FTSE 350: Brexit turbulence on route for airlines

A high priority for UK-based airlines in 2018 will be ensuring planes can fly within continental Europe from 2019 and beyond. Although the UK won’t officially leave the EU until March 2019, some semblance of an agreement must be negotiated before the end of this year when scheduling begins for the 2019 summer season. As of now, UK airlines appear split in their views on Brexit. Some have opted to apply for certificates that ensure their flying rights or set up a European subsidiary, while others have been vocal in their disdain for Brexit without much action to protect their businesses.

Wizz Air (WIZZ) and easyJet (EZJ) are two of the best prepared airlines should the UK leave the EU without an aviation agreement. Wizz Air has applied for a UK Air Operator Certificate, which would allow the central and eastern European airline to operate flights to and from the UK regardless of the outcome of Brexit negotiations. Easyjet has set up easyJet Europe, an Austria-based subsidiary business that will allow it to fly all its existing routes thanks to an Air Operator Certificate granted to it by the Austrian government.

Ryanair (RYA) and International Consolidated Airlines (IAG) haven’t said whether they’ve any Brexit contingency plans, but this isn’t to say bosses at either airline have remained silent on the matter. Ryanair’s Michael O’Leary spent much of 2017 urging the British government to negotiate a bespoke agreement, while Willie Walsh at IAG encouraged the European Parliament to relax existing ownership rules for European airlines. It’s likely that both would fall short of the threshold for 50 per cent of shares to be owned by EU nationals, so we expect to hear more on the matter from Mr O’Leary and Mr Walsh, or to see both start to sell down their shareholdings.

Another issue that could dominate the airline sector throughout 2018 is capacity. The fear is that excess capacity – particularly in the budget market – could weigh on yields. Some of this pressure was relieved with the collapse of airlines Monarch and Air Berlin, but the failure of a major airline has some analysts wondering which could be the next to go. While most airlines are continuing to look at how they can expand their routes, smaller players such as non-FTSE 350 constituent Flybe (FLYB) have started to reduce services. Cutting 85 planes to just 70 over the next three years should ease capacity by around 4 per cent, so the airline can focus on fewer, more profitable routes. 

Others have been looking at how to take advantage of the gaps left behind by Monarch. Wizz Air chief executive József Váradi said the company has put in a bid for the spaces left over at London’s Luton airport, where Wizz Air recently opened a UK base. Should the company be successful it would add between 20 and 24 additional routes from the UK to Europe. 

The collapse of Air Berlin had two very different results for the two biggest listed tour operators. Thomas Cook (TCG) reported a full-year operating profit of £12m, compared to a loss of £10m in the prior year, which was aided by the demise of Air Berlin as customers turned to the tour operator as an alternative. But the collapse cost Tui (TUI) €15m when the German airline defaulted on payments for aircraft and crew it had leased from the group. On a brighter note, holidays toTurkey and North Africa have started to regain popularity after terrorism fears had previously seen bookings in these areas slide.

A final – and brief – note on hotels. Both Intercontinental Hotels Group (IHG) and Millennium & Copthorne (MLC) could benefit from earning a significant amount of income from abroad. Intercontinental Hotels is in the process of rolling out its new Kimpton chain, the first of which opened in Amsterdam last year, and it’s also upgrading various Holiday Inn locations and introducing a digital cloud booking system. Shareholders in Millennium & Copthorne will be wondering whether it can recover after its lacklustre preliminary results, which reported that increased competition in Singapore, terrorist attacks in Paris, and refurbishments in New York resulted in flat pre-tax profits.

Similarly, Merlin Entertainment (MERL) failed to meet analyst expectations for the summer season as the terror attacks in the UK put visitors off. Cineworld (CINE) has less to worry about terror, more on how its acquisition of US theatre operator Regal Entertainment Group will play out. It’s funding the purchase partially through a rights issue, which hasn’t gone down well with investors, as its share price has been on a downward trajectory ever since the announcement.