James Stamp highlights that while no-one knows the outcome of these negotiations, passengers will undoubtedly be interested in three key areas: choice, convenience, and cost.
James Stamp, UK head of transport at KPMG, analyses the impact that the EU referendum may pose airline passengers. He highlights that while no-one knows the outcome of these negotiations, passengers will undoubtedly be interested in three key areas: choice, convenience, and cost. Stamp said:
“Liberalisation of the European aviation market in the early 1990’s revolutionised air travel in Europe. Since then, journeys within the EU have soared; the number of scheduled passengers carried between the UK and EU increased from 69 million passengers in 1996 to over 130 million in 2015. More strikingly still, the passengers carried by UK based airlines to Europe increased eight-fold between 1993 and 2014 - from 9.9 to 78.0 million. Further analysis by the transport team at KPMG indicates that the top eight UK based airlines generated over £10.5 billion of revenues from travel between the UK and EU . Agreements between the EU and major markets like the US have further driven choice outside EU borders.
“In June 2016, British voters will have a chance to decide whether the UK remains part of the EU. The extent of EU regulation of the airline sector means that an exit will require renegotiation of agreements in areas as diverse as ground handling, carbon-trading, bilateral access agreements (which allow airlines to fly between specific countries), and visa arrangements. And while no-one knows the outcome of these negotiations, passengers will undoubtedly be interested in three key areas: choice, convenience, and cost.”
Choice: Does Brexit mean a return to pre-liberalisation air travel?
“The truth is that no one knows for sure exactly what the impact will be. Liberalisation led to the EU open skies policies, with separate bilateral agreements between pairs of EU states replaced with over-arching agreements, allowing all EU carriers access to all EU destinations. The choice this has led to is clear from a quick look at any travel comparison site - on the day this article was written there were seven different airlines offering flights between London and Madrid.
“Post Brexit, governments, airlines and industry bodies would need to establish new access agreements. While we believe that EU states will – in general - want to maintain the ability for their airlines (and passengers) to access the UK market, there will clearly be room for politics to influence negotiations. In the meantime, European carriers may seek to exploit uncertainty by aggressively challenging UK head-quartered airlines bases.”
Convenience: How will a Brexit impact on passenger convenience?
“Probably the most direct impact on passengers could be the impact on travel restrictions and security. It is possible that UK citizens may be impacted by more stringent visa and access restrictions, even separate queues at airports within the EU. We believe that most EU states will not, generally, seek to restrict access on Brexit, however, this will require reciprocal concessions from the UK Government.
“Outside the EU the picture is different. The EU “visa-reciprocity” agreement seeks to agree reciprocal visa-free visit rights between EU and non-EU countries, such as the US. Although the UK is not party to this agreement, the fact that the EU and US are currently involved in a very public dispute around reciprocity , could mean that the UK would benefit from being further distanced from the EU in the case of a Brexit (although legally, nothing really changes).
“And while access is probably the key factor influencing convenience, there are other areas to consider, for example:
Cost: A possible impact on fares?
“The cost base of an airline is dominated by staff and fuel costs, and the cost of aircraft ownership. There are many variables in the cost equation and the Brexit scenarios are not yet clear in areas as diverse as staff costs (due to revised labour and immigration agreements), oil price, and airport costs. It is difficult to predict each airline’s mitigating actions and, further, the corresponding competitor responses. So predicting the £ impact on an airline ticket would be pseudo-science at best.
“To illustrate this complexity, take just one example: the impact of foreign exchange on a UK airline’s cost base. At the moment, approximately 40% of an EU airline’s cost base (fuel and ownership expense) is denominated in US dollars. Just after the EU Referendum date announcement, the GBP/USD exchange rate dropped to a 5-year low , although rates have recovered somewhat since then.
“Our analysis suggests that if sterling were to experience a similar (permanent) weakening against today’s exchange rate, then a return economy fare for a family of four travelling between Manchester and Orlando in the summer would increase (all other things remaining equal) by about £180 simply as a result of higher US$ denominated costs. Of course, if the impact of Brexit is already priced in to the exchange rate, then a reversal of the rate back to pre-announcement levels (on a vote to Remain) would result in a saving of a similar amount, and all this is before taking into account what the price of Jet-fuel itself may be.
“While the details are not clear a vote for Brexit would definitely be a vote for change.”
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Notes to Editors:
KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 12,000 partners and staff. The UK firm recorded a revenue of £1.96 billion in the year ended September 2015. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 174,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
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