Brexit and Aviation :
All Clear Now? Aug/Sep 2016

It is now almost three months since the citizens of the United Kingdom voted narrowly, but decisively, to leave the European Union. The shock to the aviation industry was at least as great as that to any other business sector. Overwhelmingly airlines, airports and manufacturers had urged a Remain vote. Not surprisingly the immediate  reaction to the result was: now what do we do? It quickly became evident that the complexity of the subject was such that no-one really knew the answer to this question, or indeed could come close to knowing with any certainty.

Initial panic may have been replaced by the beginnings of serious planning, but the fact remains that the UK is still a long way from being able to identify its future relationship with Europe, and this is as true of aviation as of anything else. As the London Sunday Times commented, quoting numerous Whitehall sources, the Government has made little progress in drawing up a credible Brexit plan. The new Department for Exiting the European Union doesn’t “yet even have a permanent home and lacks a phone number, e-mail addresses or IT systems”. In terms of putting meat on the bones of the Referendum vote, “Brexit means Brexit” is just a meaningless slogan at present.

Despite this, however, it is at least possible to shed more light on the options available. The June issue of Aviation Strategy, published within days of the Brexit result, outlined the immediate reaction to the decision. It pointed out that Article 50 of the Lisbon Treaty, launching the two-year exit negotiations, would probably not be invoked until the autumn. In fact, the timetable will probably be pushed back even further, to early next year, or even to next September if some reports are to be believed. From one perspective this is good news: it gives more time to prepare what will certainly be the most complex set of negotiations the UK has ever undertaken. But it also means more uncertainty for everyone, which is definitely not what business wants. Too much delay would also risk the next General Election in 2020 being dominated by the Brexit debate, perhaps even turning into another referendum.

It is important to remember that no matter how critical aviation might seem to us, in the Brexit negotiations it will be just one of many key sectors which will have to be addressed in detail. At the end of the day there may well have to be trade-offs between sectors, which will not be easy for Ministers. Above all, and as explained further below, it will probably be impossible to determine the final outcome of the aviation package before other major macro decisions have been taken, for example on the overall policy on the free movement of labour.

The macro picture is further complicated by developments in the European political landscape over the next year or so. We have already had the appointment of a new Prime Minister in the UK, accompanied by a perhaps surprising change of direction on a number of policy issues. It remains to be seen how the Brexit negotiations will be handled by the triumvirate of leading (and personally ambitious and at times mutually antagonistic) anti-EU politicians appointed to lead them, under the no doubt firm hand and close supervision of Theresa May. At the same time, the principal opposition party, Labour, continues to tear itself apart, raising the possibility that by the time of the next General Election the populist anti-EU UKIP could significantly increase its presence in Parliament, assuming it doesn’t itself implode by then. And to top it all off, lurking north of the English border is the pro-Europe Scottish National Party just waiting for the opportunity to declare Scotland independent and re-join the EU.

The political picture is no clearer on the Continent. Italy continues to face a financial as well as an ongoing political crisis, with the ever present threat of a banking collapse. Spain is unable to form a new coalition government, despite two elections, and another election seems a distinct possibility. (Spain, of course, is particularly significant in European aviation negotiations because of the "Gibraltar problem".)

As ever in the EU, however, it will be Germany and France which will be the key players when it comes to what kind of Brexit deal the UK can negotiate, and both countries face critical elections over the next year. Mrs Merkel may stand a reasonable chance of being re-elected, if she chooses to stand, but the signs are that her position will be significantly weakened. The prognosis for M. Hollande is even less rosy and defeat by the right looks likely. Even if this victory does not fall to the Front National, the anti-EU populist party, they will certainly have an impact on the the debate about the whole future of the EU and the UK’s exit from it. There is also an election due in the Netherlands, again with a growing anti-EU party in contention, and of course, across the Atlantic, the US Presidential election will mean that any early attempt to negotiate a new UK/US aviation agreement will be difficult as the new Administration sorts itself out, which on past experience can take many months.

None of this is good news for anyone seeking clarity on the likely outcome of the Brexit negotiations. As the old joke goes about someone asking for travel directions, you really don’t want to start from here. It is difficult to identify who the key decision-makers will be, and even more difficult to determine bottom lines. With Mr Junker and the European Commission at least notionally in charge of the negotiations from the European side, and the kind of rigid policy declarations which inevitably characterise elections, it is going to be a bumpy few months before, hopefully, calmer views emerge.

