What a hard Brexit could mean for the UK’s transport industry

Mark Hue-Williams from insurance firm Willis Towers Watson has important news days ahead of the British election.

The possibility of a hard Brexit from the European Union (EU) following the June 8 general election in the UK could change market dynamics for many transport companies, and spark questions about present business models.

If the Conservatives retain power as current polls suggest, first-mover opportunities post-Brexit will appear for nimble organisations as the UK seeks to redefine its relationship with the EU, the world’s largest economy and tourism market. Until the outcome of Brexit negotiations is confirmed, uncertainty will likely continue to affect the stability of the pound, as well as consumer and investor confidence in the UK.

Retail sales fell by 1.4% in the first quarter of 2017, the biggest quarterly drop since 2010

In theory, a weaker pound should boost the fortunes of Britain’s exporters and the transportation companies that support them. It will also make British expertise more cost-competitive on the continent. For one, the demand for highly sought-after British rail engineers is expected to continue to rise as the privatisation of Europe’s rail operations gathers pace as countries look to adhere with Europe’s Fourth Railway Directive.

The benefits of a weaker pound have yet to materialise on a wider scale as the volume of outbound goods and services from Britain shrank in the first quarter of 2017. Moreover, there are signs the pound’s volatility has prompted some belt tightening among British consumers: Retail sales fell by 1.4% in the first quarter of 2017, the biggest quarterly drop since 2010.

With their fortunes intimately tied to British buying power, the transport companies that support the import supply chains and overseas travel will be keeping a close eye on consumer confidence in the run up to Brexit.

According to Willis Tower’s Watson’s Transportation Risk Index, which gauged the opinions of 350 C-suite executives, sudden shifts in market dynamics — from consumer demand to ease of market access — were a major concern for the industry. The category of risks ranked second among senior executives based in Europe, trailing only the emerging threats in the digital domain.

Outside of the UK, there’s been some reassurance that post-Brexit Britain is expected to retain its transport competitiveness, at least for the ancillary services that support the shipping sector, such as maritime law and marine insurance.

A report published in April by Norway’s Menon Economics saw London climb to fifth in the ranks of the world’s top maritime cities. This very positive result emerged despite strong warnings from the UK’s maritime community about the challenges of a so-called hard Brexit.

According to the UK Chamber of Shipping, 95% of Britain’s international trade is moved by ship

Just two weeks earlier, the UK Chamber of Shipping had warned that a return to physical customs checks for two-way trade between the UK and the EU would be a ‘catastrophe’ for British ports and shipping.

The chamber says 95% of Britain’s international trade is moved by ship — as compared with a global average of 90% — making its movers comparatively more vulnerable to inefficient customs processes. The ports and shipping sector supports 250,000 jobs, it said.

Any contraction of consumer spending could also disproportionately affect the aviation industry, where leisure travel is often seen as discretionary, and air cargo products lean toward the luxury end of the retail market, the first to see demand drop off when confidence fades.

Recent media reports have indicated that negotiators from the UK and EU were digging in their heels for a hard-fought process. While the rhetoric has since calmed, a hard Brexit — with separate customs regimes and the end of tariff-free trade between the UK and the EU — remains a very real possibility. This prospect would affect the fortunes of the entire transport sector.

According to forecasts for the International Air Transport Association (Iata), ‘a clean break with Europe in economic and aviation terms’ — its definition of a hard Brexit — would cause the greatest passenger travel disruption for its member airlines. Under such a scenario, Iata expects the UK passenger market to be around 6% smaller in 2035 than in the case of a soft Brexit, or almost 20 million fewer passengers to, from and within the UK.

Even under the ‘hard’ scenario, however, the market is still expected to grow by 90.7m passengers over the period, or 45.5% against 2015 volumes.

Continued equal access to European passenger markets — particularly the rights to fly between cities on the continent — is likely to be as important to the fortunes of British airlines as the performance of the UK economy, particularly for low-cost carriers.

Rail operators and trucking firms — even those that don’t serve the continental markets — will be closely watching any attempts to restrict the flow of labour within and beyond the EU.

For example, 40% of employees working on London’s Crossrail project currently do not hold an EU passport, according to the company. But while stricter immigration policies may cause some short-term labour pains for projects such as Crossrail, optimists argue that, in the longer term, they could give the UK the incentive and impetus to develop the higher-skilled workforce that will be required to support a hi-tech economy.

Britain’s trucking sector is particularly vulnerable to increased immigration controls and cross-border inefficiency

According to Engineering UK, Britain will need at least 182,000 people with engineering skills each year until 2022 to deliver major projects such as HS2.

Perhaps the biggest impact from Brexit will be felt by Britain’s trucking sector, which moves about 80% of the freight around the country and is particularly vulnerable to increased immigration controls and cross-border inefficiency.

According to the country’s Road Haulier’s Association, which represents about 7,000 of Britain’s trucking firms, 75% of the sector’s 80,000-strong workforce comes from the continent.

With already suffering labour shortages and an ageing driver demographic, any reduction of its recruitment options may significantly compromise the sector’s ability to serve the national economy, and will ultimately raise the costs for its services.

The association’s biggest concern, however, is the decision to leave the EU’s customs union, which assures the free trade in goods between all members, as well as common tariff structures. Leaving the customs union almost guarantees all goods moving between the UK and Europe will have to undergo customs clearance, a four-hour process per truck, by present standards. This delay — an anathema to ‘just-in-time’ express companies such as DHL and FedEx — would multiply considerably as lineups lengthen.

At Dover, Europe’s busiest ferry port, about 8,000 inbound trucks a day from the EU are presently being handled. The labour required to clear them all would require a significant expansion of the present Customs workforce, at taxpayer expense.

All transport companies have a lot at stake in the upcoming Brexit negotiations. The question isn’t ‘if’ but ‘by how much’ their present market conditions will change. In the interim, there will be much uncertainty about where the new opportunities will lie, and how business models will have to adapt.

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