How will Brexit affect the aviation and travel industries from a regulatory perspective?

By Paul Briggs, Simon Phippard, Rachel Welch-Phillips, Robert Moher, Alex Kelly, Veronica Webster

01-2020

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). The UK left the EU on 31 January 2020. The Withdrawal Agreement, which has now been passed, provides for a transition or "implementation" period up until December 31st 2020, during which the majority of EU law will continue to apply in the UK. The final draft Withdrawal Agreement does not contain any guidance in relation to aviation or air travel post-Brexit. However, the Political Declaration, which supplements the Withdrawal Agreement, contains a non-binding commitment to establish continuity in the aviation industry.

The air transport sector is, by its nature, highly international and is subject to considerable EU influence. The sector is made more international still by the participation of a number of non-EU Member States in the current European structure. EU law primarily impacts UK aviation through regulations governing traffic rights, aviation safety and access to routes for commercial air transport services (whether within or to and from the EU). However the EU also plays a significant role in many other matters. These include consumer protection and infrastructure, such as airports and air navigation services.

Now that most EU law will continue to apply in the UK for at least the rest of 2020, little will change on Exit Day. The UK remains a member of EASA and both UK and EU airlines will enjoy their existing traffic rights throughout the European Common Aviation Area until the end of 2020. This could remain the case for longer, should an extension to the transition period be agreed (although the government has made clear its intention not to extend). While the transition period marks the start of negotiations for a long-term UK-EU relationship, there remains uncertainty about the nature of UK-EU relations after the end of 2020. 2020 may, theoretically, witness the formation of a comprehensive, long-term future relationship between the UK and its biggest trading partner. For that reason, attention is now focused on what that long-term relationship, after the transition period, will look like.

This bulletin describes the implications of Brexit from an aviation regulatory perspective.

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 Admin¬istration (FAA). For instance, financiers will often advance money on aircraft which hold an EASA type certifi-cate 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 and maintenance, flight crew licensing, airports and air navigation services. There is a widely held view in the industry that a future UK-EU relationship should ensure continuity of the role of EASA and, by implication, some form of mutual recognition of standards.

1. Mutual Recognition

• Currently, UK aircraft operators, manufacturers and personnel must comply with EASA safety rules, and benefit from mutual recognition of licences and rights to operate throughout the EU. In simple terms, an organisation or individual holding a licence or approval issued by the UK Civil Aviation Authority (CAA) under EASA rules can carry out that activity or exercise those privileges on any aircraft registered in the EU. Likewise, a licence holder from another EU state can operate on a UK-registered aircraft.

• Consequently, the starting point for the UK's departure from the EU and from EASA is that approvals, licences and certifications issued by the UK CAA directly or by UK approved organisations would no longer be recognised in the EU. UK-made parts would no longer be accepted as meeting EASA standards and aircraft incorporating these parts could be grounded.

• The future relationship between the UK and the EU must deal with the issue of mutual recognition if businesses and individuals are to maintain the current level of flexibility. Already, some seven hundred UK businesses have sought EASA "third country" approvals to continue to operate and supply their products and services with EASA approval as they do at present. In order to avoid the additional time and cost of a dual-compliance regime, agreement on EASA standards as they currently apply, and as they may apply in the future, seems essential. As a ‘third country’, the UK will, in theory, be free to conclude bilateral agreements on mutual recognition with individual states. However, since the EASA regime extends across the EU, there is little realistic prospect of negotiating variations from the regime, even if that were otherwise desirable.

2. Role of the UK in the EASA

• As an EU Member State, the UK participates in EASA and plays a full part in its management. 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 Regula¬tion. This principle did not change with the entry into force of the revised Basic Regulation in September 2018. Such states include Norway, Iceland, Liechtenstein and Switzer¬land. 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 technical regulatory environment could proceed virtually unchanged.

• Nevertheless, however influential the UK may be in aviation regulation, as a non-EU Member State, the UK would not have the same level of influence over the development of the EASA legal framework. That comes about at two levels.

• First, EU aviation rules are adopted through a variety of legislative processes. A large part of EASA's role is to make recommendations to the Commission as to the content of regulation and to advise the Commission and other European institutions on associated policy issues. The Commission, Member States and the European Parliament frequently then have their say on the final form. Countries that are not full Member States of the EU are not in a position to influence the remainder of the legislative process.

