It is too early to assess the aftershocks of the Brexit‎ vote, but cheap money for aviation borrowers looks likely to remain firmly in place thanks to an extended period of low interest rates matched by the steady flow of quantitative easing.

“The first reaction of the central bank will be to continue to flow money into the system, preparing consciously for the next catastrophe, so there is no risk of seeing interest rates moving up,” says Bertrand Grabowski, member of the board of DVB Bank.

A financier agrees saying: “Brexit will keep interest rates lower for longer and keep quantitative easing in place. This perpetuates the wall of cheap money flowing into aviation finance both in the form of debt and equity.”

The Bank of England has made clear that it will provide liquidity as necessary with some financiers anticipating the restarting of its quantitative easing programme to increase the money supply - a tool that disappeared from the British landscape in 2012.

Meanwhile, the eurozone programme of quantitative easing, which began in 2015, will remain in place until at least March 2017.  

One European banker anticipates the Bank of England will be forced to reduce interest rates from a current record low of 0.5% to zero in the next six months.

Brexit has dampened expectations that the US Federal Reserve will be able to hike interest rates this year, largely due to fears of market contagion brought about by a strong US dollar. On 24 June, the day after the referendum, the US dollar experienced its largest single-day jump since the 2008 financial crisis.

A strong dollar impacts corporate earnings, inflation and US exports. It also creates havoc in the emerging markets and China.

The US Fed previously indicated it would move rates twice this year.

DVB’s Grabowski anticipates there will be “no major impact” on European bank funding costs due to Brexit “past the little panic” the market will experience “for a few more days”, but British banks will have to “pay an extra premium, without a doubt”. 

This impact will not be felt in the aviation sector, he adds, as British banks are not “significant lenders” in the aircraft finance industry.

Several market sources point to concerns over the emergence of a possible aircraft values bubble as a result of Brexit.

“The supply of aircraft to the sector will remain high due to production rates, but low fuel prices - crude was down 5% on 24 June – could hinder aircraft retirements,” says a financier, adding: “Brexit posts an air travel demand shock in the UK, Europe and the rest of the world, so a supply demand gap further develops, lowering yields and profits.”

The financier adds: “The UK is a large and high-yield market for airlines. There has been a big supply increase this year which was looking challenging anyway. This makes it even more challenging…So if there wasn’t an aircraft values bubble, there certainly could be now. Default risk rises and values fall.” 

A lessor says continued low interest rates and cheap oil prices means “we are risking getting into bubble territory”. 

Grabowski notes if the UK is truly “out of the European Union”, then access to the European single aviation market, which allows airlines to fly freely across Europe, “will be gone leading to devastating consequences”.

“London, as a hub, will suffer and the UK may be alone to renegotiate bilateral air traffic rights treaties without the umbrella of the EU, so a bad impact for UK-based carriers. Also, with long-term growth prospects adjusted down by a few percent of GDP, this also isn’t good for traffic.”

Grabowski highlights currency concerns for British travellers. “If the British pound is pegged out of the euro, any variation of this ‘new’ currency is possible, and as expected, the major adjustments will be down without a doubt. It is easy to guess the immediate impact on UK travellers to the rest of Europe.”

Following the vote for Brexit, Carolyn McCall, easyjet’s chief executive, asked the European Commission to allow British airlines to remain as part of the EU single aviation area.

Easyjet has said uncertainty caused by the referendum meant "revenue per seat at constant currency in the second-half will now be down by at least a mid-single digit percentage compared to the second half of 2015".

London for leasing?

Despite the anticipated negative impact on air travel demand and possibly aircraft values, lessor sources argue that Brexit could force more companies to consider London as a new home for operating lessors if the EU seeks tax harmonisation.

Ireland's 12.5% corporate tax rate has repeatedly come under attack from various governments, particularly the French, which have argued that its attractive rates are forcing businesses to move away from high-tax jurisdictions.

The UK has been Ireland’s fiercest ally in avoiding tax harmonisation, resisting a move toward a tax agreement in the then 27-nation bloc in 2012.

“France already pursued Dublin once for its corporate tax and the UK blocked the move, so who is there to stop a similar push now? I could see London becoming an attractive leasing hub, particularly if new favourable tax treaties are enacted,” says an Asian-based lessor.

Another lessor agrees: “London will be looking for new opportunities and leasing would be an extremely attractive source of capital for the city.”

However, a Dublin-based lessor doubts that that EU will pursue Dublin in favour of tax harmonisation. “We will look like the good children now,” he says adding: “The UK doesn't have much interest in promoting cross border leasing. If they did, they would have done it by now.”

A financier urges caution about premature speculation in a “not quite post-Brexit world”.

“I still think the Germans will come in with a half-way solution on associate membership, so it is way too early to speculate on how this will be digested,” he says, adding: “Allow the pound to stabilise and then start trying to assess the matter."

But, as an aviation consultant notes, with various international banks already holding legal talks about shifting their operations out of the UK to Paris, Dublin and Frankfurt, “the need for concern is already very much here”. 

 laura.mueller@euromoneyplc.com