How will Brexit affect the airline industry from a regulatory perspective?

By Paul Briggs, Simon Phippard, Tim Boström, Rachel Welch-Phillips,

11-2018

On 29 March 2017, the UK Government served formal notice under Article 50 of the Treaty on the European Union to terminate the UK's membership of the EU (following the June 2016 UK referendum on EU membership). Based on Article 50, the EU Treaties shall cease to apply to the UK and the UK exit will take effect on 29 March 2019. The Withdrawal Agreement which was agreed by the UK cabinet and the European Council in November 2018, but which is yet subject to approval of the UK Parliament, provides for a transitional or "implementation" period to the end of 2020, during which EU law will continue to apply in the UK. The Withdrawal Agreement is expected to include an outline of a future UK/EU relationship agreement, in the form of a political declaration, to be negotiated during the transitional period. However the final draft Withdrawal Agreement does not contain any guidance in relation to aviation or air travel post-Brexit. If no Withdrawal Agreement is concluded, i.e. in a "no deal" or "hard Brexit" scenario, EU law will cease to apply in and to the UK on 29 March 2019.

Amidst the media excitement following the UK's decision to leave the EU, there were few certainties about the effect on the UK and broader European aviation sector. The air transport sector is international in everything that it does, is subject to considerable EU influence, and has a number of non-EU Member States participating in the current European structure. Those factors suggest considerable uncertainty about the extent to which the sector will actually change as a consequence of the UK's decision to leave the EU. This bulletin describes the implications of the decision from an aviation regulatory perspective and offers an update to our previous bulletin on the subject.

Among the bigger issues where the EU has affected UK aviation are the role of the EU in traffic rights and access to routes for commercial air transport services (whether within or to and from the EU) and its role in managing aviation safety. The EU also plays a significant role in many other matters, such as consumer protection and infrastructure matters (including airports and air navigation services). How will these issues be affected by the Brexit decision?

 

Technical regulation

  • We remain of the view that the European Aviation Safety Agency (EASA) is here to stay. The standards it sets are recognised worldwide on a par with the requirements of the US Federal Aviation Admin­istration (FAA). Financiers will advance money on aircraft which hold an EASA type certifi­cate and certificate of airworthiness. EASA's role is crucial in relation to most aspects of safety regulation including design and production of aircraft, their operation, flight crew licensing, and also oversight in relation to air navigation services.
    Hitherto, UK aircraft operators must comply with the EU safety rules, but do at the same time benefit from recognition of licences and rights to operate throughout the EU and beyond.
  • As an EU Member State, the UK participates in EASA and plays a full part in its management. So too do Norway, Iceland, Liechtenstein and Switzer­land; none of them being a Member State of the EU. Countries that are not Member States of the EU are allowed to participate in the EASA processes where they have entered into agreements with the EU under which they adopt and apply EU law in the fields covered by the Basic Regula­tion: this remains the case with the entry into force of the revised Basic Regulation in September 2018.  Such participation is not a right, but a possibility, subject to negotiation.  It is therefore open to the UK, as a non-Member State, to negotiate participation on similar terms to those other European countries and thereby to receive many of the benefits. If it does so, the existing regulatory environment could proceed virtually unchanged.
  • The disadvantage will be that, as a non-EU Member State, the UK would lose influence over the full development of the EASA legal framework. Historically these rules have been adopted through a variety of legislative processes. EASA's role is often limited to making recommendations to the Commission as to the content of regulation and advising the Commission and other European institutions on associated policy issues. Countries that are not full Member States of the EU are not in a position to influence the final form of regulations as they go through the remainder of the legislative process. If the UK were to seek membership of the European Economic Area (EEA), it would have some influence on future EU legislation but not to the same extent as a full Member State.
  • On the other hand, one of the important elements of the recent revision to the Basic Regulation is to give the Commission greater power to define regulation, by means of delegated and implementing acts, without the same level of political debate. Over time, we would expect that process to increase the role of EASA and, therefore, increase the influence of states participating in EASA. 
  • While some commentators have suggested that the UK's decision to leave the EU may have greater ramifications for the EU as a whole, we do not believe that any wider impact caused by Brexit is likely to have a significant effect on EASA or the current European aviation safety regime. In the unlikely event of fundamental change to other EU institutions, we expect that the agency, which is now well established following considerable investment by the EU and its Member States, and performs an essential function, will continue to play its current role in the technical regulation process.
  • In her speech on 2 March 2018 the Prime Minister announced the UK's intention to explore ways for the UK to remain within EASA. The White Paper published in July 2018 referred to the UK's vision for an economic partnership which included participation in agencies such as EASA. The draft Political Declaration (as at 22 November 2018) indicated:

