The fallout from Brexit is starting to weigh on U.K. corporates, particularly those that are more leveraged and have other significant operating issues. “Any broader impact on corporate sectors remains dependent on post-Brexit trade terms and the amount of time companies have to prepare for change,” Fitch Ratings analysts said in a new report.
Last month, Monarch Airlines collapsed, thanks in part to the pound’s drop, which pushed up dollar denominated costs. That in turn ramped up pressures from low cost carriers, Fitch said. More recently, easyJet had an adverse currency impact as well. Still, “…We believe the key credit risk for airlines is the potential loss of access to the single aviation market, which allows an airline in an EU member state to operate anywhere in the EU. Access is vital for [low cost carriers’] point-to-point business models and certainty will be needed well before the planned Brexit date of March 2019 because flights are open for booking months in advance.” Carriers’ offices being opened up in Europe won’t help resolve the uncertain issue of flights between the U.K. and Europe.
Meanwhile, food prices are taking off at the fastest rate since 2013, and more World Trade Organization tariffs imposed in the situation of a hard Brexit would exacerbate the problem, especially if the pound continues to depreciate, Fitch said.
Staffing costs may rise if uncertainty around Brexit causes EU nationals to leave ahead of a resolution, analysts said. Nursing shortages have already popped up at Four Seasons Health Care, which reported a rise in staff costs recently attributed to a Brexit-related shortage of nurses.
London real estate, exposed to the potential loss of financial jobs, is another area that could be negatively impacted by Brexit. The British auto industry—especially for low-margin, high-volume manufacturers—could also come to raise costs for automobiles depending on how trade terms are worked out in Brexit. “Non-tariff barriers could be an equally big challenge to just-in-time manufacturing models if Brexit leads to frequent customs delays,” Fitch analysts said. “This is already delaying investment decisions and in the long term could move more auto manufacturing and associated supply chains out of the U.K.”
– Nicholas Stern, managing editor