Part 1: As the Pound falls against the Aussie dollar, the airlines feel the pinch while consumers feel the benefit

As the world awaits the British PM Theresa May's announcement of her government's official Brexit strategy, air passengers are in heaven as the British Pound falls to its lowest level in over two months against the Australian dollar. It has fallen nearly 25% since Jun-2016 as expectations that a 'hard Brexit' is now inevitable drive the GBP down against most currencies. But it's not such good news for airlines.

Source: XE.com

Historically, the Pound has been an expensive currency for Australians to buy, making travelling to (and shopping in) the UK, particularly London, less attractive than parts of continental Europe, where the Euro has been under consistent pressure due to the economic instability of countries such as Greece and Italy.

Nevertheless, apart from a slight dip in 2012, Australian visitor arrivals in the UK have consistently hovered just above 1 million with a slight decrease of 1.3% year on year 2014 - 2015.

United Kingdom - annual visitor arrivals from Australia (2011-2015)

Source: CAPA - Centre for Aviation and OAG and VisitBritain

Australia - annual visitor arrivals from the UK (2010-2016)

Source: CAPA - Centre for Aviation and Tourism Australia

The GBP over the same period has taken a rollercoaster ride from lows of GBP1.45/AUD in April 2013 to highs of GBP2.20/AUD in Sept-2015. Since the EU Brexit referendum in June 2016 the GBP has steadily fallen (with a few bumps along the way) to its current level of GBP1.60/AUD.If Britain maintains a hard Brexit strategy, the Pound will remain low as the market compensates for the UK's departure from EU trade agreements signals a new phase of uncertainty for the British economy.

Although tourism statistics suggest that Australian tourists, irrespective of exchange rates, have been largely resilient when it comes to travelling to the UK, a consistently lower Pound would clearly make Britain a far more affordable destination for Australian tourists.

Lower fares also make travel more attractive - although not so good for airlines

To sweeten the equation, large amounts of seats on routes to the UK mean that fares remain under pressure. But currency fluctuations have a major impact on an airlines' profitability. Most costs, such as fuel and lease repayments are usually in USD. When the Australian dollar slumped against the USD, making travel abroad more expensive for Australians, it also hurt foreign carriers operating into Australia, as their revenue was now reduced proportionately. Hardest hit were the Gulf carriers and some Asian carriers like Singapore Airlines and Cathay Pacific; a significant part of their business relies on the Australian outbound market, but most of their costs are in home currencies linked to the USD.

A falling GBP means that net USD denominated revenues fall even further; and concerns over consumer confidence in the UK now mean that demand for long haul travel from the UK to Asia and Australia is also likely to be affected.

This is almost the perfect storm for the airlines on the kangaroo route - lower USD denominated fares at both ends of the route; weaker travel demand; and growing competition from Chinese airlines.

Competition to Europe will remain strong - and fares low

Given the continued rise of Chinese airline seat capacity out of Australia, offering one stop connections, competition on airfares from Australia to the UK remains stronger than ever. Fares on Skyscanner.net from Sydney to London in early May-2017 include Air China at AUD1,004 return with one stop in Beijing. China Southern is not far behind at AUD1,075 return. Even Cathay Pacific is offering a AUD1,132 fare via Hong Kong and Singapore Airlines AUD1,205 via Singapore. Local carriers in both markets are having to compete with British Airways offering AUD1,237 return, Qantas at AUD1,385 and Virgin Australia at AUD1,210.

Competition is also continuing in the Business Class market. Chinese airlines such as China Southern (with 787, A380 and A330) offer return fares Sydney-London for AUD4,929 and Cathay Pacific offer AUD5,964 for early May-2017 (Philippine Airlines offers the lowest one-stop price, at a very tasty AUD3641).

Airlines with an established premium customer base such as Singapore Airlines have held prices at AUD7,027, but Etihad, Emirates and even Qantas are currently offering Business fares for just over AUD6,000.

Price comparison: Sydney to London departing 8-May-2017 returning 15-May-2017

Source: Skyscanner

The picture is similar from the UK: fares to Australia are also heavily discounted to stimulate demand and fill seats. British Airways is offering a return economy fare to Sydney from London for GBP570 (a bargain AUD919 at today's exchange rate). By comparison a BA fare on the less competitive London-Tokyo is GBP718, a flight roughly half the length of London-Sydney.

These fares, while designed to stimulate demand, will be causing pain to the airlines. However in the context of a financially cautious British public unsure of what lies ahead, they will be around for some time yet.

And for Australian travellers to the UK, the pickings are there for the taking.

In Part 2 we will look at the impact of the similar decline of the Pound against the Kiwi dollar and how that impacts the New Zealand market.