Leaving EU May Hurt UK Aviation

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By Chinedu Eze

It is estimated that the number of United Kingdom (UK) air passengers could be 3-5percent lower by 2020, driven by the expected downturn in economic activity and the fall in the sterling exchange rate, which value has already crashed to a three-year low.
The International Air Transport Association (IATA) in its preliminary analysis of the financial and economic impact of the Brexit decision on the air transport industry noted that the near-term impact on the UK airfreight market is less certain, but freight would be affected by lower international trade in the longer term.
IATA observed that a big issue is with aviation regulation as the UK faces a trade-off between accessing the European Single Aviation Market and having the policy freedom to set its own regulations.

“The Brexit vote has triggered much uncertainty—financial and otherwise. As leaders in the UK and the EU work to establish a new framework for their relationship, one certainty to guide them is the need and desire of people on both sides of that relationship to travel and trade. Air transport plays a major role in making that possible. There were 117 million air passenger journeys between the UK and the EU in 2015. Air links facilitate business, support jobs and build prosperity. It is critical that whatever form the new UK-EU relationship takes, it must continue to ensure the common interests of safe, secure, efficient and sustainable air connectivity,” said Tony Tyler, IATA’s director general and chief executive officer,” IATA said.

The world body observed that the main points of the report include the fact that the UK has voted to leave the EU – the so-called ‘Brexit’ scenario, noting that considerable uncertainty remains regarding the precise detail of the exit and it could be two years or more before the issues are fully resolved; adding that prolonged uncertainty would influence both the magnitude and persistence of the economic impacts.
According to IATA, the immediate impact on air traffic would be governed by the effect of Brexit on two key variables: economic activity and the sterling (GBP) exchange rate.
IATA said the referendum result is widely expected to present a significant negative shock to the UK economy.

It stated that the most pronounced near-term impacts derive from heightened uncertainty, causing businesses and households to delay spending and investment decisions, as well as transmission via financial channels.
The International Air Transport Association maintained that the impact of Brexit is expected to be a permanent downward shift in the level of GDP, not a temporary impact that is recovered after a period of time.
IATA pointed out that income elasticities between income (proxied by GDP) and air travel demand vary – for example, between developed and emerging markets – but are consistently positive and greater than one while developed markets are estimated to have an income elasticity of 1.3 at a national level.
“It may be that a simple income elasticity approach picks up other factors that affect demand for air travel over the long run, such as trade openness among others. Consequently, a conservative approach would be to use a unit elasticity between GDP and air travel in the near term”, the report said.

The preliminary estimates also suggested that the UK is dominated by outbound traffic , The UK air market is dominated by outbound traffic, with such traffic accounting for just over two-thirds of total flows (in 2015 there were 53.9 million visits overseas by air by UK residents, compared to 26.2m visits to the UK by overseas residents).