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A weak pound and economic uncertainty in the wake of the Brexit vote means passenger growth in Britain’s airline industry will be only half as fast as previously forecast over the next two years, according to Moody’s’ latest report on the sector.

The wider UK economy has held up better than many observers had predicted since the referendum, but the rating agency said the airline sector is particularly vulnerable to the weakening pound.

EasyJet and IAG, the owner of British Airways, have already encountered turbulence in recent months, with both issuing profit warnings since the vote, and Moody’s expects their difficulties to continue over the next few years.

UK airlines earn the majority of their revenues in sterling but many have dollar-denominated costs, which become more expensive to pay when the pound is weaker. On top of that, sterling’s fall has been so severe that outbound leisure travel, particularly to the US, is likely to decline as Brits look for more affordable holiday options closer to home.

The impact on travel to the US means British Airways and Virgin Atlantic are expected to be the most severely effected.

The report adds that the industry could be further affected by loss of inclusion in European aviation agreements after the UK leaves the EU.

Moody’s vice president and senior credit officer Xavier Lopez del Rincon said continued membership in the European Common Aviation Area “is possible but cannot be taken for granted”, and said leaving the agreement “would be severely disruptive for airports and airlines, with far-reaching ramifications, including on UK-US aviation agreements”.

Copyright The Financial Times Limited 2017. All rights reserved.
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