The Short-Term Impact

There is no doubt that business confidence, especially in the UK but also beyond, has taken a hit as a result of the UK decision to leave the EU. Inevitably economic forecasts differ, but overwhelmingly they point to a significant reduction in economic growth, despite some quite positive early indications. The assessment by the UK Treasury suggested that UK GDP will be some 3.6% to 6.0% lower by 2018 than it would otherwise have been. Admittedly this forecast was produced during the Referendum campaign and has been criticised by many supporters of Brexit for being too pessimistic; but even at its lowest level it implies a substantial negative impact. Business uncertainty in a post-Brexit world was a key factor in the assessment, and as we have seen, so far uncertainty remains the prevailing preoccupation.

Air transport demand is highly susceptible to GDP growth. A significant decrease in the performance of the UK economy, even if it falls short of actual recession, combined with the continuing poor record of the Euro zone, is not good news for the European aviation industry.

IATA’s review of post-Brexit economic forecasts shows a likely reduction of 2.5% to 3.5% in UK GDP by 2020. This (when combined with the effect of a lower sterling exchange rate — see below) translates into a probable fall in UK passenger demand of some 3% to 5% over the same period, with a less certain but still likely weakness in freight demand.

The 1.0 to 1.5% reduction in the growth rate each year is a permanent downward shift in demand, not a temporary phenomenon to be reversed later. It comes at a time when the global airline industry has almost certainly passed its cyclical profit peak, following record high margins (for airlines) in 2015 and 2016. The direction is clearly downwards, meaning that the industry is less likely to be able to accommodate the Brexit effect painlessly.

The second immediate economic impact of the Brexit vote was the fall in the value of sterling against most other countries, and in particular against the dollar and Euro. Cheaper sterling can be good news for airlines in that it encourages tourism to the UK. However, for British citizens foreign holidays become more expensive, and for UK airlines those costs denominated in dollars, such as fuel and aircraft ownership, or Euros, such as European ATC charges, will increase.

Taken together, dollar and Euro costs account for a large proportion of total airline expenditure. The net impact on individual airlines will vary from company to company, but UK-based carriers, which tend to attract a disproportionate number of UK passengers, are likely to be worst affected.

There is growing evidence of individual airlines beginning to adjust to this new economic environment. Where they are able to do so, many are seeking to reduce their exposure to the UK and switch resources to other markets. Several, including IAG and easyJet, have issued profit warnings, although Brexit was far from the only contributory factor here. (For the latest reported quarter, IAG noted a negative currency impact of Euro148 million, primarily due to the weak pound.)

However, both IAG and easyJet have said that they did not expect the Referendum result to have a long-term impact on their businesses. Willie Walsh of IAG went so far as to say that “the fundamentals of the business have not changed. There is some short-term turbulence, but ultimately things will settle down.” It remains to be seen whether this is just wishful thinking. There are certainly causes for concern.

The regulatory risk for individual airlines depends partly on their route networks. In the case of easyJet, for example, some 57% of its frequencies are either international UK or domestic UK, leaving 43% operating to, from or within other EU countries. In terms of ASKs, some 35% of its output is devoted to non-UK EU internal market services. The equivalent figure for bmi regional is 33%. Ryanair may be Irish-registered, but it serves 29 countries from the UK, only one less than easyJet. 35% of Ryanair’s flights are to, from or within the UK. Wizz Air and Norwegian serve the UK from 14 and 13 countries respectively. Some 28% of Hungarian-based Wizz Air’s seat capacity this year is on routes that touch the UK, but less than 4% on routes between Hungary and the UK. Three non-UK airlines, Aer Lingus, Ryanair and Germania, operate UK domestic services, but only to a limited extent; such services account for one percent of their total ASKs or less.

It is evident that the market access risks associated with Brexit are greatest for the short-haul low cost carriers. The legacy carriers almost invariably fly to the UK only from their home markets, so potentially might even gain from a curtailment of LCC competition.

Ryanair has already announced the allocation of 10 additional aircraft previously destined for the UK market to Germany, Poland and especially Italy. Overall the growth in Ryanair’s UK flights next year will decline from 15% to 6%, representing about five million fewer seats to and from Britain than originally planned. Michael O’Leary has been quoted as saying that it is “highly unlikely” the airline will allocate new aircraft deliveries to the UK (out of 39 737-800s to be delivered during the 12 months to next March). “We will pivot our growth away from UK airports and focus more on growing at our European airports over the next two years.”

