farage have in effect punched every UK flight attendant in the face – and every pilot, every engineer, every despatcher, records clerk and indeed every CEO. We’ll all be poorer, our jobs less secure.
How about the airline industry have a little referendum of its own about banning the above mentioned for life. The idea might spread (to the banks perhaps, who are as badly hit as we are).
Calm down dear
I agree he has a right to be upset.
Let him vent, I like his idea.
Past time those who cause the crisis suffer consequences.
I can think of a lot of happy accidents that can take place on a flight.
Sorry about the 5 gallons (er 23 liters) of juice all over you.
Its absurd. Ask all the UK ( and Europe) shipbuilders about ‘their jobs’ that were lost, or Nokia and Ericsson workers about their jobs lost to China and Korea.
Some people have a over privileged view of the world, ( which we can see in US and Canada reaction to ME3 as well)
Both sides were selective with their statements and there was a signifcant lack of genuine, open analysis to back statements up and critique positions. The media really should have done better but I doubt the seriously entrenched on either side would have genuinely listened.
So far that’s always been true.
Good news is I have some good sources to go by that allows me to not worry about it. Sure hate to see my retirement account crater again, but what the hey, its only the 4th time.
There is a expression on my native language with means somethings like – “be mindful when you play games, this game could become a mourning” …
Some politics started to play a game… we will hold a referendum, don’t worry folks, everything under control… The problem is, the ordinary peoples paid the bill….
How about the alternative.Trust us, we won’t have a referendum.
There seems to be a lot of, referendum? What referendum? No no, that was not what we meant.
I think a solution is a revote but only a accepted by EU under the conditions that there is never another one.
South played that game with the US after they signed on, the bluff was called and they found that there was a heavy price to be paid indeed (on both sides)
It clear that is not going to ever happen in the US again.
I am not advocating war, but in the US there is a phrase, do your business or get off the pot.
The control of referenda is actually one of the key problems with the EU as organised (witness the Irish referendum that delivered the ‘wrong’ result and therefore requiring the Irish citizens to think again…). I’m sure of other political bodies too. If overly frequent would lead to stagnation in a body with so many different voices/interets. If overly restricted they are prone to create dislocations/tipping points. If eliminated….
@ grubbie
Too right, the people have spoken, I think we call it democracy don’t we? Given the perversity of the electorate if they were forced to the polls again I wouldn’t be surprised if the leave mandate increased. It was finely balanced regardless of what the pollsters wished
Last I saw 1% would change and result would be the same.
That is a bit dated now.
And that is the true bottom line.
People who don’t suffer consequences playing with the lives of those who do.
It was an advisory referendum – in deliberate contrast to the peremptory referendum on Scottish separation. There are serious legal objections to its being considered mandatory on parliament and an infinity of reasons why an UK parliamentary vote would not be subject to Scottish amendment.
The latest I heard (from a reputable source) was that a second (but mandatory) referendum will be called tied to a Scottish referendum voted on at the same time. Plus (and this stretches things) a formal request by the City of London to Scotland to incorporate the City as a Free Zone subject to all EU regulations!
That’s an interesting one, considering the whole Scottish independence move seems to be a tussle with London/Westminster (maybe the South East) rather than any other part of the UK.
http://money.cnn.com/2016/06/27/investing/uk-credit-downgrade-aaa-brexit/
I think the Euro parliament this morning had a good laugh when Nigel Farage proposed a special treatment for the UK.
Kind of let us keep to good things & get your hands off the rest. The rights but not the obligations, he’s a funny guy 🙂
Thing is the LNC members we discuss with at this forum are probably Stay voters (because well educated, internationally oriented). Can’t blame them, they’re victims maybe.
Hopefully Scott will forgive this, but screwed is the better term.
A bunch of Trump like clowns taking the ship and deliberately running it into an ice berg.
Wow, smug alert!
I know, right!
This is typical in today’s deteriorated state of political discourse. It happens because people are so bound by their particular views that any kind of challenge or evidence that others don’t think the same way is threatening. Their views are no longer open for debate, but instead have been canonized into a set of good, or proper “facts” that are considered beyond argument. Thus, when others disagree it must be due to lack of education, sophistication, or intelligence, or because those others have somehow been duped.
The smugness indeed comes across loud and clear.
Problem is a good part of the public doesn’t go beyond ” yeah a bit of independency aint bad” ” learn them bureaucrats a lesson” “everything will be fine. Kind of tv talent show or sports games, everyone has an opinion, votes and is emotionally involved and after you switch off every is back to normal.
The full implications where never on the radar because people got used to everything working out fine sooner or later.
Follow the news on this one.
@ Keesje
The full implications of this will be profound but there will be a mix of good and bad. I am sanguine regarding the future for Britain as all things have a way of working out but always with perverse consequence both good and bad.
I believe Britain will continue bumbling along much as it always has and a lot will barely change. The EU political machine however is in some trouble. I think there is groundswell of disaffection within most of Europe and in particular northern states which foot the bill. The immigration issue in the uk (who opened their doors 5 years earlier to widespread EU immigration) is now being felt in other countries but more recently.
I would be shocked and dismayed if the EU disintegrates further but could see it happening. However too many people in a lot of countries do not benefit sufficiently from open borders. You seem to think people should vote for what is ‘right for the country’. I do not think it is surprising if they vote in their narrow economic interest.
I just worry about the degree of uncertainty this all brings in the interim. It is a parochial issue that should be contained but I feel that it may act as a trigger to a substantial loss of confidence and potentially global economic downturn. This has been on the cards for a while anyway.
BTW my cleaner who hails from Serbia just informed me that she voted out (Britain is full apparently).
So, the leave voters were lazy and caught up in their emotions, but the remain voters were completely rational?
“The Brexit vote was at least partially fuelled by a resentment about elites, particularly the private and London metropolitan school elite who have reaped disproportionately the benefits of globalisation through their entry into key jobs at the higher end of society while their lifestyles have been subsidised by cheap global labour at the other end of the social spectrum.”
https://www.theguardian.com/lifeandstyle/2016/jun/28/the-privilege-of-the-elite-fuelled-the-anger-of-the-leave-voters
Sad thing; guess who will pay the price..
When I got into the world I was not expected to be an accountant, a financially analyst, a traffic engineer, a politician etc.
I was slated to go to work and make a living and by doing so not be a burden on my state and country, and by doing so have some moderate success for myself and family.
Now I have to be an expert computer tech, accountant, be able to sort through financial issues that the so called analysts blow, a nuclear engineer, a traffic engineer (they keep screwing it up) you name it.
So how in the +^%$ am I suppose to know what the right move is on anything?
I may be self educated but I think reasonably so and I am confused most of the time.
So while I become an expert in everything I still have to work to pay the mortgage and utility bills and try to keep my ship upright. Impossible.
Surely Easyjet would simply incorporate a parallel airline in (most likely, given its tax positions) Luxembourg and transfer much of itself there, so that EUsyjet is the larger part and UKyjet the smaller. Not as efficient as a single entity doesn’t seem too big an issue to me.
Ryanair would have the simpler task of setting up a UK subsidiary.
For the old airlines I think the ME3/4 remain the big issue.
Ownership might be the issue, they might need to spin it off and float it in Paris or Frankfurt.
Not necessary. Easyjet has a swiss subsidiary for its few flights there. Britain doesnt have restrictions like US does over ownership of its airlines.
Remember Norwegian Air Shuttle has its longhaul based in Ireland to resolve those sort of problems, while operating the other services based in non EU member Norway.
Norway is EES. England won´t qualify as they won´t accept the common labour market, Norway does.
I think many of you are missing the point behind the BREXIT vote, which is that the immigration issue was a symptom rather than the disease itself. The real problem for many (I voted remain) was the ever increasing ceding of Parliamentary power to Brussels – the Federalisation of Europe if you will – and the imposition of laws that our Parliament were powerless to decide upon. Coupled with the widespread belief that Britain has been paying an unduly large contribution to the EU budget it’s not hard to see why there has been the dissatisfaction that lead to the exit vote. Although at the moment there is a strong appearance of the UK having shot itself in the foot my view, for what it is worth, is that a pragmatic solution will be found. There’s too much at stake for all concerned on both sides.
Educating Johnny foreigner.
The Guardian newspaper is not bad and has the advantage of being free on the Internet, but it’s also lefty and extremely right on and London centric. So, for example young people in the UK have mixed feelings about leaving the EU and are not “furious”. Also there no specific consequences for homosexuals or people with darker skin shading, much to the disappointment of the writers.
I have travelled extensively and I am convinced that, while not perfect, the UK is one of the most tolerant countries on earth. So, don’t be expecting mass deportations.
Many people people voted to leave because of uncontrolled immigration. This is very little to do with race or nationality, it’s much more to do with the housing crisis and the difficulty of getting a doctors appointment.
The core problem is the EU’s unsound constitutional arrangementsFollowing brexit it will quickly become clear that this is not just a problem for the UK.
Jean Claude Junker’s(along with the German finance minister) statements and threats during the run up where extremely unhelpful and probably swung the vote. He appears to be delighted with the outcome.
Fully concur. i also have travelled many places and the one thing you don’t see in the UK is ingrained racism that is evident widely in other countries. There are very few countries that have had such an influx of immigrants in the past 10 years that I am aware of. There are substantial parts of the electorate that stand to lose out as a result and they voted quite understandably in their best interests. Further there is a deep seated suspicion in the UK that we are paying more than we should for our membership not helped by CAP policies of old. I have always had some reservations regarding Europe and I was a ‘remain’ voter!
I suggest that we focus solely on LNC’s raison d’être and cease Brexit discussion unless wholly and exclusively related to Aircraft related issues, Scott?
I don’t know about that. I think Scott has quite wisely just let people blow off a bit of steam
It’s always interesting to see how things are perceived abroad, even if it looks to me like a distorted, angry panic!
Talking about the market panicking, it looks to me that the southwest deferment is positive for Boeing. It helps manage the ng/max changeover and what I think everyone considers to be an order hump for the Max. Also has the benefit of sucking up aircraft from the secondhand market, assuming that the classics are parted out.
Thank the above. It seems to be in line with what I have wrinkled out.
Extremely difficult to do any time let alone at a distance and more remote from the situation.
The problem is EU, not UK or Brexit.
Some UK papers & opinion makers suggest UK is now in a position to negotiate a better deal & the EU better listen before it disintegrates.
Touching.
EU ministers are discussing how to handle the UK, a cold removal/ stripping or give them some time.
It’s tough because the smart/ influential /young part of the UK wants to stay in. E.g. the City/ parliament/ government / industry.
All the Brexit fairytales and bold slogans are in the trash bin.
http://www.independent.co.uk/news/uk/home-news/brexit-vote-leave-wipes-nhs-350m-claim-and-rest-of-its-website-after-eu-referendum-a7105546.html
Everyone is looking for the “undo” button, even the Brexitters.
Politicians are all [poops]. Check out J C Junkers famous quotes, widely available on the Internet.
Edited to conform with Reader Comment rules.
Sorry, I didn’t think it would be a problem in this instance!
Andy:
I think its a mix actually but the UK is an expression of the consequences of elites playing with others lives.
In a way its a wonder it was not more lopsided.
Airport expansion decision on hold…..
http://www.bbc.com/news/business-36671328
See, no need to panic, everything is just the same as it was.
….. old, moldy, rotten… so British….
Um, the Balkans………..
As you said… no need to panic…. it’s just another A380 on the glade path….
It’s OK Britain is finished anyway, no one will want to come to London anymore. We’ll have to turn terminal 5 into a giant shopping centr ….Oh!
https://www.washingtonpost.com/news/worldviews/wp/2016/06/25/after-residents-voted-for-brexit-this-british-county-realized-the-e-u-might-stop-sending-them-money/
Exemplary. This is not what the Brexit people said?!
Quite touching really, that you still believe in the commission’s magic money tree.
Scott:
England (more accurately Scotland) seems to have acquired a rather unusual looking appendage (er Peninsula) out to the North (more or less) along with what looks like finger type rolling hills on either side.
Said peninsula appears to have a finger………… nail up on its North end.
How does that mesh in with the posting policy?
And in more news
https://www.flightglobal.com/news/articles/analysis-automation-leap-on-777-hits-growing-pains-426702/