OREANDA-NEWS. British Airways and low-cost carriers easyJet and Ryanair are the most exposed European airlines after the UK's vote to leave the European Union, Fitch Ratings says.

Slower UK economic growth, lower consumer confidence and a weaker pound are likely to result in slower growth in passenger traffic, while uncertainty about the UK's access to the European single aviation market adds longer-term risks. But both low-cost carriers (LCCs) have strong financial profiles, which will help them partially offset operational and financial pressures. BA's diversification and healthy balance sheet help limit its risks.

The single aviation market allows airlines based in an EU member state to operate anywhere in the EU, including flying directly between other member states. Access to the market is key for LCCs' point-to-point business models and has been a key contributor to their rapid expansion. We expect traffic rights to be renegotiated, but the process is likely to be lengthy and complex, and there is potential for disruption or for some restrictions, such as limits on capacity. Ryanair and easyJet would be most exposed to any disruption because Ryanair relies on the UK for over a quarter of its revenue and easyJet generates over half its revenue from European markets.

BA is less reliant on domestic or European routes for cash flow generation. But it has also benefitted from traffic rights negotiated by the EU with third countries, including the EU-US Open Skies agreement. Continued access to the US market, potentially through a new bilateral agreement, will therefore be key for its operations.

Overall, we expect lower visibility for revenue and cash flow generation in the short to medium term due to heightened uncertainty. We rate BA (BB+/Positive) and Ryanair (BBB+/Stable), and both have strong credit metrics at their respective rating levels to absorb the immediate impact, especially in the current beneficial environment of low oil prices. But the longer-term impact is less certain and BA's positive rating momentum, if sustained, may take longer to result in a rating action.

Sterling depreciation is also likely to have a negative impact on UK airlines (excluding hedging effects) due to the currency mismatch in their revenue, cost and debt structure. Forty-nine percent of easyJet's revenue is in sterling, but 67% of its costs are in dollars or euros. The impact on BA is likely to be more muted as over half of its revenue is generated in currencies other than sterling (19% in dollars) and over 40% of its costs are in dollars or euros.