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Brexit impact on transportation industry

International Insights on Brexit|Geopolitical Risk

March 29, 2017

The U.K. Government has invoked Article 50 of the Lisbon Treaty, meaning Britain’s exit from the E.U. will be complete by the end of March 2019. 

Brexit means Brexit

Earlier in the year, British Prime Minister Theresa May delivered a speech that unequivocally outlined plans for a ‘hard Brexit’:

We seek a new and equal partnership…Not partial membership of the European Union, associate membership of the European Union, or anything that leaves us half-in, half-out.

The speech contained significant plans on trade, immigration and customs that will determine the risk landscape for many transportation companies as Britain pursues its separation from the European Union. Given the uncertainty facing the industry and the challenges of navigating fluid geopolitical events, it is perhaps unsurprising that geopolitical instability and regulatory uncertainty was the top rated category of risk in the Willis Towers Watson Transportation Risk Index.

Geopolitical instability and regulatory uncertainty

Post Brexit, it has been confirmed that the body of existing E.U. law will be converted into British law. It will then be for the British Parliament to scrutinize and decide on changes through Parliamentary debate. While the U.K. will remain subject to its obligations under any international treaties such as the Convention on International Civil Aviation 1944 and the International Convention for the Prevention of Pollution from Ships, many other E.U. policies governing the air, land and sea sectors may be renegotiated by Parliament.

U.K. Transportation industry snapshot

  • 5 billion passenger journeys on local bus services in 2016
  • 252 million passenger journeys on light rail systems in 2016 – the highest on record
  • 65.7 million visits abroad by UK residents; 82% travelled by air
  • 74% of international passenger movements at UK airports are to/from other European countries
  • In 2015, 3 million goods vehicles travelled from Great Britain to mainland Europe
  • Journeys to and from France account for 75% of international short sea passenger journeys
  • £29.2 billion spent on public transport expenditure in 2015-16

Source: Department for Transport, Transport Statistics Great Britain

The U.K.’s supply chain community with business in the E.U. – across road, rail, sea and air – will be warily watching changes on the regulatory front. Any new regulations that fortify borders and customs proced­ures at the expense of logistical efficiency could make them less competitive vis-a-vis their E.U. rivals; the same can be said for the implementation of any new trade tariffs.

The E.U. is the single biggest destination market for passengers leaving the U.K., accounting for 49% of the market. Currently, U.K. airlines can fly to, from and in between any country in the European Common Aviation Area (ECAA). As a non-E.U. member, the U.K.’s unrestricted access to the ECAA countries may have to be renegotiated and may well require the U.K. to accept E.U. aviation laws.

Airlines also benefit from arrangements with third-party countries as parties to regional pacts such as the E.U.-U.S. Open Skies Agreement. It remains to be seen if a post-Brexit UK can maintain its influence with the U.S., E.U. and other important partners such as China with the commercial value and attractiveness of its home market having declined.

Also affecting airlines are European regulations that require them to vest majority ownership and control in E.U. nationals. When Britain exits the union, many airlines will be in breach of this regulation. For example, 60% of Ryanair is currently owned by E.U. nationals; this will fall to 40% once Brexit occurs. Non-E.U. shareholders may be forced to divest their interests to EU nationals, as failure to restore majority control to E.U. citizens could result in revocation of operating licenses.

U.K. rail operators’ freedom to participate in tender processes for franchises in the E.U., and vice versa, will also depend on whether the U.K. will continue to participate in the liberalisation and integration of the E.U.’s rail system.

What regulatory talks will bring, no one knows. But uncertainty heightens the perception of risk and is the bane of the long-term infrastructure planning that is vital to the profitability of asset-intensive industries such as transportation.

Complex operating models in an interconnected world

In the white paper on Brexit released in February 2017, the government states they will “prioritise securing the freest and most frictionless trade possible in goods and services between the U.K. and the E.U.”, but will exit the single market.

The E.U. is the single biggest destination market for passengers leaving the U.K., accounting for 49% of the market.

Nevertheless, the U.K.’s wide freedom of regional trade as a member of the E.U. is likely to be curtailed by its exit. Exports to EU countries account for about 12% of U.K. GDP and about 45% of total UK exports; for imports, the E.U. is an even more important partner. With close to £500 billion in two-way trade with the E.U. subject to negotiation, the transportation industry’s strategic position as the mover of people and goods makes it particularly vulnerable to these changes.

While Brexit may not impede the right of British shipping companies to carry goods to or from the E.U., sea transport will be affected by any change in trading patterns. Some 31% of the U.K.’s lift-on/lift-off container port volume comes from E.U. trade and this figure rises to 78% for roll-on/roll-off. In land transport, 99% of international road freight for the U.K. is to and from the other EU27 nations. As a result, any new tariffs and concurrent trade slowdown could present significant risks to both sea and land transport operations.

