finance

Investors urge airlines to outline Brexit strategy


Investors are stepping up pressure on IAG, Ryanair and easyJet to explain how the airlines are preparing their businesses for a no-deal Brexit as fears rise that their aircraft will be grounded.

Shareholders have asked for meetings with airline bosses and board members as the Brexit deadline looms. There are growing concerns UK-based investors could be forced to dump shares in the event of a no-deal Brexit or lose voting rights.

One big UK-based investor said: “We are due to see easyJet shortly and will be pressing for more detail. It affects them as much as everyone else.

“They [the airlines] are putting contingency plans in place. It is going to be a major problem if they can’t take off or land.”

Another of the UK’s biggest investors said portfolio managers at the asset manager had been pressing for more details on how the airlines would cope with a no-deal Brexit.

“It is not a simple question and you can bet your bottom dollar the answer will be even more complex,” he said. “They are running the business, they are closer to the policymakers. If we got the answer that they weren’t worried about it, it would raise a warning flag.”

This is because the European Commission is planning to give airlines no extra time to meet the EU’s ownership requirements, according to Brussels’ draft contingency plans. Under existing rules, airlines must prove they are 50 per cent EU owned and controlled to qualify for operating licenses.

Ryanair and easyJet have tried to respond to the problem by preparing plans to take away voting rights of their non-EU shareholders to ensure they reach the 51 per cent threshold.

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However, these moves would not go down well with shareholders as they would lose their say on issues from pay to the chairman’s role.

Paul Lee, a corporate governance expert, said it would be a “terrible result” for UK-based investors if they were to lose their right to vote at airlines in the event of a no-deal Brexit. “If you have shares that don’t have voting rights, they are not shares. They are a warrant,” he added.

With little time left ahead of Britain’s scheduled March 29 exit, IAG remains the most reluctant to provide detailed assurances to investors about how it would address a no-deal, declining to give guidance about whether, if forced, over the long-term it would opt to be a British company or an EU one.

A report in Spanish newspaper El País over the weekend said IAG had made it clear to authorities in Madrid that it would remain European.

Brexit throws up particular problems for IAG as it owns British Airways but also EU-based airlines.

These have been compounded by the likelihood that a post-Brexit US-UK aviation agreement is expected to require the company, which is Spanish-registered, to be majority owned by UK parties.

“For traffic rights purposes, [IAG] needs to argue that BA is British to one side of the world and to the other they need to argue that [IAG’s other subsidiaries] Iberia, Vueling and Aer Lingus are solidly European,” said Andrew Lobbenberg, analyst at HSBC. He added that supposing that such an outcome could be sustainable after Brexit requires “a suspension of disbelief”.

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To date IAG has done little more than mention that it has “contingency plans” for Brexit, the response on the issue from Antonio Vázquez Romero, IAG chairman.

Elsewhere, long-haul low-cost carrier Norwegian has a UK subsidiary in the same position as BA regarding the US as does Virgin Atlantic.

Sir Richard Branson owns 51 per cent of Virgin, making it majority UK-owned. But he is in the process of selling 31 per cent to Air France-KLM, which could complicate Virgin’s access rights to the US. US airline Delta owns the remaining stake.

In the event of a no-deal Brexit, AF-KLM and Delta have agreed a deal to keep Virgin as the majority shareholder, protecting its US flight rights.

Norwegian said: “Structurally, Norwegian is well-positioned to protect our flying rights both in Europe and the UK, including in the unlikely event of a ‘no deal’ Brexit.”

Norwegian would use its main airline to keep flying around Europe and its UK one to fly to the US, if a UK-US agreement is reached.

In the case of IAG, if there is a no-deal Brexit, it will need to disenfranchise non-EU shareholders by taking away voting rights — although this may leave BA in an awkward position regarding its profitable US flights.

But even if everything goes as IAG is hoping for, with a smooth transition and favourable agreements, there is no assurance that it can maintain its corporate equilibrium indefinitely.

HSBC’s Mr Lobbenberg said: “The requirement that European airlines are controlled and owned by EU citizens is there in black and white.”

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Additional reporting by Alex Barker in Brussels



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