Wizz Air has also halved planned capacity growth in the UK, from 30% to 15%, the equivalent of two A320s, pointing to the pound’s devaluation as the main reason.

Long-haul services have similarly been affected, although probably to a lesser extent. Capacity reductions announced so far have been concentrated on UK-originating leisure routes, as one would expect.

Delta and its transatlantic partner Virgin Atlantic have announced a cut in UK-US capacity of 2-4%. Delta alone has forecast a $40 million reduction in its $350 million revenue earned in sterling as a result of the pound’s devaluation. United will close its Newcastle-New York service, almost certainly a predominantly UK-originating route, from 6 September, and has agreed to continue to operate between Belfast and Newark only in return for a three-year £9 million subsidy from the Northern Ireland Government, having previously announced the route’s closure from September.

On the other hand, American Airlines has said that the impact of Brexit may actually be positive in the short term. Its former President, Scott Kirby, just appointed to the same position at United, was quoted as saying that so far “it is hard to see any evidence it’s a big problem.” This optimistic view seems to be based mostly on “a lot more lawyers, bankers, consultants flying across the Atlantic trying to figure out what [Brexit] means,” perhaps not the most sophisticated of analyses.

Market Access

There is at present an almost total lack of clarity about the likely outcome of the Brexit negotiations, both overall and in relation to aviation. All one can really do at this stage is to list the options available. However, the preferred outcome, expressed by almost everyone in the industry, is relatively easy to identify. The status quo would do nicely, thank you.

Despite periodic grumblings about Brussels bureaucracy and meddling, no Member State has had a greater impact on the EU aviation regulatory regime than the UK. It was the UK, along with the Dutch and Commission, later joined by the Irish, which were the driving force behind the liberalisation of air services in Europe and the creation of the aviation internal market; and the UK has similarly been a strong supporter of much subsequent legislation in areas such as consumer protection, safety regulation, ATC reform, assistance to passengers with reduced mobility — to name just some of the initiatives. Why would the UK industry, and Government, want to change fundamentally a regime which they have fought so hard to achieve, one which has also of course benefited consumers enormously?

Unfortunately, carrying on as before does not seem to be an option. There will have to be change of some sort. The question is: how much? There will almost certainly have to be agreement on certain macro issues, not least the movement of labour between the UK and the EU, before the details of an aviation package can be negotiated. The UK Government has identified three options for a future UK-EU relationship, and each of them has a broad parallel in air transport:

• Membership of the European Economic Area (EEA), the model followed by Norway. This would bring access to the single market, but so far has also meant acceptance of the free movement of labour. The aviation equivalent would be membership of the European Common Aviation Area (ECAA).
• A specific bilateral agreement between the UK and EU, as the Swiss have. This would provide an opportunity to address specific concerns, but on past experience it would have most of the shortcomings of the EEA/ECAA approach.
• No special agreement, relying on WTO rules. For air transport this would probably mean falling back on the bilateral air services agreements which applied before the creation of the internal aviation market, if they are still legally valid, and negotiating new ASAs if they are not. However, this would only address the market access problem. There are many other challenges which would require additional negotiation.

At least superficially, the simplest approach might be for the UK to join the ECAA. This is now an enormous market, comprising 36 countries with a population of some half a billion. Furthermore, it is still growing, with the European Commission arguing that eventually it could encompass up to 55 states with a total population of almost one billion. Essentially it is a very large, liberalised air transport market covering the EU and numerous near-by countries, governed by an agreed set of regulations.

However, there are serious shortcomings from the UK’s perspective. To join the EAA/ECAA, Norway, for example, has had to accept the free movement of labour, hardly something likely to appeal to those in the UK who voted for Brexit. In addition, the UK would have to accept all current and future aviation legislation (the so-called ’air transport acquis communitaire’) without having any influence on it. Again, hardly consistent with the Brexit call to “take back control from Brussels”. Finally, on past experience there would have to be some form of financial contribution by the UK to the EU budget, potentially a substantial contribution. That will appeal to the Brexiters!

