Is the US Airline Industry Overreacting to Brexit?
Photo courtesy of British Airways
All three legacy carriers, but especially American Airlines, could be negatively impacted by the UK’s vote to leave the European Union.
Precisely 6.5 percent of American Airlines capacity touches the UK. United, in comparison, has 5.3 percent of its seats tied to Great Britain. Delta comes in at 2.7 percent, but it has recently launched flights to Scotland and is looking to expand further in England’s northern neighbor.
Investors concerned about effect on American carriers
Airline stocks reflected the close ties between the air travel industries in the US and UK. In the days leading up to the vote, polls appeared to show that the Remain effort would prevail. Airline stocks in the US rose on this expectation. They fell significantly today, however, after Britain’s Leave effort proved successful.
The industry as a whole took a hit on Wall Street, with shares of Southwest and JetBlue, who do not currently fly to Europe at all, also dropping by 1.6 percent and two percent respectively.
Too early to be concerned?
The drop was not due to any concrete changes, but rather to the uncertainty brought on by the Leave vote. It will still take two years, at least, for the UK to negotiate its withdrawal from the EU. Part of this negotiation could include allowing airlines in Great Britain to remain a part of EU aviation agreements.
Other countries that are in Europe but not part of the EU are still able to benefit from the bloc’s liberal aviation policies. Norway and Iceland, for example, are not part of the Union, but they have negotiated deals that allow their airlines to fly as if they were.
Things could be different for the UK, however. Airlines on the continent, who have had a hard time competing with the likes of easyJet, could pressure their national governments to oppose any deal between Brussels and London because leaving UK airlines out of any EU treaties would level the playing field for airlines like Eurowings and Wizz.
How closely are US airlines tied to the UK?
American Airlines certainly has the most to lose from Brexit. It is closely allied with British Airways though a major joint venture. The UK flag carrier feeds AA’s England-United States routes by connecting fliers on the continent with London. This could leave the Dallas-based airline looking for new European hubs and partners, which would not be an easy task. It probably wouldn't be able to find as beneficial a deal as it now has with BA.
Delta, which has a significant stake (49 percent ownership) in Virgin Atlantic, could also be affected by the uncertainty caused by Brexit in a major way.
Is this an overreaction?
Some analysts suggest that US airlines are not going to be negatively affected by Brexit in the long run. S&P Global Market Intelligence analyst Jim Corridore told USAToday that shareholders in the US are overreacting and that things will not turn out as badly as expected.
“It’s my view that US stocks are overreacting ... Most of these markets are not high margin markets for the US carriers. We think that the airlines are going to be profitable in 2016. But (the UK decision) is definitely a real issue that’s impacting the stocks.’’
So US airlines are worried and the high level of uncertainty about Brexit means that there is indeed reason for concern. However, the long term effects of the UK’s divorce from the EU might not be a bad for American airlines as shareholders think.
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