• On the other hand, one of the important elements of the 2018 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 (including, importantly, non-Member States).

• Second, although the UK could retain significant influence through membership, a non-EU Member State does not participate in the Management Board of EASA. This would inevitably lead to a reduction in the UK's influence at the final point of agreeing EASA recommendations.

• There have been some indications that the political will exists for continued UK participation in EASA. In March 2018 Theresa May 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. Furthermore, the Political Declaration (as at 19 October 2019) indicated:

"The Parties will also explore the possibility of cooperation of United Kingdom authorities with Union agencies such as … the European Aviation Safety Agency (EASA)."

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)."

Commentators' views differ as to whether Sajid Javid's comments in January 2020 about regulatory non-alignment indicate a fundamental change of policy.

3. What if there is no agreement during 2020?

• It is of course possible that, come the end of 2020, there is no agreement on EASA membership or mutual recognition, and no extension is agreed to the transition period. In that event, the situation would be rather similar to the risk of the UK leaving in March 2019 with "no deal". Contingency legislation[1] was introduced in March 2019 to address this possibility. While that regulation no longer applies now that the Withdrawal Agreement has been agreed, and would have to be reinstated if a similar situation arises at the end of 2020, it gives an indication of what might be expected in order to avoid aircraft having to be grounded.

• Such regulation would have provided that certain certificates, such as type certificates and design organisation approvals issued by EASA to UK organisations, would remain valid for nine months. This would enable EASA to issue the certificates which would be needed as a result of the UK becoming a 'third country' and the CAA losing its right to issue certificates. Some certification issued by the CAA in respect of products, parts and appliances (Authorised Release Certificates, Certificates of Release to Service and Airworthiness Review Certificates) would remain valid following the UK's departure on an indefinite basis – i.e. for as long as each certificate is itself valid.

• There was also limited recognition of results of examinations taken prior to Exit Day in training organisations subject to oversight by the CAA.

TRAFFIC RIGHTS

1. The EU single aviation market

• 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 Wizz Air.

• 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 bi¬lateral agree¬ment with the EU. In recent years the EU has also entered into agreements with Moldova, Georgia, Morocco, Jordan and Israel.

2. The impact on UK-based airlines

• The starting point is that once the UK leaves the EU, airlines holding operating licences issued by the UK will no longer enjoy automatic access to the sin¬gle EU aviation market. As such their rights to oper¬ate to, from and within the EU would need to be provided through alternative arrangements. The value placed upon 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 restructured its operations to retain an EU operating licence through its Austrian easyJet Europe subsidiary, thereby ensuring access to the single EU aviation market. Similarly, Ryanair announced its intention to obtain a UK operating licence so as to maximise access to routes to, from or within the UK.

• For UK airlines to maintain comparable access, the UK would have to either negotiate ac¬cess to the ECAA agreement or enter into a separate air services agreement with the EU (similar to Switzerland). Entering into bilateral agreements with specific Member States or blocs of states of the EU is a theoretical option, although, given the Commission's position on external aviation relations with major trading partners, we do not anticipate that the EU would favour this process.

3. A future UK-EU air services agreement

• In any event, agreement is essential by the end of the transition period (whether that be in December 2020 or if there is any extension). Views vary on whether a comprehensive agreement can be negotiated in 11 months. It took some seven years for the Swiss agreement to be negotiated and enter into force (although this agreement did form part of a package of other agreements between the EU and Switzerland).

• The Political Declaration acknowledges the will to secure an agreement on traffic rights but also refers to 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."

• From a UK stand¬point, access to the single EU avia¬tion mar¬ket may be weighed against the freedom to adopt its own regulations and policies, and the possibility of negotiating new external bilateral agreements reflecting the UK's priorities.

• The fact that Brexit deprives European airlines of automatic access to the UK aviation market theoretically gives the UK leverage in negotiating access to the EU aviation market. However it is conceivable that the EU would only be prepared to offer materially enhanced access to internal EU27 routes for UK-based operators in return for concessions on other aspects of economic regulation within the UK or on non-EU traffic rights.

