Brexit: the
Aviation Deal
December 2020
Finally agreed on Christmas Eve, the new trade agreement between the UK and the EU puts in place the post-divorce visitation rights for air travel between the two. The UK officially left the European Union on the 31st January 2020 and had a transition period to negotiate the basis of its future relationship which ended on the 31st December. Had there been no agreement, noone could be sure of the legal basis for international air transport between the two.
The aviation section covers a mere 25 of the 1,256 pages in the document — which shows its perceived importance. It encompasses three main points.
For traffic rights, the first four freedoms of the air are reciprocally agreed as a matter of course. There will be no restriction of fares or tariffs, and no requirement to file for approvals. There is unlimited access for UK airlines to serve any point in EU member states carrying fare paying passengers from territories of the UK, and reciprocal rights for EU airlines to points in the UK. The agreement allows for co-terminalisation (serving more than one point on the same service — as if that could possibly make commercial sense in Europe) and, subject to bilateral negotiation with individual states, the possibility for fifth freedom cargo-only flights. Cabotage (the right for an EU airline to carry traffic between two points within the UK or a UK airline to carry passengers between two points in the EU) is excluded.
In effect, the impact on the intra-European operations of the network carriers or the LCCs, which have established both UK and European country AOCs, will be minimal.
The agreement provides clarification on what constitutes a UK and an EU airline, using the traditional concepts of “ownership and control”.
An EU airline is defined as an air carrier that must be owned directly, or through majority ownership by an EU member state, a member state of the European Economic Area (EEA), Switzerland, their nationals or any combination thereof and has its principal place of business in the Union and has a valid air operator certificate issued by the competent authority of the Union or Member State.
A UK airline is one that has its principal place of business in the UK, holds a UK air operator certificate, and either:
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(a) be owned directly, or through majority ownership and effectively controlled by the UK, its nationals or both; or
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(b) be owned directly, or through majority ownership by an EU member state, a member state of the EEA, Switzerland, their nationals or any combination thereof whether alone or together with the UK and/or nationals of the UK and on 31st December 2020 held a valid operating licence in accordance with Union Law.
This element of the agreement is of concern. The whole question of substantial ownership and control as a determinant of where an airline belongs arose from the 1945 Chicago convention, from which ICAO was created, and has regularly been used in the wording of bilateral air service agreements. It was a pragmatic solution at the time: most airlines outside the USA were nationalised, and Europe was still at war. But through the liberalisation and globalisation of the industry since the 1978 Deregulation Act in the US, it has become an increasingly outdated concept.
Since the early 2000s ICAO’s preferred ASA model has defined a country’s airlines as being those air carriers with their principal place of business in that country, without reference to ownership. So far only one country, Columbia, has adopted it, and everyone else insists on a majority level of national ownership of any airline — the USA requiring 75% US ownership of voting rights and 50% of total capital, while the EU requires a simple majority of ordinary shares.
The UK included a version of the more liberal approach in its recent agreement with the US — primarily because flag-carrier British Airways on the face of it is owned by a Spanish registered company (IAG) and Virgin Atlantic is ostensibly controlled (although only 49%-owned) by Delta.
Regulations restricting ownership by nationality ignore the global nature of the capital markets. It is conceivable that a teacher in Berlin could have some of her savings invested in a unit trust run by a US investment fund that is managed and quoted in London and has a shareholding as part of its portfolio in Irish registered Ryanair. And the financial markets in London and the US are more oriented to equity investments and more willing to risk capital in the airline industry.
Europe’s financially most successful airlines — Ryanair, IAG, easyJet (with a major Cypriot Greek shareholder domiciled in Monaco) and Wizz Air (effectively owned and controlled by US-based Indigo Partners) — have a large shareholding base officially registered in the UK, all of which became non-qualifying as part of EU ownership limits on 1st January. Each rushed out measures to disenfranchise them — this means that UK shareholders in these airlines can retain their shares but have lost all their voting rights. New investment by UK nationals may be restricted.
This is an exercise in futility. However, the third major point the agreement makes provides a glimmer of hope. Recognising “the potential benefits” it says that the UK and EU agree to talk about “examining options for the reciprocal liberalisation of ownership and control” within a year (or so) as a result of which they may decide to amend the agreement. This may mean a reversion to the negotiating tables of the 1980s with the aim of restoring the European liberal aviation regime embodied in the “Third Package”, now undermined by Brexit.
If you are locked down and feeling a bit gloomy, nothing will raise your spirits more than a read of the aviation section of the Brexit agreement:
