RYAAY Ryanair Holdings PLC

By Robert Wall 

LONDON -- European airlines were among the hardest hit by the market turbulence Friday, following the startling decision by Britons to leave the European Union.

Airline stocks fell sharply on concerns a weaker British currency and possible slowdown in the wider European economy would curtail demand for air travel. The result of the vote also puts into doubt international agreements governing air traffic rights to and from the U.K.

While much hinges on the broader economic fallout, the effect on business quickly became clear. International Consolidated Airlines Group SA, which owns British Airways, Ireland's Aer Lingus and Spanish carriers Iberia and Vueling, issued a surprise profit warning on Friday.

"In the run-up to the U.K. referendum during June, IAG experienced a weaker-than-expected trading environment," the London-based company said, adding it no longer expected to reach its full-year target of an operating profit increase on par with last year's. The operating profit target was around EUR3.2 billion ($3.6 billion).

The U.K. is one of Europe's biggest aviation markets and home to some of the region's largest airlines, including British Airways and EasyJet, Europe's No. 2 discount carrier.

Europe's largest airline, Irish discounter Ryanair Holdings PLC, uses London Stansted airport as one of its main bases.

"We expect airlines serving the U.K. market to face immediate weaker outbound leisure demand, as the pound weakens and business travel declines given economic and political uncertainty," HSBC analyst Andrew Lobbenberg said.

The International Air Transport Association projected the number of air passengers traveling to and from the U.K. could drop by 3% to 5% from its previous forecast.

EasyJet Chief Executive Carolyn McCall said the company has asked the U.K. government and European Commission "to prioritize the U.K. remaining part of the single EU aviation market, given its importance to trade and consumers."

Ryanair Chief Executive Michael O'Leary said ahead of the referendum the airline's growth in the U.K. could be slowed if the country leaves the EU. Ryanair didn't address the effect of the vote in its business plans, only saying a seat-sale linked to the referendum had drawn strong interest.

Peter Simpson, chief executive of bmi regional, a smaller carrier operating mainly from regional cities, signaled the airline may reconsider being based in Britain. "Our continued business domicile as a U.K. entity is less than clear at this point in time," he said. The carrier had expanded heavily outside the U.K., he said, so it is wary of potential barriers to that growth.

The EU's single aviation market, which allows any airline within the region to fly to any city in the bloc, has spurred air travel and profits for many of the region's airlines. The agreement also governs traffic rights with countries overseas, including services from the U.S. to London, the single-largest destination for trans-Atlantic flights.

"All of this facilitates greater competition between airlines and, working effectively, results in lower fares and more choice for passengers," lawyers at Eversheds said ahead of the referendum.

British politicians now will have to negotiate new rules for the skies. Options include becoming an adjunct member to the European single aviation market, like Norway and a few other non-EU countries. It could also pursue a bilateral agreement with the EU similar to that agreed by Switzerland; or a hodgepodge of separate deals with the EU, the U.S. and other countries, industry experts said.

Pablo Mendes de Leon, professor of air law at Leiden University, said adjunct membership in the European aviation market may be unlikely, because it would subject the U.K. to European regulations with little say to influence them. A more likely option would be establishing bilateral agreements with EU member states, he said, which may vary.

Traffic rights between the U.S. and Britain could revert to an old and highly restrictive bilateral agreement, called Bermuda 2, that limited flights and access to London Heathrow, said John Byerly, the former chief U.S. aviation treaty negotiator. Both sides would likely move quickly, though, to a more liberal deal, he said, which would preserve existing services and pacts such as those between American Airlines Group Inc. and British Airways, and Delta Air Lines Inc. and Virgin Atlantic Airways Ltd.

--Doug Cameron contributed to this article.

Write to Robert Wall at robert.wall@wsj.com

(END) Dow Jones Newswires

June 24, 2016 16:04 ET (20:04 GMT)

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