Impact of a No-Deal Brexit on the Aviation Industry
15 Mar 2019
What seemed inconceivable until a few months ago now appears (even in light of the recent spate of House of Commons votes) a real possibility – a no-deal Brexit. While Europe holds its breath, we explore in our update what a no-deal might mean for the aviation industry in the UK, Ireland and more generally.
While much mention has been made in the press regarding the default application of World Trade Organisation ("WTO") rules to the UK in the event of a no-deal Brexit, it should be noted that WTO rules do not apply to the aviation industry. There is no safety-net. In this context, and in light of the growing possibility of a UK no-deal exit, the Commission has rushed out rudimentary measures to temporarily govern traffic rights and regulation.
So, what does the Commission's plan entail and what are the potential issues that may arise?
Two measures have been adopted:
1. To ensure temporarily (for 12 months) the provision of certain air services between the UK and EU; and
2. To extend temporarily (for nine months) the validity of certain aviation safety licences.
The Commission measures cover direct flights, looking to ensure that point-to-point flights by a UK airline from the UK to Europe (and vice versa) will be allowed to continue pending implementation of new permanent arrangements. However, the measures do not provide specific guidance regarding intra-European flights (so, for example, BA flights from London to Paris will continue to be allowed but there is a question mark over the status of an onward BA flight from Paris to Rome).
Currently, in order to maintain an operating licence for intra-EU flights, EU rules require that air carriers be majority EU owned and controlled. One need remember in this context that Ryanair and Iberia, for example, are each UK companies. Absent specific guidance in the Commission measures, there is a tangible possibility that a Ryanair flight from Dublin to Prague or an Iberia flight from Madrid to Berlin will not be permitted following a no-deal Brexit.
Ryanair and Iberia each point to their ability to restrict voting rights for non-EU shareholders as sufficient qualification under the EU ownership rules. It is important to note, however, that while Michael O'Leary, Willie Walsh, the Spanish government (Iberia, Vueling) and the Irish Commission for Aviation Regulation (Aer Lingus) have all made reassuring noises on these lines, the drawing of a distinction between economic and voting rights as a basis for ownership qualification is not something that has ever been countenanced by the EU. Even in a best case scenario, i.e., that the commission is minded to allow this, it would require specific EU dispensation and it remains to be seen what quid pro quo the EU may ask for in return.
The measures in addition state that flights will be capped at 2018 numbers and there is no provision to allow the opening of new routes or the expansion, constriction or scrapping of existing routes. So, even on a liberal interpretation, the temporary rules will be extremely limiting for certain airlines and routes.
All of this is quite apart from the burden that the UK faces in negotiating multiple individual air services agreements to regulate bilateral travel access rights once the transitional period is over.
Over the past 50 years, a complex layer of aviation legislation has developed governing manifold areas around air safety and security (much of which the UK was at the forefront in formulating, developing and implementing, perhaps somewhat ironically). The European Union Aviation Safety Agency ("EASA") is the organisation tasked with certifying, regulating, standardising, investigating and monitoring European aviation safety.
With a no-deal Brexit, the UK immediately ceases to be a member of EASA. The Commission measures provide a bare bones short term arrangement for continued recognition of certain licences, pending implementation of permanent arrangements.
For the UK to build an independent regulatory framework would be a Herculean task and it is inconceivable that this could be done within the nine month transitional period (even the most optimistic analysis estimates that for the UK Civil Aviation Authority to rebuild its safety regulation capability would take five to ten years). The most likely outcome, therefore, is that the UK will seek third country membership (there is precedent for this – Switzerland currently occupies a third country position). However, there will likely be difficulties for the UK with this; for example, they would need to agree to accept European Court of Justice jurisdiction (direct or indirect) as the ultimate arbiter in airline safety disputes, a challenging political sell. It is hard to envisage any other option for the UK, however, with the result that the UK will be subject to European jurisdiction over matters in relation to which they will no longer have any voting rights or influence.
Positives for the UK?
In the context of the above gloomy outlook, what are the potential positives for the UK aviation industry?
• Consumer protections: current EU legislation around passenger rights (e.g. for cancelled flights) can be costly for airlines. The UK will no longer be subject to these rules. However, a reduction in passenger rights may not be politically popular.
• Similarly for EU-ETS (emissions standards regulation), this can be expensive as airlines generally are required to buy allowances. Removal of these emission standards, however, may impact on UK airlines' ability to fly into Europe and reducing pollution protections may be politically unpopular.
• Removal of nationality requirements may facilitate UK mergers (e.g. with US airlines).
Potential positives for Ireland
• Likely to see an increase in aircraft registrations with the Irish Aviation Authority.
• Possible airline head-quarter moves to Ireland.
• Currently, lease documents are largely English or NY law governed. As the largest remaining common-law jurisdiction in the EU, it is possible over the medium term that parties will consider the use of Irish law for such agreements, thus removing any uncertainty regarding recognition and enforcement of UK jurisdiction clauses and / or UK judgments within the EU.
• With possible limitations on flying rights between the UK and Europe, it is possible that Dublin will prove a more attractive gateway to Europe for the lucrative North American aviation market, risking Heathrow's coveted spot.
The UK is the largest aviation market in the EU, with UK passengers, constituting one third of all intra-EU journeys and one quarter of journeys from the EU to third countries. In this context, it is hard to envisage a situation where a significant restriction on flights will be allowed to occur. Such an outcome would be unwelcome for all; we are already seeing aviation companies stockpile parts which will negatively impact business. However, while the political will to facilitate travel arrangements may be there, there are significant legislative and regulatory obstacles to overcome and it remains to be seen on whose terms any final arrangements will be.
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