4. No-deal contingency plans

• As with mutual recognition of licences, the EU implemented legislation[2] in March 2019 to ensure that commercial flights would continue on an interim basis in the event of a no-deal Brexit. Again, the regulation does not apply if the Withdrawal Agreement comes into force, so will have to be reinstated if the transition period ends without agreement. This effectively allowed about eight months for the UK and the EU to reach a long-term deal governing traffic rights. In the meantime, UK carriers could continue to fly across the EU, make stops for non-traffic purposes, and operate commercial services between the UK and EU member states. Moreover, UK air carriers could perform all-cargo services between the UK, the EU and a third country for 5 months following Brexit, but this was subject to a capacity restriction. Additionally, for seven months from the UK's departure date, UK air carriers could continue to operate on routes subject to public service obligations.

• These measures would have preserved UK-EU flights but would have ended UK carriers’ access to internal EU routes. UK carriers' access was to be subject to the UK granting equivalent rights to EU carriers – albeit that the UK has frequently stated that it would be willing to grant comparable rights. It is notable also that early drafts of these measures would have capped capacity on UK-EU flights at existing levels.

5. Traffic to non-EU Member States

• It is more difficult to predict what will happen to traffic rights between the UK and those countries outside the single EU aviation market with which the EU has now entered into comprehensive air transport agreements. There are 17 countries in this category. UK airlines’ access to these routes arises through its membership of the EU. By leaving the EU, the UK will, for instance, cease to be a party to the EU-US open skies air transport agreement (the "EU-US Agreement"). The UK has concluded its own bilateral agreements with these countries, to take effect when UK airlines' access to those routes under the EU agreements ceases. For example, in November 2018 the UK concluded an air transport agreement with the US. Such agreements are also necessary to permit airlines from those 17 countries to fly to the UK, since after Brexit the EU can no longer confer rights to fly to or from the UK on countries outside the EU, unless the UK and the EU agree otherwise.

• A full list of negotiations and their progress can be found here.

• So far as UK airlines exercise traffic rights under bilateral air transport agreements to which the EU is not party, nothing will change on Brexit. There are over 100 countries in this category, including Brazil, China and India.

6. Key issues for an EU/UK air services agreement

• In our view the three main issues in relation to a future air services agreement between the EU and the UK are likely to be as follows. First, to what extent would EU and UK airlines be allowed to operate flights within each others’ territories? Second, will agreements on such access also encompass controls over traffic rights to points outside the EU? Third, will either the EU or the UK impose nationality-based restrictions on ownership and control of airlines as the price of access to their respective markets?

OWNERSHIP AND CONTROL LIMITATIONS

1. Generally

• Many countries around the world restrict, to some extent, 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. Examples of more stringent restrictions include the US and Japan which limit the foreign ownership of their airlines to 25 and 33 percent respectively.

• Some other countries have diluted or otherwise liberalised ownership and control requirements. The UK regards restrictions on airline ownership and control as "outdated". India now permits full foreign ownership of its domestic airlines (subject to prior approval from the government), while certain other countries, including some in Latin America have adopted an approach based on the airline's principal place of business, and on sufficient oversight of technical regulation, rather than insisting on majority ownership and control by its own nationals.

• The Commission's 2015 Aviation Strategy raised the issue of relaxing ownership and control restrictions for European airlines. It will be of particular interest for airlines and investors to see whether this process results in a recommendation 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.

• The scope of the review of Regulation 1008/2008 indicates some openness to an alteration of the current test, provided that the internal market is still adequately protected. This possibility was supported by Henrik Hololei, Director-General Mobility and Transport, in a speech in Washington in July 2018. On the other hand in March 2018 the Commission 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 party to the agreement would have no obligation to accept a designation of the airline in question.

2. Ownership and control post-Brexit (UK-US Agreement)

• The UK has traditionally favoured a liberal approach to ownership and control requirements. It is possible that the post-Brexit landscape will see a relaxation in ownership and control requirements. In December 2016 Andrew Haines, then the CAA’s chief executive, said the following:
“In a post-Brexit environment, relaxing the ownership arrangements UK-registered airlines currently have to comply with, could present an opportunity to attract new equity from non-EU investors, which could potentially improve choice and competitiveness for consumers”.

