How Brexit risks a flourishing aviation sector

In this blog, we explain current EU aviation agreements, and how leaving these agreements will impact UK airlines. As the Brexit negotiations progress and the details of a deal emerge, we will post further updates and look at the implications for each part of the UK aviation sector in turn.

The UK’s aviation sector is uniquely threatened by Brexit. If an alternative to current European aviation agreements is not in place by March 2019, when the UK exits the EU, aircraft could be grounded – with significant consequences for passengers and airlines.

UK airlines have thrived in liberalised European airspace

The low prices and great choice that today’s European air passengers enjoy are rooted in two important aviation market events from recent history.

First, in the mid-1990s, European Low Cost Carriers (LCCs) rapidly expanded their fleets and routes, offering flights for much lower prices than legacy carriers by greatly reducing operating costs. Secondly, this growth coincided with a strategic shift in European aviation strategy, from protectionism to free market economics.  In 2006, the European Union established the European Common Aviation Area (ECAA)[1], an act of route liberalisation that replaced hundreds of restrictive bilateral Government agreements[2].

As a result, European airlines had the freedom to fly across, within, and between airports in the ECAA area.  The creation of the ECAA allowed entrepreneurial airlines to open routes that legacy carriers were unwilling to serve.  It resulted in LCCs such as easyJet building networks and hubs in Europe, and operating new inter-European routes.

The UK has a thriving aviation sector. According to Oxford Economics, aviation contributed £52 billion to the UK’s GDP and supported 691,000 jobs in the aviation sector and wider supply chain. Europe is a key contributor to the continued success of the UK’s thriving aviation sector, with approximately 60% of UK air passengers landing in Europe[3].

Another key destination for UK passengers is the USA. UK airlines were able to take advantage of a further liberalisation in airspace in 2008 when the ECAA and the USA reached the Open Skies[4] agreement, easing route restrictions between the ECAA and the USA.

City analysts fear the UK will lose access to the ECAA, and therefore also to EU aviation agreements with ‘third countries’ – such as the USA – after Brexit, with negative consequences for airline revenue and growth.  This fear led to heavy falls in UK airlines’ share prices following the Brexit referendum last year.

  Flying within Europe – the importance of the ECAA

Losing ECAA access is a probable outcome for the UK, as the pre-conditions for access conflict with the Government’s negotiating positions on Brexit: 

  • The ECAA is under the jurisdiction of the European Court of Justice (ECJ);   many pro-Brexit politicians strongly oppose the ECJ having any role in the UK’s judicial system after Brexit
  • The only countries with access to the ECAA that are not EU Member States are countries within the European Economic Area (EEA[5]) – such as Norway.  EEA membership requires free movement of people, EU budget contributions, and compliance with relevant EU “law” (directives), which would be unpalatable to many pro-Brexit politicians

A further risk is EU member states taking a protectionist stance[6] in Brexit negotiations.  EU member states may seek to protect their domestic airlines from UK competition, impacting UK airlines with inter-European routes, such as easyJet.  For instance in February Lufthansa CEO Carsten Spohr stated that he would oppose easyJet and British Airways re-entering the ECAA after Brexit.

European Commission officials[7] met with UK airlines in May to explicitly warn them that continued ECAA access was unlikely after Brexit, and advised early contingency planning.

Officials confirmed that only airlines meeting the following criteria could fly within the ECAA:

  • Majority European-ownership.  This requires 50.1% of airline shares to be owned by European nationals or organisations
  • Headquarters or a ‘significant base’ in Europe, and an associated Air Operating Certificate from that country

If UK airlines restructure and invest in a European HQ to meet these requirements, they will be able to continue flights between ECAA countries, and within a single ECAA country.

For this reason, easyJet announced in July that it had applied to register a new airline[8], ‘easyJet Europe’, in Austria with a fleet of approximately 100 aircraft.  This investment will allow a continuation of easyJet’s current inter-ECAA flights under its new airline easyJet Europe after Brexit.

Whilst Ryanair is not a British airline, and is registered in Ireland, approximately 40% of its shares are British owned[9].  After Brexit, a proportion of these shares will likely need disinvesting for the airline to demonstrate continued majority EU ownership and to continue operating inter-ECAA flights.

International Airlines Group (IAG), which owns British Airways and Iberia amongst other airlines, may also need to restructure to meet the EU’s criteria.  It has not released details of its share ownership, but several analysts have estimated that only 20% of IAG will be European-owned after Brexit.  IAG’s Chief Executive, Willie Walsh, has been lobbying the European Commission[10] to change the requirements for majority EU-ownership and ECAA access.  IAG has the right to disinvest non-European shareholders if its flying rights are at risk, but this is seen as a last resort by the company.

Flying into the ECAA after Brexit – a big unknown

As outlined above, airlines are investing now to ensure they have ongoing inter-European access after Brexit. However, whilst that risk can be mitigated, there is currently no future mechanism for airlines to fly into Europe / the ECAA area after the UK leaves the EU.