"The Parties will also explore the possibility of cooperation of United Kingdom authorities with Union agencies such as … European Aviation Safety Agency" (EASA). In this context, the United Kingdom will consider aligning with Union rules in relevant areas"

and

"The Parties should make further arrangements to enable cooperation with a view to high standards of aviation safety and security, including through close cooperation between EASA and the United Kingdom's Civil Aviation Authority (CAA)."

  • This suggests that the political will exists for continued UK participation in EASA, although as a non-EU Member State it would not be possible for the UK to sit on its Management Board. Issues such as budgetary contributions would need to be resolved.

Traffic rights

  • Since 1993, airlines from Member States of the EU have had free access to operate commercial services throughout the EU (although the right to operate routes within another Member State (cabotage) was not fully implemented until 1997). This market liberalisation is without doubt one of the main factors behind the successful growth of pan European airlines such as easyJet, Ryanair, Norwegian and Wizzair.
  • Access to the single EU aviation market has also been extended to airlines based in Norway, Iceland and Liechtenstein under the EEA agreement, and subsequently to Albania, Bosnia and Herzegovina, Croatia, Kosovo, the former Yugoslav Republic of Macedonia, Montenegro and Serbia under the European Common Aviation Area (ECAA) agreement (to which also Norway and Iceland are parties). Switzerland, while not a party to the ECAA agreement, also has access to the single EU aviation market through a bi­lateral agree­ment with the EU.
  • Once the UK leaves the EU, airlines holding operating licences issued by the UK will no longer enjoy automatic access to the sin­gle EU aviation market. As such their rights to oper­ate to, from and especially within the EU would need to be provided through alternative arrangements. The importance of such  access was illustrated by the disclosure, on the day of the announcement of the result of the referendum, that easyJet had asked the UK Government and the European Commission to prioritise the UK remaining part of the single EU aviation market. Since then, easyJet has taken a number of steps to restructure its operations to retain an EU operating licence (a licence it has now gained through its Austrian easyJet Europe subsidiary) and ultimately access to the single EU aviation market.
  • For UK airlines to maintain such access, the UK would have to either ac­cede to the ECAA agreement or enter into a separate agreement with the EU (similar to Switzerland). Entering into bilateral agreements with specific Member States or blocs of states of the EU could also be an option, although we do not anticipate that the EU would favour this process. Irrespective of which avenue is chosen, it could potentially become a lengthy process: by comparison it took some seven years for the Swiss agreement to be negotiated and enter into force (although the Swiss bilateral agreement forms part of a package of other agreements between the EU and Switzerland). From a UK stand­point, access to the single EU avia­tion mar­ket may be weighed against the freedom to adopt its own regulations and policies, and the possibility of negotiating new bilateral agreements whereby only the UK's interests (and not those of the EU as a whole) are looked after.
  • It is equally important to remember that a departure by the UK from the EU would also deprive European airlines of automatic access to the UK aviation market, which is undoubtedly important. Ryanair, Norwegian and Wizz Air are all examples of airlines having significant base operations in the UK.  This could give the UK leverage in negotiating access to the EU aviation market but at what price? Most obviously, of course, would be the UK granting EU airlines reciprocal ac­cess to the UK aviation market. Other issues that may come into play could include consumer protection, security, emissions trading and commitment to the Single European Sky. Other than Donald Tusk's encouragement on 7 March 2018 that talks start shortly when he described the disruption of flights between the UK and the EU as "particularly absurd", there has been limited indication of the EU's position. The draft Political Declaration acknowledges the will to secure an agreement on traffic rights but also related issues such as consumer protection:

"The Parties should ensure passenger and cargo air connectivity through a Comprehensive Air Transport Agreement (CATA). The CATA should cover market access and investment, aviation safety and security, air traffic management, and provisions to ensure open and fair competition, including appropriate and relevant consumer protection requirements and social standards."

