Where do You Want to go on Holiday?

The Brexit effect on the UK tourism and airline industry

Hugh Schofield

After the vote to leave the EU on the 23rd of June, the pound crashed from a high of $1.50 to about $1.26.  The pound to euro also devalued from just over €1.30 to €1.16. This decrease in the value of the pound has had many effects on the UK economy but most immediately on businesses reliant on UK tourism, to and from the UK. The stock prices of Ryanair and IAG (which owns Spain’s Iberia, Ireland’s Aer Lingus, Vueling and British Airways) saw a similar fall after the result.

 

As the pound devalues compared to other currencies, UK holidaymakers must spend more pounds to buy the same number of Euros/Dollars/etc. This means the cost of: accommodation; food; drink; etc will increase in relative terms compared to the pound. Brits will either have to spend more to get the same holiday experience, downgrade their plans or simply abandon them.

 

Expectations of waning tourism caused Ryanair to cut its profit forecast by 5% (on the 18/10/16).  Surprisingly enough, despite an initial fall in its share price, Ryanair is once again trading at pre-Brexit levels. Perhaps this is because investors believe it is well suited to weather the effects of Brexit as Brits with shrunken pockets will choose to skimp on luxury air travel and choose Ryanair over its less frugal competitors. Ryanair’s diversified network across a number of European countries and its plans for further expansion ensure that it will be more resilient to troubles at home than domestically focusses rivals.

 

Similarly, IAG has endured a difficult few months as it has issued a 4% decrease in its operating profit in the third quarter of 2016 leading to a 4% fall in its share price. IAG blamed the decrease on the “tough operating environment” as British Airways cut long-term profits. However, like Ryanair, IAG is seen by analysts to be in a better position than many of its rivals like Lufthansa and Air France-KLM as it had already started a program of cost cutting in order to compete with budget airlines like Ryanair and EasyJet.

 

However, there may be some winners in these circumstances- the UK tourism industry, as the falling pound makes the UK a budget friendly travel destination. According to the chief executive of Merlin Entertainments, Nick Varney,  “We will get more Eurozone visitors coming in as it will be relatively cheaper to holiday in the UK. My view is that this scenario will endure and the pound will settle at a more competitive rate”.

 

However, this may be only a temporary change in fortunes for the UK as after Brexit, tighter immigration laws may decrease the number of foreign visitors into the UK and any extra visa charges may also deter European holiday makers from making a trip to the UK. The Office for National Statistics stated that overseas residents made 2% fewer holidays to the UK in the three months before September 2016, relative to the same time last year. This may be because of an increased anti-immigration feeling by UK citizens, that is felt by foreigners. This means that fewer people see the UK as a holiday destination even with the devaluation of the pound.

 

The change in the value of the pound has dramatically changed the face of the UK tourism industry but the changes might not be over quite yet. According to the Office of National Statistics, in the three months up to September 2016, UK residents visiting foreign countries actually increased by 7% compared with the same period last year. This may be because holidays are planned and booked in advance, therefore the full decline in interest in overseas holidays from Brits might not be fully felt by airline companies. This means that there may be tough times ahead for those with large exposure to any particular part of the UK tourism industry.

 

Also, the pound has started to increase in value again, up from $1.20 in October to $1.25, when the UK government’s plans for triggering Article 50 were derailed by a high court ruling and up to $1.26 after Trump won the 2016 US presidential election. This means that if there are further events that cause the pound to increase in value like an increased chance in ‘soft’ or ‘smooth’ Brexit, then the pound may start to break the $1.30 and approach the $1.40 mark. This would cause the pound to start to reach pre-Brexit levels, meaning that status quo before the referendum will start to return. Thus, the changes in the UK tourism industry will be short lived. However, there may be a long term increase in tourism to the UK, due to the increased media coverage in other countries, meaning if the pound was to increase then there may be some surplus benefit to tourism.

 

Overall there is massive uncertainty in the UK tourism industry over the future direction of travel. For airlines, the sharp decrease in the price of oil since 2014 has been a blessing- Delta Air Lines saved around $2 billion dollars, net of its hedges, in 2015 alone, and there is potential that oil prices will increase in the coming months. In addition, there could be a decrease in demand from UK residents for flights. Although it has not happened yet, according to the Office for National Statistics, it is a logical consequence from the devaluating of the pound. This would mean that airlines operating out of the UK may suffer as they feel the effect of less demand and increased cost, so could be pushed into the red. Local UK tourism might also not feel the predicted effects of Brexit. This is because increased visitation was partly due to a 2% rise in business trips to the UK. Therefore, part of the rise may be temporary as businesses seek to plan for the long terms effects of Brexit, not an increase in the number of people site-seeing in the UK. This means for all involved, there is massive uncertainty with sudden changes in the value of the pound and oil happening overnight, and Article 50 looming overhead, meaning well-made plans can quite literally, be destroyed overnight.

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