Brexit and the travel industry

17 August 2016

17 August 2016 by MHA MacIntyre Hudson

When we awoke on Friday 24th June 2016 it appears the world, at least for the UK and businesses operating here, had changed, the people had spoken and decided they wanted to leave the EU. So what are the consequences for the travel and aviation businesses future?

As yet, nothing has changed; we are still members of the EU and will continue to be until we have negotiated our exit. The rules allow for negotiations over 2 years from activating Article 50 of the Lisbon Treaty and our new Prime Minister, who voted to remain rather than leave, has made it clear she is in no rush to invoke it but it may take longer to get ourselves out of the EU as no one has ever tried before! There is a new team whose role it is to negotiate the deal with the EU Commission but at first glance, the EU does not appear to be in a conciliatory mood and the government has admitted we no longer have civil servants with any negotiating skills as they all left to go and work in Brussels years ago. This means the first job will be to find a team capable of negotiating and ensuring the UK is not walked over in the next 2 years

The only immediate change has been in the exchange rates against the Euro and dollar. The pound lost heavily against the US $ which had an immediate impact on every airline who pay for fuel in US$ and many travel businesses who contract in US $. The newspapers reported that the customer’s pound in their pocket would go much less far when they arrived in resort with stories, incorrect of course, that meals had gone up 50% in Spain and allegedly being the cause of the collapse of the travel group, Low Cost Holidays.

Although the price of oil has remained fairly constant, the fall in the value of the £ has been reported on July 21st as the cause of an additional cost of £40 million in the first month by Easyjet.

A number of operators have already repriced unsold holidays to reflect the higher exchange costs and others have considered surcharging for existing bookings but the rules under the existing Package Travel Directive of 1990, as introduced into English law, put severe limits on operators’ ability to charge more. Many might be wise to review their booking conditions and consider introducing a term allowing price changes as a result of currency fluctuations and fuel prices at the very least. The banks have suggested that currency volatility may continue for some time and this may be good time to review the need to hedge future currency needs so that even if the £ increases in value the business knows in advance how much its supplier costs will be.

The law as it stands, including the Package Travel Regulations 1992 will stay on the statute book even after we leave. Whether we now decide to push forward with the new Package Travel Directive remains to be seen but the collapse of Low Cost Holidays on July 15th has shown a gaping hole in financial protection.  This could get much wider if the UK Government continues with its intention to implement the 2015 Directive which positively encourages travel businesses to locate their business in the jurisdiction of lowest cost financial protection. Unless banks who issued the credit and debit cards used to pay for the holidays agree to pay back their customers, the Spanish protection scheme is suggesting, at the time of writing, that the bonding they held will not be able to repay even £8 per person irrespective of the cost of the holiday purchased.

Brexit may also have profound effects on aviation interests in the UK. At present there is a single aviation market which allows any EU airline with an AOC (Air Operator’s Certificate) to fly between any two points within the EU. In fact the rights have been extended to countries within the ECAA which allowed an airline such as Norwegian to grow to be the third largest low cost airline in Europe after Ryanair and Easyjet.

Clearly when we leave the EU we will have to re-negotiate our aviation relations, ideally we become part of ECAA and continue as before but if not, we may need to negotiate new bi lateral agreements with each EU country and some may see this as an opportunity to improve the opportunities of their own home grown airlines such as Alitalia who have faced a serious threat from Easyjet and Ryanair. Ryanair, based in Dublin will be in a much stronger position, only needing a negotiation between the UK and Ireland, but Easyjet as a UK based airline, faces a potential problem and has already been talking to a number of EU aviation departments about obtaining a second EU AOC to enable it to continue to fly as it does at present.

The UK government has taken the view that no EU country wants to risk the loss of tourism by denying UK airlines flying rights when we leave the EU but the EU Commission has already made it clear that any concessions will be dependent on the UK continuing to accept the “four freedoms” at the heart of the EU, one of which is freedom of movement of labour. Many of those who voted to leave, did so on the basis that this would ensure a curb on immigration from the EU, it will be interesting to see whether the UK is in any position to negotiate on the point, Norway found when they attempted to do that the EU refused point blank.

It is also important to acknowledge that UK  travel businesses as a whole currently employ some 22,000 EU citizens in the UK itself, if they choose to leave as a result of the vote, many may find it difficult to replace them, especially those with language skills which the British seem so loathe to learn.

It may not just be flights to and from the EU that are affected when we leave, the EU has an ‘open skies’ policy between itself and the USA. If the UK could not reach agreement, and President Obama prior to the vote said the UK would be at the back of the queue for trade agreements, then we would presumably revert to the previous agreement, known as Bermuda II which only allowed two airlines from the UK and two from the US to operate, a huge change from the current situation, and a position that would certainly lead to much higher fares and much less choice.

EU261, the Regulation that allows UK customers to claim compensation if airlines cancel, overbook or delay flights for more than 3 hours is not UK law, it is a Regulation that is ‘directly applicable’ as a result of our membership of the EU. When we leave, BA, Virgin and other UK airlines will no longer be EU airlines and unless we voluntarily agree to accept it, as Norway, Switzerland and Iceland do, then flights from the UK with British airlines will no longer be protected. Bizarrely if customers are booked on similar flights from the UK on Air France, KLM or Lufthansa, they will be still protected if they are flying to another EU destination. There are already rumours that any deal in respect of a right to fly for British airlines will be based on the UK accepting the continued enforcement of EU261, but some airlines who suggested Brexit would have no effect on their business are arguing against continuing with the costs associated with the Regulation and would like to see an end to it.

Travellers flying to Europe already have an EHIC (European Health Insurance Card) offering them similar medical treatment as citizens of the country they are visiting receive, once the UK leaves, the UK will have to decide whether we negotiate a continuing agreement, if not the need for travel insurance becomes even more important.

The consequences of Brexit are still unclear, it may well be two years or more before the travel and aviation industries see the full effects, there are certainly risks ahead, the real question is can we make use of the new opportunities?

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If you require any further information on the topics discussed in this article please contact your local MHA MacIntyre Hudson advisor.