• In November 2018 the UK and the US concluded a new Open Skies agreement. This was in order to continue UK-US operations when the UK loses the benefit of the EU-US Open Skies deal. Provisions contained within this deal ensure continuity by preserving the rights of EU nationals to own UK based airlines. After Brexit, UK airlines will be able to remain owned by UK, EU and European Economic Area (EEA) shareholders rather than by UK nationals alone. UK airlines will need to show that “substantial” ownership remains vested in the country or "one or more" states that were party to the EEA agreement. It avoids the need, for the purposes of US traffic rights, for UK airlines to reduce levels of EU investment.

CONSUMER PROTECTION

• Brexit could also affect consumer protection; especially passengers' rights to compensa¬tion 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 these regulations, while third country airlines, in principle, are only bound by the regulation on flights from an EU country. As part of the EU law acquis, those regulations remain part of UK law after Brexit (and not only during the transition period) even though not implemented by UK domestic legislation, until amended by the UK.

• 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, for example, by technical defects outside the control of the airline.

• Should the UK wish to secure any access to the EU aviation market greater than simple cross-Channel traffic rights, we believe it is safe to assume that the EU would require compli¬ance with Regulation 261/2004 (and similar EU consumer protection regulations). However, it might also be an opportunity for the UK to ease some of the requirements placed on airlines operating flights to points outside the EU.

• UK law on certain related issues such as air carrier's liability in the event of accidents, and the obligation to carry appropriate insurance, currently derives from EU law. The relevant EU regulations will apply in any event as part of the acquis of EU law, but additional secondary legislation applies in the UK. We do not however see any material likelihood of divergence from what the EU requires: in the case of air carrier's liability the UK has already ratified the Montreal Convention which is the standard imposed by the EU Regulation.

IMPLICATIONS FOR AIRLINES FROM OUTSIDE THE EU AND UK

• Generally, the implications for non-EU airlines operating to the UK under existing bilateral air services agreements will be minor. Those airlines would already comply with ownership and control requirements imposed by those agreements. However, as mentioned above, the UK/US air services agreement does not require UK-designated airlines to be majority owned and controlled by UK nationals. EU (or EEA) ownership suffices. This has the effect of minimising disruption to investment in UK airlines. If the UK were to continue a comparable policy with relation to other bilateral air services agreements with other non-EU countries, we can see a situation in other regions where countries seek a comparable relaxation.

• It is well known that a number of non-EU countries regard EU policy on matters such as consumer protection as over-reaching. Their airlines may, of course, regard Brexit as an opportunity for the UK to modify such regulations, but that issue depends, in part, on how far an EU-UK air services agreement imposes requirements on the UK to adopt EU regulation in these matters.

PACKAGE TRAVEL

1. The impact of EU law

• EU law has a significant bearing on sales of holidays and other travel products in the UK. Much derives from the 2015 EU Package Travel Directive ("PTD2") which imposes duties on organisers of package holidays and those selling or facilitating linked travel arrangements ("LTAs"). However, as with the Air Travel Organisers’ Licensing ("ATOL") scheme, which provides for insolvency protection, UK implementation is largely achieved by secondary legislation so will continue in its current form after Brexit with limited changes.

• The Package Travel and Linked Travel Arrangements Regulations 2018 ("2018 Regulations") implement PTD2 in the UK. The 2018 Regulations protect consumers buying package holidays or LTAs through mechanisms for refunds and repatriation in the event of insolvency as well as imposing obligations on the organisers of package holidays. These obligations provide consumer protection as they require those organising or selling these products to provide, at the point of sale, information to consumers on whether they have bought a package holiday or an LTA, since the regulations offer different levels of protection. As is well known, organisers of package holidays remain responsible for performance of their subcontractors such as airlines or hoteliers.

2. Insolvency protection and EU mutual recognition

• Under the 2018 Regulations, organisers of package holidays and traders facilitating LTAs must have insolvency protection. The higher burden on package holidays requires ATOL protection. For LTAs, ATOL protection is optional, but some insolvency protection may be required, such as insurance cover, a bond or a trust fund.

