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Brexit’s Ironic Twists Hit Spain’s Biggest Industry

Summary:
“Peak Tourism” has already set in. Brits account for 22% of tourists in Spain. Now add Brexit. By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET. In a delectable irony, two of the biggest corporate victims of a disorderly Brexit could turn out to be Spain’s flagship carrier Iberia and low-cost airline Vueling. Both companies are majority owned by British Airways’ parent company International Consolidated Airlines Group (IAG), which is UK-based. And current EU rules require European carriers to be both majority-owned and operated in the bloc. If the UK leaves the EU on March 29, IAG will no longer meet those requirements. If the current legislation is not changed or a new loophole inserted into it, Iberia and Vueling’s European fleet could find themselves grounded in 70

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“Peak Tourism” has already set in. Brits account for 22% of tourists in Spain. Now add Brexit.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

In a delectable irony, two of the biggest corporate victims of a disorderly Brexit could turn out to be Spain’s flagship carrier Iberia and low-cost airline Vueling. Both companies are majority owned by British Airways’ parent company International Consolidated Airlines Group (IAG), which is UK-based. And current EU rules require European carriers to be both majority-owned and operated in the bloc.

If the UK leaves the EU on March 29, IAG will no longer meet those requirements. If the current legislation is not changed or a new loophole inserted into it, Iberia and Vueling’s European fleet could find themselves grounded in 70 days’ time. As absurd as it may sound, even planes shuttling between Spain’s two biggest cities, Madrid and Barcelona, could be refused permission to take off.

In recent weeks, the two airlines, together with the Spanish government, have been trying to convince the European Commission that they are more Spanish than they are British, but seemingly to little avail. The major sticking point is the matter of ownership. Both Iberia and Vueling say that although they are both under majority British ownership, control is in the hands of one Spanish company. While IAG holds 49.9 percent of voting rights, Garanair, the remaining 50.1 percent voting stake is wholly owned by Spain’s struggling retail giant El Corte Ingles whose debt is currently junk-rated.

For the moment negotiations on the airlines’ behalf between the Spanish government and the European Commission appear to be at an impasse, although that didn’t stop IAG from proclaiming that it is confident it “will comply with the EU and the UK ownership and control rules post-Brexit,” adding for good measure that it is, without a slither of a doubt, a Spanish company.

Spain’s biggest tourism lobby, Exceltur, is not wholly convinced. “We do not know the shareholding structure and the legal intricacies of the case. We do not have any magic wand either, but we have to clear up uncertainties so that Iberia can continue to fly,” said Exceltur’s vice-president José Luis Zoreda.

The lobbying group is concerned about not just Iberia and Vueling’s predicament but all airlines that are in danger of losing their EU operating license. “We cannot afford to lose our connection with a market as important as the UK,” said Zoreda.

The numbers speak for themselves. In 2018 Spain attracted 17.6 million British visitors. That’s 22% of the 80 million foreign tourists that visited the country, according to Exceltur. While the number was down by over a million on 2017’s record haul of 18.8 million British visitors, it still dwarfed the number of visitors from second-placed Germany (11.8 million) and third-placed France (10.8 million). Brits also bought more Spanish real estate than any other nationality in the third quarter of 2018.

For Spain’s economy, the tourist industry is arguably as vital as the financial industry is to the UK’s. It accounted for 11.8% of Spain’s GDP in 2018, says Excentur in its latest report. According to the World Travel and Tourism Council, Spain’s tourist industry employs, directly or indirectly, 2.8 million people — roughly 15% of the total working population. By contrast, the industry group City UK estimates that the UK’s financial services industry provides some 2.3 million jobs.

But the good times are beginning to fade for Spain’s multiyear mass tourist boom, as we’ve warned a number of times (most recently here and here). After years of double-digit or high single-digit growth the number of foreign visitors to the country grew by a meager 0.9% in 2018 while the number of overnight stays actually fell by 3.4%. For the first time in eight years the tourist sector closed out 2018 with real revenue growth rate (2%) below that of Spain’s GDP (+ 2.5%).

Exceltur calls this “normalization”. After an extended period of runaway expansion that brought with it buckets of money and jobs as well as sky-high prices and rents, overcrowding, noise, overstretched public services and infrastructure, Spain appears to have finally hit “peak tourism.” Last year’s slowdown was also accentuated by the “marked recovery” of cheaper rival destinations in the Eastern Mediterranean such as Turkey, Egypt and Tunisia. According to Exceltur, these three countries alone attracted 12.5 million more tourists last year.

Now, as the deadline for Brexit approaches and Spain’s two biggest airlines are caught in the cross-hairs, there is a risk that Spain’s tourist industry could suffer a major demand shock just as broader market conditions begin to deteriorate. A very similar threat exists for Germany’s car industry for whom the UK market accounts for 20% of total global exports. Germany’s auto industry representatives’ warnings of the “fatal” consequences of a no-deal Brexit are growing shriller by the day.

With just 70 days left before deadline day, fear is rising on both sides of the English Channel that the UK will unceremoniously crash out of the EU without a deal. Though the economic fallout for the UK is likely to be greater and for that reason tends to grab a lot more of the headlines and attention, it is becoming increasingly clear that many EU Member States and the businesses they harbor are no less ready for a no-holes-barred, no-deal Brexit than their British counterparts. 
 

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