  • If the EU and UK find a solution that ensures continued access for their respective air­lines to the single EU and the internal UK aviation markets, most airlines would probably be able to continue operating as if Brexit never happened. A UK airline would likely be able to continue operations from its EU bases under its UK air operator certificate and operating licence without having to establish local airlines (if at all possible from an ownership and control perspective; see below), in just the same way as an EU airline can presently operate, and could continue to operate, from and within the UK. 
  • It is more difficult to predict what will happen to the comprehensive air transport agreements entered into by the EU has negotiated with certain third coun­tries (i.e. countries not forming part of the single EU aviation market). There are 17 countries in this category, i.e. those where services between the UK and a non-EU member state arise by virtue of the UK's membership of the EU. As an example, by leaving the EU, the UK will cease to be a party to the EU-US open skies air transport agreement (the "EU-US Agreement"). Given the importance of the EU-US market generally, and the UK-US market specifically, a solution is critical. Whether the UK would permit other EU airlines access to the UK-US market is, however, not clear. For that matter, the US may also have reservations.  Given the extent to which members of the US Congress, labour organisations, airlines and even presidential candidates have questioned whether certain previous applications for a foreign air carrier permit were consistent with terms and conditions of the EU-US Agreement, it would not come as a big surprise if the US were to give labour standards a higher priority in connection with the negotiation of a new air service agreement between the US and the UK. 
  • The above essentially boils down to two main issues. Firstly, to what extent would EU and UK airlines be allowed to operate flights to, from or within the UK and EU respectively, and whether agreements on such access also encompass controls over traffic rights to points outside the EU? Secondly, would the EU's ownership and control regulations (which provide for majority ownership and control to be vested in EU nationals) apply to UK nationals, and will the UK in such case im­pose similar ownership and control regulations re­quiring UK airlines to be majority owned and/or controlled by UK nationals?

Ownership and control limitations

  • Many countries around the world have ownership and control regulations in place that, to a varying extent, restrict foreign ownership and control of their airlines. The EU is no exception, in that EU nationals are required to have majority ownership and control of EU airlines. Other examples include the US and Japan which limit the foreign ownership of their respective airlines to 25 and 33 percent respectively.
  • That said, there are also examples of countries that have diluted or otherwise liberalised ownership and control requirements. India now permits full foreign ownership of its domestic airlines (subject to prior approval from the government), while certain other countries have adopted a 'principal place of business' approach, and sufficient oversight of technical regulation rather than insisting on majority ownership and control by its own nationals.
  • If remains to be seen whether, and if so how, the ownership and control restrictions will change within the EU.  It will be of particular interest for airlines (and investors) to see whether the impact assessment in the consultation on Regulation 1008/20081 will recommend that the rules on ownership and control are retained in their current form or modified in some way. 
  • In an initial consultation on the Aviation Strategy, respondents noted, among other issues, that rules on ownership and control of EU air carriers require clarification.  This is not surprising since the ownership and control test can be difficult to apply.  In particular, questions arise where shareholders are complex corporate entities such as trusts or investment funds; where there are questions of positive/negative control; and where there is joint control of air carriers.
  • Although the review of Regulation 1008/2008 is in its early stages, its scope indicates at least some openness to an alteration of the current test provided that the internal market is still adequately protected. The Commission's Aviation Strategy, indicates a willingness to pursue a policy of relaxation of ownership and control rules with respect to European airlines if certain conditions are met; this possibility was supported by Henrik Hololei, Director-General Mobility and Transport, in a speech in Washington in July 2018. On the other hand the Commission on 12 March 2018 announced its concern that common ownership of airlines by investment funds might harm competition.  It will be interesting to see whether these concerns are borne out, and if so, whether this could influence the Commission's approach to ownership and control requirements.
  • The ownership and control requirement is relevant not only for airlines' ability to obtain and maintain an operating licence, but also for traffic rights granted under other bilateral air services agreements. These often contain nationality clauses. Unless an airline is majority owned and effectively controlled by nationals of the relevant state, the other state being a party to the agreement would have no obligation to accept a designation of the airline in question.
  • Despite the UK's traditionally liberal approach to ownership and control requirements it may seem far-fetched to expect the UK to allow EU nationals to own or control UK airlines if the EU does not do likewise. If ownership and control limitations were to come into effect, it could significantly affect certain airlines (both in the UK and EU), prompting them to restructure both on a corporate and operational level, and in some instances perhaps forcing them to give up certain routes and markets.
  • If for example the UK-US market be­came reserved to UK and US operators (and other airlines that are able to negotiate fifth free­dom rights), this would prevent EU airlines from operating flights between the UK and the US. If the UK were to apply ownership and control rules similar to those of the EU (whereby foreign ownership is limited), the possibilities for EU airlines to operate such flights through a UK owned or controlled subsidiary would also be reduced. Instead, such EU airlines would likely need to establish a split operation (with a minority owned UK airline operating between the UK and US) should they wish to operate to the US from the UK. The same issues would probably also face UK airlines wanting to operate between the EU and the US.
  • We assume that the UK wants to avoid such an outcome since it would affect UK air­lines' ability to operate throughout the EU, as well as owning or con­trolling air­lines in the EU. Some UK airlines have taken steps to set up an airline elsewhere in the EU to mitigate the risk of a hard Brexit; this could become increasingly complicated should the EU and UK impose ownership and control regulations against each other.