Brexit could give Theresa May’s government an opportunity to reposition bilateral trade and the associated regulations in ways that could improve the U.K.’s economic fortunes and boost local employment. But, so far, most analysis is focused on the potential pitfalls associated with Britain’s split from the Union. The intergovernmental Organisation for Economic Co-operation and Development (OECD) has forecast that the U.K.’s departure could see its trade volumes fall 10-20% by 2030.

The U.K. will no longer have the weight of the E.U. economy behind it when attempting to negotiate bilateral trade deals, customs agreements and tariff regimes. Instead it will be operating alone as the world’s 5th largest national economy. Depending on the prospective partner, it will require shrewd negotiating to compensate for decreased economic leverage.

Changing market dynamics and business model insecurity

Since the Brexit announcement in June 2016, the pound has witnessed a period of turbulence that remains ongoing. As companies gradually stop benefiting from currency hedges implemented before the referendum, earnings will be hit. One U.S. organisation that serves as Britain’s biggest engine maker recently announced a $600 million setback to their earnings as a result of currency volatility.

The International Air Transport Association suggests that Brexit could see air passenger traffic fall 3-5% by 2020

If the pound continues its slide relative to the US dollar a silver lining for airlines and cross-Channel rail operators could be a boost in tourist arrivals. Nevertheless, as British nationals face economic uncertainty they may be less inclined to travel abroad. As the primary facilitators of tourism and high-value trade, airlines have much at stake. The International Air Transport Association suggests that Brexit could see air passenger traffic fall 3-5% by 2020, “driven by the expected downturn in economic activity and the fall in the sterling exchange rate.”

As rail industry growth is closely tied to population increases and economic success, any macroeconomic turbulence following Brexit could see demand for rail travel fall. Furthermore, price rises in regulated U.K. rail fares are tied to inflation, and current U.K. inflation rates are their highest since June 2014. Analysts are attributing this to the somewhat delayed economic impact of the Brexit vote.

Digital vulnerability and rapid technological advancement

On 25 May 2018 the European General Data Protection Regulation (GDPR) will come into effect. Any U.K. company processing the personal data of E.U. citizens will continue to be bound by the regulation post-Brexit. Companies will therefore have to manage these obligations while also ensuring compliance with any new U.K.-specific legislation. With GDPR enforcement fines of up to €20 million — or 2-4% of global turnover — non-compliance poses significant financial and reputational risk.

With GDPR enforcement fines of up to €20 million, non-compliance poses significant financial and reputational risk.

According to the Transportation Risk Index transportation executives in Europe perceive an “inability to keep up with the pace of technological development” as a top-10 risk facing their businesses over the next 10 years.

A lack of available technology talent will therefore be a critical challenge to the U.K. transportation industry in coming years, potentially made worse by a tightening in the free movement of labour.

Talent management and the complexities of a global workforce

Perhaps the most impactful of all post-Brexit shifts will be to immigration policy. Transportation executives rely heavily on immigration to staff their workforces. When they hear assurances about tighter controls on post-Brexit immigration, they naturally envision labour shortages. These fears will have been accentuated by a recent lack of clarity about whether exiting E.U. expatriates will be allowed to remain working in the U.K.

According to one report, 2 million additional workers will be needed to meet demand from the U.K. transport and storage sector by 2022. For rail operators, any reduction in the available talent pool or uncertainty surrounding the status of E.U. workers could cause delays in major infrastructure projects, such as High Speed 2. Labour shortages in the sea transportation sector are less likely to have wider economic ramifications, given that U.K. ownership of the merchant fleet has declined for the past two decades.

2 million additional workers will be needed to meet demand from the U.K. transport and storage sector by 2022

The hardest hit of all the transportation sectors would be trucking, where an acute shortage of U.K. drivers is being worsened by the prospects of an ageing workforce. Trucking relies heavily on drivers from the E.U.; truck owners are simply not able to recruit enough British drivers to keep pace with demand. Of the 290,000 drivers of heavy goods vehicles in the U.K., approximately 60,000 are from the E.U. Any reduction of the sector’s recruitment options will compromise its ability to serve the economy. Any reduction in supply will raise trucking costs for manufacturers.


Increase trade with the rest of the world.

The government’s white paper states that “By boosting trade and opening markets and attracting the world’s most successful companies to invest in the U.K., we will create jobs and enhance productivity and GDP.” If this is a success, transportation companies will be afforded access to new markets and new paths to growth

Improve industry engagement with regulatory process.

Increased autonomy over regulation means U.K. transportation companies may have greater engagement in the regulatory process. This could allow for businesses to operate more effectively.

Co-author Karen Larbey is the Director of Strategy and Planning for the Transportation Industry at Willis Towers Watson. In her role, Karen works to bring specialist and industry knowledge to develop broader solutions focused around the client’s needs on a global basis. She was formally the Global COO for Aerospace and was responsible for the successful operations.

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