Brexit Gives EU Airlines Bumpy Ride

LONDON—Amid Brexit market turbulence Friday, European airlines have been among the hardest hit.

The U.K. is one of Europe's biggest aviation markets and home to some of the region's largest airlines, including British Airways, a unit of International Consolidated Airlines Group SA, and Europe's second-largest budget airline easyJet. Europe's largest airline, Irish discount carrier Ryanair Holdings PLC, uses London Stansted airport as one of its main bases.

The effect on business quickly became clear. IAG, which also owns Ireland's Aer Lingus and Spanish carriers Iberia and Vueling, Friday issued a surprise profit warning.

"In the run up to the U.K. referendum during June, IAG experienced a weaker than expected trading environment," the London-based company said, adding it no longer expected to reach its full-year target of an operating profit increase on par with last year's. The operating profit target was around €3.2 billion ($3.6 billion).

European airline stocks fell sharply amid concern a weaker British currency and feared slowdown in the wider European economies would curtail demand for air travel. The vote also puts into doubt agreements for traffic rights to and from the U.K.

"We expect airlines serving the U.K. market to face immediate weaker outbound leisure demand, as the pound weakens and business travel declines given economic and political uncertainty," HSBC analyst Andrew Lobbenberg said Friday.

The European Union's single aviation market, which allows any airline within the region to service any city in the bloc, has spurred air travel and profits for many of the region's airlines. The agreement also governs traffic rights with countries overseas, including services from the U.S. to London, the single-largest destination for trans-Atlantic flights.

"All of this facilitates greater competition between airlines and, working effectively, results in lower fares and more choice for passengers," lawyers at Eversheds said ahead of the referendum.

EasyJet Chief Executive Carolyn McCall Friday said: "We have today written to the U.K. government and the European Commission to ask them to prioritize the U.K. remaining part of the single EU aviation market, given its importance to trade and consumers."

Peter Simpson, chief executive of bmi regional, a smaller carrier operating mainly from more remote cities, signaled the airline may reconsider being based in Britain. "Our continued business domicile as a U.K. entity is less than clear at this point in time," he said. The carrier had expanded heavily outside the U.K., he said, so it is wary of potential barriers to that growth.

British politicians now will have to negotiate new rules for the skies. Options include becoming an adjunct member to the European single aviation market, not unlike Norway and a few other non-EU countries; signing a bilateral agreement with the EU similar to that agreed by Switzerland; or a hodgepodge of separate agreements with the EU, the U.S. and other countries, industry experts said.

Pablo Mendes de Leon, professor of air law at Leiden University said adjunct membership in the European aviation market may be unlikely, because it would subject the U.K. to European regulations with little say to influence them. A more likely option would be bilateral agreements with EU member states, he said, which may vary.

Ryanair Chief Executive Michael O'Leary ahead of the referendum said the airline's growth in the U.K. could be slowed if the country leaves the EU. Ryanair didn't address the effect of the vote on its business plans, only saying a seat-sale linked to the referendum had drawn strong interest.

Write to Robert Wall at [e-mail]

(END) Dow Jones Newswires

June 24, 2016 06:55 ET (10:55 GMT)

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