The Swiss-EU agreement on air transport came into effect in 2002, one of seven sectors covered by the overall agreement. Switzerland is not a member of the ECAA, but its bilateral arrangement with the EU provides most of the same benefits. In return, however, it has had to agree to a number of conditions which, as noted above, will not appeal to UK negotiators, not least the free movement of labour. A 2014 Swiss referendum decision requiring restrictions to be placed on such free movement may well, if implemented, mean that Switzerland will be forced to abandon the air transport agreement with the EU. On the other hand, if the EU agrees to relax the labour movement requirement while allowing Switzerland to have continued membership of the ECAA, which some argue is a possibility (but most believe to be unlikely), this could be of interest to the UK.

It should not be forgotten as well that the UK will require the agreement of the remaining EU Member States. They will be under pressure from many of their own airlines and airports to minimise any market disruption and remove uncertainty as quickly as possible. Equally, however, they will have their own competitive agendas. Some governments, such as France and Germany, might be focused primarily on the macro issues determining the overall Brexit negotiations. But others, and perhaps especially Spain, may have particular aviation concerns. For the past couple of years Spain has held up a series of important aviation initiatives, especially in the areas of consumer protection and ATC reform, because of the "Gibraltar problem", essentially a disagreement between Spain and the UK on the extent to which EU aviation rules should apply to Gibraltar. The crown colony’s economy will be very exposed post-Brexit (hence the highest pro-Remain vote of any UK region) and it seems unlikely that the UK Government would abandon its principled position now. At the same time, Spain may well dig in, especially given the current state of its domestic politics. A lengthy stand-off is not impossible.

Another option for the UK would be to negotiate bilaterals with those individual other countries currently covered by EU agreements. This would be a large job, but feasible over time. The UK negotiated a series of very liberal arrangements (at least in terms of third/fourth freedom and pricing rights) with several Western European states shortly before the creation of the internal aviation market. It is not clear whether these would automatically apply again post-Brexit in the absence of an alternative, but if they did, it would provide some reassurance to airlines. Given that the UK is the largest aviation market for most ECAA countries, they could well share an interest in maintaining as much of a competitive environment as possible. However, if new agreements have to be negotiated, there will be an argument over whether the European Commission has competency and therefore a monopoly of negotiating power for the core EU Member States.

The second largest air transport market for the UK after Europe is the US, governed by the EU-US Open Skies Agreement initially signed in 2007. Here there is less doubt about what would happen if the UK withdrew from the EU-US deal. Bermuda II is still a legal entity (it applies to air services between the US and a handful of British Dependent Territories) and would automatically govern UK-US air services again in the absence of anything else. (In fact, the EU-US agreement does not contemplate any individual European state withdrawing, but since technically it is still being applied provisionally, that should not create a problem.) Realistically, however, neither Government is likely to want to see a return to the old mercantilism of Bermuda II, despite the UK’s initial lack of enthusiasm for the EU-US deal. The fact that the absence of an open skies regime would inevitably lead to the withdrawal of anti-trust immunity for their trans-Atlantic alliances would certainly mean that the major airlines would support an alternative approach. There is no obvious reason why both the UK and US would not choose to sign a new bilateral quickly based closely on current arrangements, once there is a working US Administration in place.

There is also an EU air services agreement with Canada. Here the previous UK-Canada bilateral agreement, which would presumably apply again if the UK withdrew from the EU deal, was very liberal in terms of third/fourth freedom rights and there is unlikely to be a problem in terms of market access for either side. Similar arrangements would have to be made for the non-EU members of the ECAA, but since for most of them the UK is such an important aviation market, not least for tourists, again it seems unlikely that significant problems would arise other than finding the time to negotiate so many the bilaterals. In the worst case scenario there are even precedents for carrying on without an ASA, at least for a while, on a so-called comity and reciprocity basis, as the US and France did for several years.

The European Commission has been negotiating aviation agreements for some time with Brazil, Australia and New Zealand. In addition, it was recently given mandates to approach Turkey, Qatar, the UAE and the ASEAN bloc. Post-Brexit the UK will clearly not be part of these negotiations. Where this matters most for global aviation is with respect to the Gulf area. In the face of strong pressure, in particular from France and Germany, to take action against ’unfair’ competition from the Gulf airlines, the UK has been a consistent voice urging a less protectionist approach. The absence of this pro-competitive lobby will almost certainly alter the balance of the debate in Europe and could well lead to a far more protectionist EU international policy. (See Aviation Strategy, May 2015)

An additional issue is the fact that the UK, along with other EU Member States, has amended a large proportion of its global air services agreements to incorporate the concept of ’community carrier’. This means that in any UK bilateral agreement containing the clause, airlines from any member of the EAA have equal status in accessing the relevant traffic rights. Thus, French or German carriers, for example, will continue to be treated as UK airlines until every one of the relevant ASAs has been renegotiated, while UK carriers will cease to have similar treatment in EAA bilaterals from the moment Brexit takes effect. Fortunately the commercial importance of this problem is fairly small, given the relatively few airlines operating long-haul services from another EAA member state.

Thus, these are some of the market access complexities created by Brexit. There are no simple answers or obvious compromises. The whole debate will almost certainly be long and very difficult to conclude until the outcome of the negotiations on the macro issues becomes clearer. In other words, the immediate future will be characterised by more rather than less uncertainty, just what the aviation industry doesn’t want.

Other Regulatory Issues

There is a whole series of non-market access issues, raising problems just as complicated, which will have to be addressed to implement Brexit. These are listed below.

Airline Ownership and Control

At present an airline must be majority owned and controlled by EU nationals to be treated as an EU carrier. If it meets these criteria, it is free to operate anywhere within the ECAA, including cabotage services within the borders of individual EU states. Post-Brexit, this will present a major challenge to several carriers, especially those registered in the UK. IAG has a complex governance structure (as does Air France/KLM and the Lufthansa Group) designed to ensure that BA can continue to be treated as a British airline, Iberia as Spanish, etc. Whether these structures will be sufficiently robust in the new environment remains to be seen, but there has been no serious challenge yet. However, the positions of airlines such as easyJet, bmi regional, Flybe, etc, all of which operate extensively on the Continent, are more problematical. (It is interesting that in easyJet’s last Annual Report, Brexit is not even listed as one of the company’s major risk factors, although “major shareholder and brand ownership relationship” is. Brexit is merely mentioned almost as an after-thought at the very end of a long list of lesser risks.)

There has been talk of easyJet applying for an AOC in another EU country. It already has a Swiss subsidiary, easyJet Switzerland SA, with its own AOC. (According to the company’s latest Annual Report, easyJet UK has a 49% interest in the Swiss airline, with an option to acquire the remaining 51%.) As Aviation Strategy noted in June, the concept of establishing subsidiaries with their own AOCs to create a European network was pioneered by Air Europe in the 1980s, arguably one of the factors which led to its downfall. Nevertheless, such an approach could go some way towards solving the problem facing the likes of easyJet, but it would not address the key issue of ownership and control. Furthermore, to get an AOC from an EU Member State would require the airline to have its “principal place of business” in that Member State. This is defined as “the head office or registered office within which the principal financial functions and operational control, including continued airworthiness management … are exercised.” This is considerably more than a brass plate job.

As of September 2015, the Hajji-Ioannou family so-called ’concert’ party held almost 34% of easyJet’s issued share capital, marginally less than the previous year. It is by no means obvious that an additional 16% of the shares are held by other EU nationals, given the company’s quotation on the London Stock Exchange. According to one estimate, 54% of the airline’s shares are UK held, presumably including the Hajji-Ioannou family holding (which could also be classified as Greek), and a further 20% are controlled by US interests. The final numbers will be close to the critical 50% level. There have been rumours of a joint £6.4bn ($8.4bn) take-over offer being prepared by Aercap and Stelios Hajji-Ioannou. Aercap is a major aircraft leasing and finance company with 1,202 aircraft valued at $43bn owned or under management. Why such a company would be interested in buying a low cost airline, especially in these challenging times, is unclear. However, if it did, it would again raise questions about ownership and control. Aercap may have its Head Office in Dublin, but it is quoted on the New York Stock Exchange and ultimately is almost certainly owned by US shareholders.

Ryanair, despite its extensive route network out of the UK, is registered in Ireland and will therefore remain an EU carrier post-Brexit. Or will it? It has already indicated that it might seek a UK AOC in order to continue to operate from there to the Continent. However, as of June 2016, according to its latest Annual Report, US shareholders held almost 42% of its shares. Many of the remainder will almost certainly be held by UK citizens. (One report has spoken of about 50% being UK-held.) It would clearly be a major challenge to achieve a majority EU ownership. On the other hand, there would be one piece of good news for Britain if Ryanair did decide to seek a UK AOC; it would earn additional revenue for the UK CAA. A move by several British airlines to the Continent, on the other hand, could put severe pressure on the regulator’s finances.

