Brexit and the Single European Aviation market: first comments and reflections
One of the most relevant issues to be faced by the UK economic and industrial sector after the referendum that proposed the exit of the UK from the EU concerns the impact on British air carriers in their relationships with the EU aviation system, both in terms of regulatory issue and of operating procedures.
Despite the circumstance that there will be little or no immediate change to the regulatory environment, since it will take at least 2 years to negotiate the exit terms, starting from the UK notification to the EU of its intention to leave under Article 50 of the Treaty on European Union, great uncertainty is likely to amplify the negative economic impacts of Brexit.
Consequently, in the longer term, the regulatory impact of Brexit on the aviation sector will depend on the nature of the exit terms and future arrangements between the UK and the EU.
Such negotiating process, apart from the various models of agreement that could be reached and their implications for aviation regulations, finds actually its basis on a trade-off between two key issues; access for UK airlines and customers to the European Single Aviation Market and policy freedom for the UK to set its own regulations.
To better understand the issues facing both the EU and the UK it is worth briefly recapping the story and evolution of the relationships between the EU and the European countries which never joined the Single Aviation Market.
The ECAA and the EFTA-SEE agreements
The 1960 Stockholm Convention established the European Free Trade Association (EFTA) as an alternative to European states that did not want or could not yet join European Economic Community, now the European Union. EFTA was founded by the following seven countries: Austria, Denmark, Norway, Portugal, Sweden, Switzerland and the United Kingdom. Finland joined in 1961, Iceland in 1970 and Liechtenstein in 1991. In 1972, the United Kingdom and Denmark left EFTA to join the EC. They were followed by Portugal in 1985 and by Austria, Finland and Sweden in 1995. Today the EFTA Member States are Iceland, Liechtenstein, Norway and Switzerland.
The European Economic Area (EEA) was established in 1994 with the aim to extend the provisions applied by the European Union in its internal market to the remaining countries of the European Free Trade Association (EFTA). Consequently, Norway, Iceland and Liechtenstein became members of the EEA, while Switzerland, thus remaining an EFTA member, decided not to join the EEA but to deal with the EU separate agreements.
In 2006 the European Common Aviation Area (ECAA) was established as defined by bilateral agreements between European countries about a single market in aviation services.
Built upon the EU’s acquis communautarie and the European Economic Area, the ECAA in effect hoped to achieve the goal of liberalization of the air transport industry by allowing any company from an ECAA member state to fly between any airport in all ECAA member states (including the possibility for foreign company to provide for domestic flights).
The ECAA agreement was signed by almost all of the 27 EU members, the European Community itself, Norway, Iceland, Croatia, Macedonia, Albania, Bosnia and Herzegovina and Kosovo (UNMIK as Kosovo representative under Security Council resolution 1244). The last two EU member states to sign it were Slovakia and Latvia respectively on June 13th, 2006 and June 22nd, 2006. Finally, Serbia signed on June 29th, 2006 and Montenegro on July 5th, 2006.
ECAA market access
Taken as a whole, the EU is easily the single biggest destination market from the UK, accounting for 49% of passengers and 54% of scheduled commercial flights.
Therefore, taking into account those countries that have access to the Single Aviation Market (the way in which the air transport industry is called within the EU and whose legal basis lay in Article 100(2) of the Treaty on the Functioning of the European Union) as members of the European Common Aviation Area (ECAA), the importance of market access to such space for the UK becomes even more significant. In this respect, a key consideration in understanding the regulatory implications of Brexit is the extent to which the UK is willing or able to negotiate continued access to the Single Aviation Market.
Moreover, the discussions on the market access go beyond UK-EU routes. In fact, the UK’s routes to the rest of the world will be affected too. Since 2002, EU member states have been required to apply the provisions of the Single Market to bilateral air service agreements with third states. Most notably, this requirement is characterized by the Community Carrier clause, which requires third countries to apply the same treatment to all the airlines registered in the EU as well as those airlines registered in the country which signed the bilateral agreement.
At the same time, the EU Commission has also given effect to the external dimension of the Single Aviation Market by negotiating so-called comprehensive agreements with third countries as a single trading block. Perhaps the most high-profile of these agreements is the EU – US open-skies agreement which entered into force in 2008.
Prior to the EU-US open – skies agreement, as a matter of fact, air transport relations with the US were governed by bilateral agreements between EU countries and the US. 16 EU countries already had open – skies agreements in place. However, this fragmented approach proved to be an obstacle as it prevented the completion of a genuine single market.
In 2002, the Court of Justice of the European Union handed down judgments in cases referred to it by the European Commission (C-466/98, C-467/98, C468/98, C-469/98, C-472/98, C-475/98 and C-476/98). These decisions clarified the sharing out of the external competences between the EU and EU countries and certain issues concerning freedom of establishment.