Consumer protection

  • Brexit could also affect consumer protection; especially passengers' right to compensa­tion and care in connection with delayed and cancelled flights pursuant to Regulation 261/2004. Other examples include Regulation 1107/2006 on rights of disabled persons and persons with reduced mobility when travelling by air.  As a member of the EU, UK airlines are always bound by the regulation, while third country airlines, in principle, are only bound by the regulation on flights from an EU country.
  • Although the UK historically has advocated high consumer protection standards, it is no secret that the airline industry generally believes that the burden placed on the airlines is too high; especially with regards to delays and cancellations caused by extraordinary cir­cumstances.
  • Should the UK wish to remain in the single EU aviation market, we believe it is safe to assume that the EU would require compli­ance with Regulation 261/2004 (and other applicable EU regulations) whether the UK becomes a member of the ECAA agreement or enters into a bilateral agreement with the EU. However, it might also be an opportunity for the UK to ease some of the requirements placed on airlines operating flights from the UK.

Implications for airlines from outside the EU and UK

  • As a starting point third country airlines – i.e. those from outside the EU – do not have automatic access to the internal EU aviation market and the access they might have would probably not change as a matter of the UK leaving the EU. What could change though is the right to operate into the UK, at least if such right follows from a comprehensive agreement between the EU and the relevant third country. Should this be the case, the UK might need to negotiate a new bilateral agreement with the relevant third country to ensure continued market access.
  • Should the UK adopt ownership and control regulations in a form similar to EU rules, the potential implications for non-EU airlines would probably be small, since these airlines would already be subject to the EU's ownership and control regulations. That said, and as mentioned above, we note that under the EU's Aviation Strategy, the Commission will under certain circumstances pursue a policy of relaxation of ownership and control rules with respect to European airlines. If the EU were to liberalise its ownership and control requirements, a departure by the UK from the EU would mean that such the benefit of such relaxation would not automatically extend to UK carriers.  On the other hand, the UK would be free to set its own ownership and control limitations based on its own needs and priorities.

A "no deal" Brexit?