At that time, flights from the UK to an ECAA country will either require the UK to have either a bilateral agreement in place with the destination state, or the UK will need to negotiate continued ECAA membership.

Accordingly, the Government[11] has confirmed it is working “…to secure the best possible access to European aviation markets... it’s in the interests of all countries, and all who travel between them, that we seek open, liberal arrangements for aviation”.

However, it is fair to say this statement hasn’t assured the industry.  Michael O’Leary, CEO of Ryanair, highlighted his concern in July, stating that[12] “[there] is a real prospect, and we need to deal with this, that there are going to be no flights between the UK and Europe for a period of weeks, months beyond March 2019”. More recently, he has said[13] the UK is in denial of what is about to happen.

Niall Sorahan, Ryanair’s Chief Financial Officer, expressed his frustration[14], noting, “We absolutely want to keep Britain flying, we want to continue to have operations between the UK and Europe.  However, unless people actually start sitting around a table and discussing this, nobody will have this kind of certainty. And that’s a big problem for all the airlines.”

In contrast to Ryanair’s concerns, Tim Alderslade, Chief Executive of Airlines UK, is confident that a solution can be found in time, noting that[15] “aviation brings value to both the UK and the EU, it is not only a British or an EU export…there is clearly an incentive, therefore, for both sides to conclude an agreement sooner rather than later, to provide clarity to both consumers and airlines”.

 

Flying from the UK to key ‘Third Countries’ after Brexit – the importance of bilateral agreements

Finally, it is important to note that currently UK airlines benefit from the EU’s “Open Skies” agreement with the USA, which provides EU countries with liberalised access to USA airports. Again, Brexit will result in UK airlines losing this benefit, and bilateral agreements between the UK and the USA will be required. On this subject, the Government stated that[16] it is  “…working hard to deliver the quick replacement of the EU-based third country agreements, with countries like the US and Canada”.

This message hasn’t calmed our ‘third country’ partners, who are also concerned.  The Chief Executive of America’s largest trade body, Airlines for America, stated in July that[17] “If there is no agreement between the UK and EU by March 2019, other sectors fall back on World Trade Organisation rules but we have no legal framework under which to fly… it is absolutely essential that an Open Skies air transport agreement is put in place between the UK and the EU as well as between the United States and the UK”.

 

So what next

Today’s EU provides airlines with highly valuable access to and from EU member states, and between EU States and key third parties.  A ‘hard Brexit’, in which the UK leaves Europe without a free trade deal, or a transitional deal, would in our view be catastrophic for the competitiveness of UK airlines and would severely curtail air travel for UK passengers.

Please do contact us for more information or to discuss the specific challenges your organisation faces from these changes. We have worked with leading organisations across UK aviation, from airlines to airports and regulators, and we are tracking developments in this space closely to ensure we can help our clients respond to the challenges of Brexit. 

[1] https://ec.europa.eu/transport/modes/air/international_aviation/country_index/ecaa_en

[2] https://en.wikipedia.org/wiki/Air_transport_agreement

[3] https://www.ft.com/content/57c0c01c-ef9c-11e6-930f-061b01e23655

[4] https://en.wikipedia.org/wiki/EU–US_Open_Skies_Agreement

[5] https://www.gov.uk/eu-eea

[6] http://www.ainonline.com/aviation-news/business-aviation/2017-03-04/legal-experts-fear-major-brexit-disruption-aviation

[7] https://www.ft.com/content/d39943fa-130d-11e7-b0c1-37e417ee6c76

[8] http://news.sky.com/story/easyjet-launches-bid-to-fly-in-eu-after-brexit-10948116

[9] https://www.theguardian.com/politics/2017/mar/22/uk-based-airlines-told-to-move-to-europe-after-brexit-or-lose-major-routes

[10] https://www.ft.com/content/d1440f12-6656-11e7-8526-7b38dcaef614

[11] http://inside/Pages/default.aspxhttp:/www.cityam.com/268336/transport-secretary-chris-grayling-says-some-time-before

[12] http://www.telegraph.co.uk/news/2017/07/11/ryanair-chief-michael-oleary-discuss-brexit-effect-aviation/

[13] http://www.bbc.co.uk/news/av/uk-40801987/ryanair-s-michael-o-leary-uk-in-denial-over-brexit-impact

[14] http://www.independent.co.uk/travel/news-and-advice/ryanair-flights-britain-eu-brexit-open-skies-transport-secretary-chris-grayling-a7857906.html

[15] http://www.travelweekly.co.uk/articles/283581/brexit-aviation-deal-likely-due-to-threat-to-uk-eu-flying

[16] http://www.cityam.com/268336/transport-secretary-chris-grayling-says-some-time-before

[17] http://www.telegraph.co.uk/business/2017/07/23/us-aviation-trade-body-urges-brexit-negotiators-prioritise-airline/