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RISK IN CONTEXT

Up in the Air: The Impact of Brexit on UK Aviation and Aerospace

Posted by Phil Elson on 26 September 2016

Following the majority vote in favour of the UK leaving the European Union (EU) on 23rd June this year, the aviation industry is now considering what the impact will be.

Initial estimates from the International Air Transport Association (IATA) immediately after the vote suggested that the annual number of UK air passengers would suffer a slight decline. Driven by both an anticipated potential downturn in economic activity and the fall in the sterling exchange rate a decline would make air travel more expensive for Britons. However, more recent general economic indicators over the summer have been ambiguous and opinion remains divided on the future strength of the UK economy. Ultimately, any impact of Brexit on the aviation industry will largely depend on the negotiations that will take place between the UK and the EU.

Post-Brexit Risk Drivers

Access to the European Common Aviation Area (ECAA)

Currently, with the UK as a member of the EU, its airlines may fly any route to and from any country in the European Common Aviation Area (ECAA). This includes domestic routes within a particular ECAA country, routes between two ECAA countries and routes from any ECAA country to outside the area. Of course, this right also applies to other European airlines operating in the UK. Following the UK’s decision to leave the EU, this highly desirable unrestricted access to the ECAA has been placed into question. Similarly, non-UK EU airlines that operate to and from the UK will need to consider whether those rights will be retained post-Brexit.

Other Bilateral Agreements Independent of the ECAA

The impact of a departure by the UK will also depend on traffic rights to be negotiated with non-ECAA countries (such as the US, for example, for which the EU-US Open Skies Agreement currently applies in the UK). There are also additional EU air service agreements with multiple other countries, which, when the UK leaves the EU, the UK will need to independently negotiate replacement bi-lateral deals. Any changes in the practical application of these agreements are likely to impact UK competitiveness in the long term.

Access to the European Economic Area (EEA)

The question of whether the UK will remain part of the EEA is one of particular importance for its export-led aerospace and defence industries. If the UK were to leave, this would have various ramifications. For example, it may impact the competitiveness of UK companies to bid on European contracts and their ability to collaborate with other EU companies. Conversely, sterling devaluation could result in greater competition and increased sales activity, given that the majority of the UK’s aerospace exports are sold to countries outside the EU. However, if the UK remains in the EEA, the impact on UK aerospace industry is likely to be limited.

Potential Economic Protectionism and the Free Movement of Talent

Any possibility of future new EU tariffs and trade barriers could make UK exports to the EU less attractive. In addition, there are concerns that restrictions to the free movement of all EU citizens could adversely affect the UK’s ability to attract aviation-related talent from EU countries. Conversely, the removal of this general right would not necessarily preclude the UK Government from instigating its own initiatives to attract talent from anywhere in the world. Nonetheless, at the moment, the uncertainty surrounding these two issues is of real concern for UK-headquartered and multinational companies with UK operations, who may consider relocating jobs away from the UK to Continental Europe.

Risk Management and Insurance Considerations

The full ramifications of the UK’s vote to leave the EU will take many years to evolve. During this time, airlines, aerospace manufacturers, and airport-related entities should work closely with their insurance and risk advisers to consider the potential of any resultant change in the risk and insurance environment. This would include:

1. Understanding your changing risk profile and assessing what new risks may emerge as the UK’s exit from the EU is negotiated.

2. Reassessing your supply chains and sourcing agreements, part of which should include considering the labour situation throughout the supply chain.

3. Understanding the wider commercial impact of Brexit within the aviation industry and how this will affect demand for your goods and services.

It is important to remember that any regulations in force prior to the referendum continue to apply, and this is likely to remain the case until alternative arrangements are finally agreed. Marsh will continue to work with insurers and our aviation clients to further understand what Brexit will mean, and will issue further guidance as more information and clarity becomes available.

Related to:  Aviation & Aerospace

Phil Elson