Brexit: Tension mounts but no panic (as yet)
September 2018
As described in previous Aviation Strategy articles, Brexit raises numerous complex issues for air transport. Aviation has its own, unique international regulatory regime, distinct from World Trade Organisation rules, is highly regulated at several levels and attracts more than its fair share of public attention. It is little wonder that there is such confusion and gloom when it comes to one of the most important negotiations the industry has faced for a long time.
Michael O’Leary of Ryanair has been particularly pessimistic about the post-Brexit future. In an interview with CNN in March, for example, he again stressed the risk of all flights between the UK and the rest of Europe being grounded from next spring. “Six months before Brexit is when the airlines will really be panicking and customers will… [be asking] ‘Are these flights going to operate?’”
This certainly isn’t the first dire warning from O’Leary about Brexit. As long ago as August 2017, he threatened to take flights off sale in September 2018 if an open skies deal wasn’t agreed between the UK and EU. Three months earlier he had advised British holiday-makers to get used to travelling by boat as there was a real risk that Brexit could shut down all flights to and from the UK. Yet this month Ryanair, far from closing down sales to and from the UK, announced that it was adding 23 new routes to its London schedule for summer 2019, including 14 from a new base at Southend.
We are now some six months away from Brexit Day, 29 March 2019. Is there any sign of panic among aviation stakeholders, or should we take O’Leary’s warning with another large pinch of salt? The answer is far from clear. Fundamentally there is still every reason to believe that acceptable aviation deals covering safety regulation and airline market access will be achievable in time. Probably, as explained below, these deals will replicate much of the regulatory arrangements currently in place, and everyone will be asking: “What was the problem?”
However, at the same time there are certainly signs of some panic as Brexit Day gets closer, especially with respect to safety regulation. This affects all aspects of aviation, but particularly manufacturing. The problem is not that agreement on a deal has become any more difficult in itself. Rather it reflects a lack of flexibility on the part of the European Commission that is preventing critical preparatory work being undertaken. There is consensus that to arrive at Brexit Day with no deal and no preparation would be a disaster.
The timetable for the broader Brexit negotiations over the next few months includes a series of EU summits on 20 September, 18 October, probably the week beginning 12 November and finally 13 December. No agreement was reached in September, as had originally been hoped, and November now looks like a more likely date. The final deadline is 13 December if an agreement is to be ratified in time by the UK and EU Parliaments. In addition, there remains significant doubt on whether any deal can attract sufficient political support in the UK.
So a No Deal outcome is still possible. Nathalie Loiseau, the French minister for European Affairs, perhaps taking the lead from Michael O’Leary’s approach to Brexit, recently warned that in such circumstances the French Government would block all flights from the UK, which seems extreme to say the least, even accepting that the parties are still in the middle of a lengthy and difficult negotiation. The UK Government “acknowledged that planes would be grounded without a post-Brexit agreement,” but that is not quite the same as saying that all flights would be stopped. Most commentators believe that old bilateral air services agreements between the UK and individual EU States would at least protect most third/fourth freedom operations. Nevertheless, it is clear that the stakes are high and the pressure is mounting.
Safety Regulation
The UK CAA has stated publicly that it would not be in a position for some time to take on all the safety regulation responsibilities currently performed by the European Aviation Safety Agency. It is vital, therefore, that some way is found to ensure that such regulation is carried out effectively and legally. By far the best way of doing this would be for the UK to remain a participant in EASA. This is in everyone’s interests, including the EU/27 (and indeed the wider aviation industry beyond the EU), not least because the UK is at present the largest contributor of manpower and finance to EASA.
Since EASA is an EU agency, formal membership is open only to EU Member States, but there are ample precedents for non-Member States to become Associate Members. There were thought to be two problems with this approach from a UK perspective. First, EASA will continue to be subject to the jurisdiction of the European Court of Justice, which was a red line for many UK supporters of Brexit. Secondly, Associate Members of EASA can participate in meetings and discussions, but formally do not have a vote on decisions.
However, votes are actually quite rare in the organisation, which tends to reach agreement by consensus among technical staff. In March, the UK Government announced that despite the problems outlined above, it was prepared to accept, and pay for, Associate Membership. This was certainly an enormous relief to aviation stakeholders.
There is no obvious reason why the EU should reject a UK application for Associate Membership of EASA, at least in normal circumstances. It has welcomed several other third countries to join on such terms. The expectation after the Prime Minister’s proposal, therefore, was that once agreement had been reached on a broad Brexit deal, arrangements would quickly be put in place to ensure that something very close to the current safety regulatory regime would continue uninterrupted.
That may still be the case, but unfortunately problems have arisen which threaten to greatly complicate the situation. In particular, the inflexibility shown by the Commission in the main Brexit negotiations has been repeated in the aviation sector, especially in relation to allowing preparation for post-Brexit arrangements to begin before the principal EU/UK negotiations have been completed. This is particularly important in case the outcome of the negotiations is No Deal.