• The ATOL scheme implements the obligations imposed under PTD2 (and its predecessor) to have insolvency protection in place. UK-based companies selling package holidays must have security in place against the organiser's insolvency. If the organiser goes into insolvency while the consumer is overseas, the fund established by the scheme and managed by the CAA will ensure the consumer can return home. If the business goes into insolvency before the consumer travels abroad, they will be able to draw on the fund for a refund. Although LTAs are outside the scope of the ATOL scheme, ATOL protection is sometimes offered as a marketing tool to bolster consumer confidence. Furthermore, there are elements within an LTA which may require ATOL protection or are subject to other insolvency requirements.

• As outlined above, mutual recognition is a hot topic in the context of Brexit. One of the key elements of PTD2 was that Member States must recognise protection put in place to protect against insolvency of organisers established in other Member States. In other words, a trader established anywhere in the EU may rely on insolvency protection put in place in its own country, wherever in the EU it sells package holidays or LTAs. As a result, traders established in the UK, but selling throughout the EU, benefit from reciprocal recognition of insolvency protection in the EU, and vice versa.

• After Brexit, there will be no obligation on remaining EU Member States to recognise insolvency protection for UK organisers trading in Europe, and the UK Government does not expect the EU to require its remaining members to do so. It would therefore confer an advantage on EU traders to permit them to sell package holidays in the UK while relying on their own insolvency protection schemes. The UK has therefore implemented a statutory instrument ("SI") to counteract this result. Under the SI, EU traders actively selling package holidays or LTAs in the United Kingdom will be required to comply with the UK insolvency protection rules. The SI will not, however, have any effect on traders that are not targeting business activities in the UK. Therefore, UK consumers may be at risk if they purchase package holidays from EU-based traders and should enquire about applicable insolvency protection prior to purchasing.

• Whether a future trade agreement will provide for mutual recognition remains unclear. For now, government advice currently warns businesses that they may have to comply with two regimes following Brexit, if they actively sell to consumers in an EU Member State. 

OTHER ASPECTS OF EU AVIATION POLICY

• The range of areas within aviation affected by European regulation is broad: this summary has not addressed environmental protection or the Emissions Trading System, the Single European Sky project, or directives and regulations on occurrence reporting and accident and incident investigation, aviation security and obligations with respect to advanced passenger data. All of these areas are presently subject to EU regulation and either apply directly or are subject to specific UK implementation.

• There are some areas of economic regulation, such as availability of ground handling services, airport charges or landing slot allocation, on which UK law draws heavily on EU policy but where UK policy may naturally be more liberal. Brexit may offer the UK an opportunity to set its own policy in some of these areas, but we can see the EU desire that air services agreements be predicated on a level playing field becoming a factor in negotiations on the future relationship.

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 refer¬endum.

• As many observers have noted, this will in all proba¬bility require subscribing to the much of 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.

• On the other hand the UK's own policy freedom could increase in certain areas. 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.

• Some form of air services agreement is essential by the end of the transition period. The UK Government objective is clearly to avoid any extension of that period. We would anticipate that the principle of operations between the UK and EU27/ECAA countries, without capacity or tariff limitations, by airlines respectively owned and controlled by UK or EU nationals, could readily be agreed. Progress is likely to depend on how far the following issues become part of the negotiation and how contentious they prove to be:

• Ownership and control of airlines, given the UK’s generally more liberal approach in this respect;

• Access for UK airlines to intra-EU27 routes, bearing in mind the asymmetry inherent in the respective advantages to UK and EU27 airlines;

• The UK's freedom to negotiate air services agreements with non-EU states;

• Continued application of other aspects of EU economic regulation, consumer protection, environmental policy and airspace policy;

• Alignment with, or non-derogation from, EASA standards; and

• UK participation in EASA.

• More generally, whether a good long term air services agreement can be settled this year may also depend on the extent to which it becomes tied up with the broader trade negotiations and how closely the EU sticks to its “no sector cherry-picking" principle.

[1] Regulation (EU) 2019/494 of the European Parliament and of the Council of 25 March 2019 on certain aspects of aviation safety with regard to the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the Union

[2] Regulation (EU) 2019/502 of the European Parliament and of the Council of 25 March 2019 on common rules ensuring basic air connectivity with regard to the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the Union

 
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