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Opinion: Three Years Waiting For Brexit And Still Not Fully Prepared

UK and EU companies should be preparing for a no-deal Brexit now.

Printed headline: Exit Exigencies

 

The UK faces yet another Brexit deadline on Oct. 31 and, with newly installed Prime Minister Boris Johnson at the helm, separation from the European Union without a deal has become much more likely—forcing the UK aviation industry and aftermarket to contend with “hard” Brexit contingencies once again.

While some large players have used the last three years to prepare, many companies in the UK and 27 other European Union member-nations—particularly small and midsize suppliers and service providers—are still not fully ready for life after Brexit.

That’s mainly because myriad questions over regulation, licensing and certification have been answered either very tentatively or not at all, making it difficult and expensive to overhaul operations to satisfy an uncertain outcome. For instance, in the event of a no-deal Brexit, the UK’s Civil Aviation Authority (CAA) has pledged to recognize all European Union Aviation Safety Agency (EASA) certificates, approvals and licenses for use in UK aviation and on UK-registered aircraft for at least two years after the official separation. But EASA has offered no such reciprocal promise. While the EU has made an offer to extend flying rights until March 2020 to prevent flight disruptions, the five-month reprieve would provide only a limited cushion.

The uncertain future is taking a toll on the UK economy. The Bank of England (BOE) recently cut the growth outlook for the nation to 1.3% for both 2019 and 2020, from 1.5% and 1.6%, respectively. The pound sterling has been losing ground against the dollar and euro for much of the past three years, a trend the BOE expects to continue. The Institute of Directors, the UK’s longest-running organization for business leaders, considers less than 50% of UK businesses Brexit-ready.

A year ago, Oliver Wyman calculated a Brexit that assumed a reset to World Trade Organization (WTO) rules would cost UK industries as much as £27 billion ($33 billion) a year based on additional costs from tariff and non-tariff barriers alone. The consultancy projected it would cost aerospace as much as £3 billion. Businesses in the remaining 27 EU countries would be hit with £31 billion in additional costs. These numbers do not include, for instance, the potential for reduced investment or the impact of a lower gross domestic product and the declining value of the pound sterling.

Lack of Clarity

While contingency plans are being developed for a no-deal scenario, the possibility of UK airlines and aircraft being grounded after March 2020 still exists—even with the inevitable scramble between October and March to find stopgaps. But even if there is no disruption in service, airlines are likely to face added operational costs from such Brexit downsides as new congestion created by changing passport and customs rules.

This ambiguity affects a host of licenses, including those held by pilots, who are already in short supply. In 2018, CAA internal documents warned that thousands of EASA licenses, ratings and certificates for pilots and aircraft would have to be transferred in a no-deal Brexit. That transition—already underway—promises to be costly, time-consuming and possibly incomplete at zero hour.

From the point of view of the MRO sector, the most immediate concern would be licensing that affects MRO companies, engineers and design organizations. Here again, reciprocal license recognition for a designated time period after Brexit has not been agreed upon. This means that UK-registered maintenance organizations would need to comply with EASA third-country operation (TCO) rules—designed for non-EU nations—to be able to service EU-registered aircraft after Brexit, adding both cost and complexity to MRO operations.

Aviation engineers with EASA licenses issued by the UK CAA need to switch now to a full UK CAA license and/or get a new EASA license issued by an EU member state. UK design companies have only nine months after Brexit to secure from EASA its often difficult-to-obtain design approval to work on EASA-registered aircraft.

Supply Chain Disruption

On the positive side, aerospace parts sales already operate subject to WTO conditions, so there’s no anticipated tariff impact. Still, for aviation and the aftermarket, there is a significant risk the supply chain isn’t ready for a post-Brexit world. The new cross-border processes put in jeopardy the just-in-time ecosystem that took years to build and are already pushing up costs as just-in-case stocks and additional warehousing become necessities.

Some larger aviation players have already swallowed higher costs and complexity to accommodate contingency plans. At least one aerospace company has added as much as £100 million worth of parts inventory.

Meanwhile, the plethora of small and midsize parts suppliers is unlikely to be similarly prepared for the changes coming, lacking the financial wherewithal to accommodate just-in-case inventory or the personnel to be fully versed on the many changes in rules. This simply adds to the potential for disruption.

Carrier Concerns

For airlines, the extension through October—and of flying rights through March 2020—provided some breathing space during the busy European summer season by lessening concerns that Brexit would disrupt vacation plans. That’s small comfort if a no-deal scenario forces UK carriers to comply with TCO rules to fly in both geographies.

Airlines also face ownership structure hurdles. Under a no-deal Brexit, an airline operating in the EU that is majority-owned by a UK entity would lose the automatic right to fly in the EU market. To avoid disruption, several carriers have established a second air operator’s certificate (AOC) in an EU member country.

No doubt, the extra seven months has provided aviation and aftermarket companies more time to prepare. But the nagging uncertainty and contradictory claims on a no-deal scenario are keeping the post-Brexit outlook murky at best and potentially dire.

Robbie Bourke is an Oliver Wyman Cavok vice president and head of Cavok’s European business. David Stewart is a partner with Oliver Wyman and senior advisor to Cavok. Michael Khan is an Oliver Wyman partner.

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