There has been growing concern that failure to engage in informal exchanges now could lead to disastrous consequences, mainly because of the absence of legal certainty. As a result, two industry trade bodies — ADS, representing the UK aviation manufacturing sector, and GAMA, representing the majority of the world’s manufacturers of general aviation aircraft and equipment — wrote in June to Michel Barnier, the EU Chief Negotiator for Brexit, urging a different approach as a matter of urgency.
The ADS/GAMA concern is shared by the UK Government and CAA, resulting in further pressure being applied behind the scenes. In their letter the two trade bodies focus in particular on the problems faced by manufacturers, but the issues which they raise apply also to most of EASA’s activities.
The letter notes: “As we are now less than one year [the letter was sent in June] from the UK’s exit from the EU, the concerns of our sectors are growing more pressing. The ongoing uncertainty on aviation safety arrangements means that companies face being forced to make investment decisions in the coming weeks and months based on the {worst?} case scenario. This does not benefit the UK or the EU27, and the impact as these irreversible decisions are taken will be felt in supply chains and operations across the whole of Europe and beyond…
“The European aviation industry as a whole cannot afford any unintended consequences that arise from legal uncertainties. Any ambiguity in the legal status of UK certified designs and parts could result in aircraft being unable to fly anywhere. Similarly, uncertainty about the status of aircraft maintenance approvals, pilot and maintenance training approvals as well as pilot and technician licences threaten the continued operation of aircraft across Europe.”
The strength of the words used reflect how serious this issue is for the manufacturing industry. ADS and GAMA point out that the transfer of responsibility to EASA from national authorities in 2003 created several serious, often unexpected, problems which even led to the grounding of some aircraft at the time. Unsaid, but clearly implied, was the message that it would be madness not to learn from this experience and walk blindly into another debacle, especially when there are obvious ways of avoiding such an outcome.
In conclusion, ADS and GAMA state that “our risk analysis concludes that … EASA and the UK’s … CAA need to urgently begin technical and contingency planning discussions by the June European Council, and separate to the political negotiations.” Michel Barnier’s Deputy, Sabine Weyand, replied on 26 July, stating that “while I understand your request for technical discussions in order to limit disruption and safety risks, without sufficient clarity on both the outcome of the withdrawal process and the future UK legal framework, such discussions would currently be premature.”
ADS wrote again to the Commission on 7 September, clearly frustrated at the lack of movement, saying: “ADS knows that the UK Government has requested on several occasions that technical discussions between EASA and the CAA begin. We understand these have not been allowed to take place so far at the instruction of the European Commission. This is inconsistent with the letter and the spirit of the Commission and the Council calling on stakeholders to prepare for the consequences of Brexit.”
“… ADS understands that detailed bilateral discussions at a technical level have already taken place between the CAA and the US, Canada and Brazil. As long as the Commission blocks similar bilateral technical discussions between the CAA and EASA, it fosters uncertainty and risks legal liability, insurance and passenger safety issues for the global aviation and aerospace industry.”
ADS and GAMA are trade bodies lobbying on behalf of their members, but the arguments they have presented really cannot be viewed as an exaggeration of the situation. There is clear and growing frustration at what many see as the Commission’s unnecessary inflexibility. It cannot be said too often: time is running out. If the Commission’s objective is to increase the pressure on the UK in the broader political negotiations, it may have miscalculated, with potentially very serious consequences. Everything may, of course, work out satisfactorily in the end, and that is certainly most people’s hope, perhaps even expectation, but the risks are substantial and increasing.
Market access
When it comes to panic, however, most public attention has been directed at market access. The creation of the EU internal aviation market, ironically to a large extent a UK initiative, has been a huge success and radically changed the airline industry in Europe. Add to this the fact that the UK is the largest source of intra-European air traffic, not least tourists, and that the problems created by Brexit affect continental European (and Irish) stakeholders almost as much as UK ones, and it is not unreasonable to ask why anyone other than the most hardened European bureaucrat determined to punish the UK for its Brexit decision would choose to damage such an EU policy success.
In the absence of formal contacts between the EU and UK on airline market access, it is obviously difficult to be certain on what the eventual outcome might be. (The UK Secretary of State for Transport met the EU Transport Commissioner recently, with aviation one of the topics on the agenda, but few details have emerged on what they discussed. In any case, more detailed exchanges between officials are what is really needed.)
However, it is possible to make an educated guess by asking what type of bilateral arrangement might the EU seek with the UK if the latter had never joined the Union. What would the EU be saying if the UK was a long-standing, fully independent State?
A clue to the answer to this question was provided in a speech given in July by Henrik Hololei, Director General for Mobility and Transport at the Commission. Speaking to the International Aviation Club in Washington DC, Mr Hololei stuck rigidly to the Commission line on Brexit, noting: “What is clear is that the UK would not be able to benefit from the similar access to the EU aviation market as now and the UK carriers will not be considered European carriers anymore. The UK would also cease to be a full member of the European Aviation Safety Agency once it exits the EU.”