Wizz Air is another non-UK airline which might fall foul of the EU’s ownership and control rules post Brexit. It has recently stated that ’qualifying’ nationals now account for just 51% of its shares. Wizz Air is having to consider the possibility of treating non-EU shareholdings as ’restricted shares’, depriving the holders of certain rights, including the ability to vote at general meetings. The alternative is to force the disposal of shares held by non-EU citizens. In either event, there is bound to be a negative impact on the company’s share price, and overall Brexit can only make matters worse.

At present the only UK airline flying long-haul services from the Continent is BA’s Paris-based subsidiary, Openskies, apart from some limited operations by Thomson Airways. These services might not be possible post-Brexit, but presumably ownership of Openskies could relatively easily be transferred to Iberia and the Thomson operation could be taken over by another part of the Thomson group based in the EU. However, Norwegian operates long-haul routes from the UK, and could face problems in the future even with a UK AOC. The French-owned La Compagnie has just announced the termination of its London–New York service, ostensibly because of Brexit, but more likely a reflection of other factors.

There is one small oddity about the ownership and control of UK airlines under the EU internal market rules. When the original so-called Three Packages of liberalisation were negotiated two UK carriers could not meet the new strict ownership rules. (The UK CAA had applied a more relaxed approach, particularly to the ownership element.) Monarch was owned by Swiss interests and Thomson Airways by Canadians. These two carriers were, therefore, given a special status, as “honorary” EU citizens, so that they could be treated as EU airlines. Monarch is now fully UK owned, but the continued role of its special status is unclear. Could this unusual concept be a possible compromise for other airlines in the post-Brexit world?

Other EU Aviation Legislation

The EU has gradually expanded its regulatory influence far beyond the original internal market concept. Slot allocation, computer reservation systems, ground handling, consumer protection, the environment, safety, security, air traffic management — the list goes on and will grow further in the future. Most of these regulations are incorporated automatically into UK law and may therefore no longer apply post-Brexit. One obvious solution would be to introduce new UK legislation with identical rules, and carry on as before. Membership of the ECAA would avoid the need for this as it would come with automatic acceptance of all EU aviation legislation. However, this would presumably also involve subsequent adoption of any future new EU rules or amendments to the current ones without the UK having any influence over them. There is also the small matter of a financial contribution to the EU to help pay for the legislative work and enforcement. Some might argue that this is not what Brexit was supposed to achieve.

Aviation Policy

As already noted, the UK has had a significant influence on EU aviation policy from the beginning, and has tended to push that policy firmly in a liberal direction. On the whole it has been an ally of the Commission in this, but not of all other Member States. This influence will be missed, and the result could be a far more restrictive, even protectionist, EU aviation policy. Currently this is probably most visible in the debate over relations with the Gulf states, where France and Germany in particular have lobbied for restrictions to be placed on those Middle East airlines which they claim are in receipt of unfair state subsidies. The Commission now has a mandate to negotiate air services agreements with the UAE and Qatar, so this problem will have to be addressed soon.

The Commission published its regulatory vision for the future last December, entitled the EU’s Aviation Strategy. It very much reflected the compromises needed to accommodate the different pressures the Commission is under. Inevitably perhaps the result has satisfied no-one. All six trade associations representing Europe’s aircraft operators, for example, jointly described the document as lacking ’ambition’. The balance between liberalism and protectionism, which has recently been the centre of the EU regulatory debate and is seen in the Aviation Strategy policy paper, can only be destabilised by Brexit. As the Centre for Aviation Policy (CAPA) has noted: “...liberal ideals are under attack... Once the careful process unravels, the outliers can become revitalised. Vested interests re-emerge, and they are many and varied... Protectionism is a highly infectious disease.”

Air Traffic Control

The creation of the Single European Sky, and in particular the huge SESAR technical initiative, is key to an efficient future European airspace. In the words of Violeta Bulc, EU Transport Commissioner: “Delivering on the SES2+ regulation in 2016 is vital. This is the single biggest issue to be resolved in making our EU aviation market more efficient and competitive.” The UK, mainly via the partly privatised NATS, has been playing a key role in these developments, which so far has been largely financed (and promoted) by the European Commission. The amount of money involved is substantial. It is by no means clear whether, and if so how, the UK will be able to continue to participate in SESAR, yet without a UK involvement the whole initiative will be greatly diminished.

