The tougher operating environment in 2019 is likely to exacerbate liquidity woes of those European airlines that are highly leveraged, prompting defaults or M&A. Recent airlines' bankruptcies, including Flybmi this weekend, and sale attempts support our view that fierce competition, Brexit uncertainty, and oil price and currency volatility will continue to threaten financially weaker airlines and drive further consolidation.
James McCormack, Global Head of Sovereign Ratings at Fitch Ratings, talks about the Brexit negotiations and the implications for the UK economy. He speaks with Manus Cranny on Bloomberg Daybreak: Middle East.
The UK government's defeat over the EU withdrawal agreement heightens uncertainty over the eventual outcome of Brexit. Downside risks of a disruptive exit are reflected in the Negative Outlook on the UK's 'AA' sovereign rating.
If the UK rejects the draft Brexit agreement, a disorderly exit from the EU would become increasingly likely. That could seriously undermine Eurotunnel truck volumes on Brexit day to allow for customs checks on tariffs and rules of origin, and regulatory and other inspections.
The Brexit process has a range of potential outcomes and no single scenario has a high probability, in our view. A critical issue in a disorderly "no-deal" scenario would be the loss of EU "passporting" rights, which authorise UK FIs to transact with EU clients.
The automotive, aerospace, retail, real estate and airline sectors are all exposed to a "no-deal" Brexit, Fitch Ratings says. The risk to individual issuers varies with their size, diversification and financial strength.
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Ports and airports would be most vulnerable in a "no deal" Brexit scenario in the infrastructure and whole business securitisation sector, with traffic declines and increased costs putting pressure on cash flows.
An intensification of political divisions within the UK and slow progress in negotiations with the EU means there is such a wide range of potential Brexit outcomes that no individual scenario has a high probability. We no longer believe it is appropriate to identify a specific base case. An acrimonious and disruptive "no deal" Brexit is a material and growing possibility.
The Brexit plan formulated by the Conservative cabinet late last week would position the UK for a relatively soft exit from the EU, but it faces significant challenges. It is not clear that the plan in its current form will be acceptable to EU negotiators and the UK parliament, as highlighted by today's resignations of two senior cabinet ministers.
The pound's decline was a factor in last month's collapse of Monarch Airlines, as it pushed up dollar-denominated costs. This exacerbated more fundamental operating problems, including competition from low-cost carriers, which intensified after terror attacks in Egypt and Tunisia and an attempted coup in Turkey drove more competition on Monarch's key routes to Spain and Portugal.
There is a wide range of potential outcomes to the negotiations including an exit agreement with a transition arrangement giving continued preferential access to the EU Single Market as a bridge to a future UK-EU free trade agreement, or the UK leaving the EU and reverting to trading on WTO terms. An acrimonious "no deal" Brexit leading to substantial disruption to customs and trade, or the UK staying in the EU beyond March 2019 cannot be excluded.
The core London office market has cooled since the UK's EU referendum but remains highly overvalued. Tight office supply has supported prices to some extent, while sterling's weakness has caused a recent boost in overseas demand for trophy assets, allowing City office yields to fall back slightly in 2017.
The British government will soon provide formal notice of its intention to withdraw from the European Union, and, as contentious as the debate on Brexit has been to now, the period ahead promises to be even more combative.
The range of possible Brexit outcomes remains wide and the envisaged timescale for reaching a UK-EU trade agreement ambitious following UK Prime Minister Theresa May's speech outlining her government's priorities in leaving the European Union.
Fitch Ratings said in a new report that alternative scenarios where the UK (AA/Negative) leaves the EU (Brexit) without either transitional trade arrangements or retaining extensive single market access are credit-negative.
EMEA corporate free cash flows are expected to be weaker in 2017 compared with our forecasts a year ago amid continuing anaemic economic growth and new uncertainties introduced by the UK's Brexit referendum.
Fitch Ratings is commited to ensuring continuity of service to investors and other users of our ratings as a result of the UK's exit from the European Union. We continue to have an open and constructive dialogue with regulators and stakeholders to ensure we comply and serve your needs. For more details, please read the Fitch Joint Statement on Updated ESMA Guidelines (PDF)