British Airways owner cuts profit target on Brexit fallout

London / Bloomberg

British Airways owner IAG SA lowered its 2016 profit target as the UK’s vote to leave the European Union threatens to extend a drop in demand that started in June in the run-up to the historic referendum.
Operating profit this year will no longer increase at a level similar to the 70 percent surge posted in 2015, Chief Financial Officer Enrique Dupuy said in a statement issued hours after the vote became public. The company didn’t provide a scale for the earnings adjustment beyond saying that 2016 growth will still be “significant.”
Even before the profit warning, IAG, which has key hub at London’s Heathrow airport, was hit harder than other European airlines as investors tallied the fallout for different industries in the market turmoil sparked by the vote. Aviation is particularly exposed because of the volatility of demand. Also, a Brexit threatens agreements that allow EU and U.K. airlines to fly freely across the region. EasyJet Plc Chief Executive Officer Carolyn McCall said she wrote to European and British officials to “ask them to prioritize the UK remaining part of the single EU aviation market, given its importance to trade and consumers.”
Ryanair Shock
IAG shares opened down as much as 34 percent, its biggest fall on record. The stock recovered somewhat and then dropped again after the statement, closing down almost 23 percent in London. EasyJet and Ryanair suffered declines of more than 20 percent before clawing back some of those losses.
The result of the UK’s vote is “a shock and a disappointment,” Kenny Jacobs, head of marketing at Ireland’s Ryanair Holdings Plc, which had actively campaigned for the U.K. to remain in the EU, said on Bloomberg TV. “We are going to have a period of great uncertainty for the next two years as the U.K. has to figure out how do you dismantle the past 40 years.”
Despite the profit warning, IAG downplayed the possible lasting impact of a British exit from the EU. The company, which also owns Spanish carriers Iberia and Vueling and Ireland’s Aer Lingus, doesn’t see a long-term risk to its business from a Brexit. That includes demand for travel in and out of the carrier’s critical Heathrow hub.
The International Air Transport Association said preliminary estimates suggest the number of UK air passengers could be 3 to 5 percent lower by 2020, driven by an anticipated downturn in economic activity and the fall in sterling exchange rates. Freight will be affected by lower international trade in the longer term, it said.
Regulation will be an issue, IATA said, with Britain facing a trade-off between accessing the European Single Aviation Market and having the policy freedom to set its own regulations.