NATS itself appears relatively sanguine about the future. It has been quoted as saying that “we will still have to comply with the requirements of the current regulatory targets as part of the UK-Ireland Functional Airspace Block (FAB); we will continue to upgrade our technologies during the 2015-2019 regulatory period, which will enable us to deploy concepts developed through SESAR that will benefit our customers and passengers. Neither will change the need for airspace modernisation in the UK.” Not many would shed tears if the UK-Ireland FAB was abandoned, at least in its current form, but the leading role played by NATS in the European ANSP alliance Borealis is a different matter. As ever, funding will probably be critical. It is relevant that Norway has been forced to contribute financially in order to become a SESAR member.

The regulation of ATC charges in Europe is now closely supervised by the Commission’s Performance Review Committee (PRC). From one perspective the withdrawal of the UK from the EU won’t matter as the CAA is the national regulatory body and continues formally to set charges. However, a reversion to the old, pre-PRC situation may not please airlines, who have been critical of the CAA’s more benign approach to regulation in the past (admittedly there is now a new regime in place in the CAA) and have welcomed the more robust PRC approach. Finally, the Government’s plan to sell off its remaining shares in NATS has surely been scuppered, at least for the time being. It would be impossible to launch a sale without considerably more clarity about the regulatory regime which will apply in the future.

Safety Regulation

Along with France, the UK was one of the two leading air safety regulators in Europe, particularly with respect to aircraft and engine certification. To a significant extent this reflected, of course, the large UK aviation manufacturing base. The establishment of the European Aviation Safety Agency (EASA) in 2002, building on the work of the Joint Aviation Authorities (JAA), was designed to harmonise safety, airworthiness and certification procedures across the internal market, and to some degree beyond. Based in Cologne, EASA has gradually extended its areas of competency and recruited a large staff, many transferred from national bodies. It has 32 members, the 28 EU states plus Iceland, Switzerland, Liechtenstein and Norway, and some partners such as Turkey. However, as EASA is an EU body, only the 28 Member States have a vote on the organisation’s governing committee (not that votes are all that common) and other members have to make a financial contribution to the running costs.

The potential withdrawal of the UK from EASA would be “catastrophic” according to ADS, the trade body for British aerospace companies; it would take ten years, it is claimed, for the UK to re-create the certification infrastructure needed. Of course, a way has to be found for the UK to continue its EASA membership in some form, but the challenges should not be under-estimated. Even if the UK were to follow the precedent of Norway’s membership, it is difficult to see how its current level of influence in the organisation could be maintained, and influence is often just as important as legal access.

Airports

Airports are arguably the aviation sector least affected by Brexit. They are subject to a number of EU regulations, but nowhere near as many as, say, the airlines are. Clearly they will feel any downturn in traffic in the short/medium term. Immigration and customs facilities will probably have to be redesigned, again, if EU and UK citizens are to be treated differently to control migration, which could be expensive. On the other hand, there is the possibility of the reintroduction of duty free for international short-haul flights, which is clearly a money-maker for airports.

There is also the question of whether Brexit will affect a decision on additional airport capacity in the South East of England, a debate which has been rumbling on now for almost 50 years. It would not be surprising if some were to argue that the likely short-term downturn in traffic is a good reason to put off a decision yet again. At the same time, however, the Government is likely to want to launch some infrastructure initiatives soon to help to counter any post-Brexit economic slowdown, and the new runway project has the advantage of mostly, though not wholly, being privately financed. Whether the current state of uncertainty about the economy will make it more difficult, or the lower interest rates less difficult, to finance a runway remains to be seen.

Conclusion

So basically it’s all a bit of a mess. It is not too difficult to identify the post-Brexit outcome which most in the aviation industry would prefer, and we can list the options available to achieve such an outcome, but we are really no closer to saying with any certainty what the final outcome is likely to be. To be able to do so requires a clearer understanding of the parameters set for the overall UK-EU negotiating framework, and in particular what will happen about access to the common market and the principle of the free movement of EU citizens. Only then will it be possible to identify in any detail what will be achievable for aviation. It would hardly be surprising if the negotiations involved considerable horse trading across sectors, which in itself will create even more uncertainty. As CAPA has commented, “once the horse trading begins, there can be no certainty that other areas of trade and politics will not pollute any logic that applies in the aviation sector.” We might hope for a rational outcome, but we shouldn’t necessarily expect one.