As a result, the Commission received an authorisation to negotiate an air agreement with the US that applied for the EU as a whole. Depending on the terms of exit, these agreements would potentially cease to apply to the UK, possibly requiring the UK to negotiate a whole raft of separate bilateral agreements. Negotiating an air services agreement can be a time – consuming process and this would coincide with the moment where UK Government officials are busy amending a wide range of laws. In the interim, therefore, it is possible that provisions would revert to the last agreement that was in force prior to the entry into force of the comprehensive agreement, for example Bermuda II in the case of air services between the UK and US. Such a situation would have deep implications for airlines and their customers, no matter how unlikely.
In practice, it is expected that agreement would be reached (eg. via Memorandums of Understanding) to maintain existing arrangements pending negotiation of a new bilateral agreement.
Once again, whether the UK would need to negotiate new bilateral agreements or not, it will depend on the nature of its future arrangements with the EU; broadly speaking, the closer the future relationship with the EU will be, the more will be not necessary for UK to amend air services agreements.
Potential models for UK-EU cooperation post-Brexit
The UK Government identified the three most likely options for future UK arrangements with the EU.
- Membership of the European Economic Area (EEA), which is the model currently followed by Norway and which ensures full access to the Single Market;
- Ad hoc bilateral arrangements, similar to the bilateral agreements between the EU and Switzerland (in fact the aeronautical relationships between UE and Swiss Federation are ruled by a special agreement signed in 1999); and
- WTO relationship (e.g. no special/formal arrangement with the EU).
- Access to the Single Aviation Market according to the option provided by the UE Regulation no. 1008/2008 or, in other words, taking into consideration the hypothesis that would consist for UK air companies in setting up a Community Air Operator’s Certificate through the acquisition of a shareholding of more than 50% in EU carriers’ equity, or, as in the case of IAG, to avail themselves of intra-EU flights subsidiaries or allied carriers who already holds and/or can retain the necessary aeronautical operator’s licenses.
Each of these options travels parallel to the landscape of the possible aero-political arrangements: membership of the European Common Aviation Area (ECAA), a negotiated UK-EU horizontal agreement or no formal relationship. Each of these options deserve, of course, to be discussed more widely.
The decision for the UK to leave the EU has significant and wide-ranging impacts, involving both an economic and regulatory context. Some of these effects will be perceived immediately (e.g., via the exchange rate impact on the cost of air travel) while others will appear more longer-term in nature.
In part, these effects are dependent upon the precise terms negotiated as part of the exit agreement. Therefore, the consequences of Brexit on the Single European Aviation market is a still open issue. Finding a solution will not be easy. Because of that a temporary arrangement is likely. What the final outcome will be is hard to tell.
 Very significant to this extent are the different situations of EasyJet and IAG. The Luton-based EasyJet, in fact, could be viewed as the most exposed to a hard Brexit because it is based in the UK and has only a UK and a Swiss air operator certificate, or AOC. The UK AOC, as things stand, allows the company to fly between the UK and EU countries (and vice versa) as well as between EU states. To fly between EU states post-Brexit, it is likely to need another AOC, because also Switzerland is not a member of the EU. Just weeks after the EU referendum in June easyJet said it was in the process of applying for an EU AOC, which should be enough to allow it to operate intra- European flights after March 2019. Currently only EU-owned airlines can operate flights within the EU – this means that 50.1% of shareholders must be based in Europe. There is some flexibility to this geographic limit: for example, Norwegian Air is based in Norway, which is outside the EU. However, it should be noted that Norway sits within what is known as the European Economic Area, which includes all EU countries as well as Iceland, Liechtenstein and Norway, allowing the three latter nations to be part of the EU’s single market. Since it is increasingly unlikely that the UK will be a member of single market after Brexit, the main way for easyJet to operate intra EU flights post Brexit is to establish a subsidiary company within the EU or to acquire the majority in the stock capital of an EU-based carrier, holder of an EU AOC. At the opposite, there’s the situation of IAG. British Airways, owned by International Airlines Group, does not fly any intra- continental routes and so would not be hit if the EU prevented UK airlines flying within the confines of the bloc after March 2019. Furthermore, IAG’s other airlines include Spanish-based Iberia and Vueling, as well as Ireland-based Aer Lingus, meaning the wider group already possesses permission to fly within Europe. As for ownership, IAG is the listed entity and trades on both the London Stock Exchange and Madrid bourse thanks to its Spanish registered office. The company declined to provide a breakdown by nationality of its shareholders but it said it would comply with EU regulations. Qatar Airways owns 20% of IAG, but it does so via its Luxembourg-based company, something that is likely to help it maintain the necessary 50.1% ownership by EU-based investors to continue its operations.