  • Despite Council agreement on the Withdrawal Agreement and the political declaration it remains possible that the UK will leave the EU without signing the Withdrawal Agreement. In that event the transition period would not come into effect and, although the UK would adopt EU regulations as its own under the European Union (Withdrawal) Act, the UK would become a "third country" outside the EU. Despite the fact that, for instance, aviation certificates, licences and approvals issued by the UK would have been issued to EASA standards, they would no longer be recognised automatically within EU27 states. There would be no automatic traffic rights between the UK and EU 27 states, nor access for UK carriers to intra-EU27 routes (or routes between EU 27 and third countries) or for EU27 airlines to intra-UK routes (or routes between the UK and third countries).
  • Both the UK and the Commission have issued a number of publications detailing their view of the effect of a "no deal" Brexit and their contingency plans.
  • In September 2018 the UK DfT issued three Guidance Notices on the consequences of a "no deal" Brexit (covering traffic rights, aviation safety and security) indicating, among other things, that:
    • specific permission would be needed for flights between the UK and the EU, but envisaging that the UK would grant permission to  EU airlines to continue to operate, preferably on the basis of a multilateral agreement with the EU. Bilateral agreements with individual EU member states would otherwise be needed;
    • a UK Part-TCO authorisation would be required by EU27 airlines, but these would in principle be issued on the basis of an EASA AOC;
    • certificates and approvals issued by EASA or by another EASA member state would continue to be recognised for UK aircraft for up to two years after exit day, subject to earlier expiry; and
    • Part-FCL pilots' licences issued by an EASA authority will require validation to permit operation of a UK-registered aircraft, but such validation will be forthcoming so long as the pilot is proficient in English.
  • The Guidance Notices contain considerable detail about the implications for various participants whether individual or organisational and whether any given function is regulated by the UK or another EASA state. A number of elements work on the basis that the UK presumes the EU will reciprocate.
  • In its Contingency Action Plan released in November 2018, the Commission indicated that it will propose measures to ensure:
    • that UK air carriers are able to fly over the EU, to make technical stops (such as refuelling), and to land in the EU and fly back to the UK. These measures would also be subject to reciprocity from the UK. The wording is slightly curious in that it is clear that technical stops do not entail the embarkation or disembarkation of passengers, but the right to "land … and fly back" does not specifically mention that right. However it seems to have been accepted that this means that revenue flights will go on;
    • continued validity of type certificates and organisation approvals for a limited period of time, subject to reciprocity from the UK; and
    • that parts and appliances placed on the market by entities certified by the UK CAA prior to withdrawal may still be used under certain circumstances.
  • So far as UK airlines exercise traffic rights under bilateral air transport agreements to which the EU is not party, nothing will change – either pursuant to the Withdrawal Agreement or in the event of "no deal". There are 111 of these, including Brazil, China and India. In addition, there are 17 countries to/from which UK air services are governed by comprehensive agreements entered into by the EU. These include the abovementioned EU-US Agreement with the United States. In these cases, the UK has committed that alternative arrangements will be in place to cover the risk of a "no deal" Brexit. The DfT recently reported that a draft of a new UK/US Air Transport Agreement has been made available to parties who need to know, and that a final round of negotiations is to take place in late November.

Summary

  • It is clearly open for the UK to seek to negotiate a position in a post-EU world which would enable aviation business to continue as it has in the years leading up to the refer­endum. At the time of writing we are unable to tell whether the current arrangements will continue during a transition period or whether a "bare bones" agreement will be put in place following a "no deal" Brexit. In either case, there appears to be willingness in principle to negotiate long-term arrangements covering both technical and economic regulation.
  • As many observers have noted, this will in all proba­bility require subscribing to the same regulatory regime and legislative requirements that pertain at present. Arguably, for the industry, that would represent limited change, but the UK's influence to determine the overall European policy direction and the detail of much of the legislation will be diminished (although its own policy freedom poten­tially could increase in certain areas).
  • On the other hand, a departure from the ECAA would present the UK with an opportunity to adapt its aviation policies to its own needs and priorities without having to take into account the EU as a whole.
  • The long term outcome in terms of future access to routes, and the extent to which the UK may be able to negotiate favourable terms, will depend on many factors, not least the view taken by continuing Member States or European institutions about the effect of offering concessions, or of taking a hard line, on any other Member States whose electorates might be thought likely to follow the UK's example.

The range of areas within aviation affected by European regulation is broad: we have not addressed the Emissions Trading System, commitment to the Single European Sky project, or directives and regulations on such matters as ground handling, airport charges, slot allocation or security regimes.

We will continue to publish updates as the situation develops in order to assist you in assessing the wider impact of Brexit on the aviation industry.

 
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