This is all very well, but doesn’t go much beyond stating the obvious. However, Mr Hololei actually spent most of his speech addressing the broader EU external aviation policy, and in particular the EU/US agreement which last year celebrated its tenth anniversary, and here he was much more revealing about what might follow Brexit. The EU/US “historic game changer”, as he put it, has been a success, despite the fact that the partners’ share of global traffic has fallen from some 50% to 37% since its inception. Most importantly, he argued, much more could have been achieved, and could still be achieved if there was more commitment to reform.
Where the EU/US Transatlantic Aviation Area (TAA) fell short of European hopes and expectations was in its failure to address the national ownership and control rules which still widely apply to airlines. Despite efforts by the EU, following similar attempts by the UK over many years, the US refused to adopt a new approach to these long-standing restrictions (nor would it allow foreign airlines to operate cabotage services in the US), going no further than to agree to continue discussions. Over the ten years since the TAA came into existence, there has been no progress at all in this area.
Mr Hololei was clear about the need for reform: “If we look at this today then I believe that, in order to enhance competition and advance investments to the European carriers, we need to re-think the Ownership and Control regulation more generally. It is very difficult to understand why we have these restrictions that are not present in any other industry…. I believe in the potential of truly global carriers and, if I look at the possible challenges to the sector, then that might also be very important for the future of the industry.”
Then comes the critical statement: “…let me remind you of my vision for the EU-US aviation relations that I have shared with you over the past years: a creation of a genuine Transatlantic Aviation Area that combines both markets ensuring high standards, leading to high connectivity and tremendous synergies. A yardstick for the global aviation community, a lasting influence for the future development of our sector! This was the dream of the negotiators of the ATA and the spirit of the negotiators of the Agreement, when we committed to remove market access barriers, further enhancing the access of our airlines to global capital markets, and to lead by example.”
Clearly what Mr Hololei is saying is that the EU Commission is still committed to the original proposals for what was then termed the ‘Open Aviation Area’ and presented to the US at the beginning of the negotiations. This negotiating mandate had the support of all 28 EU Member States and the wider European aviation industry. Indeed, it was originally drafted by the Association of European Airlines, then the trade body of the legacy carriers in Europe.
Europe’s objective, building on the success of the EU internal aviation market, was to create an enormous free trade bloc for air transport, accounting for some 50% of the global industry. Essentially this would involve taking the current EU internal aviation market and stretching it across the Atlantic.
All the old bilateral restrictions on market access (including cabotage), pricing and crucially ownership and control would be swept away. Unfortunately, while much of the proposal was acceptable to the US, not least because it coincided with its own long-standing Open Skies policy, the US would not accept reform of the airline ownership and control rules and cabotage services.
From one perspective, it is surprising that the Commission is maintaining this liberal approach in the face of mounting pressure in Europe for a more restrictive external aviation policy, best illustrated by the campaign by the likes of Lufthansa and Air France/KLM to curtail the expansion of the Gulf carriers. Many had expected the departure of the UK from the EU to weaken the Commission’s hand and force it to become more protectionist, but there is no hint of such an about-turn in Mr Hololei’s speech.
Rather he notes that one of the biggest challenges facing the industry and regulators today is “protectionism driven by an agenda influenced by renewed nationalism and wide-spreading populism… Protectionism … leaves a flawed picture of temporarily increased job security but after the first indirect effects this quickly evaporates. It is important that Europe does not fall into this growing camp but continues to fight for global open markets that serve us best.”
One might wonder what Lufthansa and Air France/KLM thought of such a clear and unambiguous restatement of the Commission’s long-standing external aviation policy, not to mention any supporters of President Trump in the audience. However, it is certainly consistent with the policy pursued in negotiations with both the US and Canada, although perhaps less so with respect to the attempt to reach a wide-ranging agreement with Brazil, which reputedly collapsed when the Brazilians lost patience with the EU reluctance to grant extensive fifth freedom rights. (Brazil has recently announced new bilateral agreements with several individual European States.)
The key question answered?
But what about the Brexit negotiations, once they eventually get underway, as they must at some stage — even a ‘Hard Brexit’ falling back on WTO rules for most industries would still require separate aviation agreements. Reverting to our earlier question — what would the situation be if the UK had never been a member of the EU? — the answer from Mr Hololei’s Washington speech would seem to indicate that the Commission would be more than willing to negotiate a very liberal air services agreement between the EU/27 and the UK, one that effectively replicated virtually all of the elements currently found in the EU’s internal aviation market.
It is difficult to envisage any other approach that would be consistent with the EU’s stated external aviation policy, as outlined in Mr Hololei’s speech. After all, no-one can question the UK’s adherence to any fair competition rules, unlike the allegations made against the Gulf States, since it is following, and has undertaken to continue to follow, EU principles. The competitive playing field, for both UK and EU/27 carriers, is about as even as it could ever be.
Thus, if the EU is prepared to offer very liberal air services agreements to the US and others, why would it not be prepared to do the same for the UK, especially since Brexit creates almost as many problems for EU/27 airlines and airports as it does for their UK counterparts, not to mention the implications for the EU tourism industries? The only reason not to do so would presumably be to ‘punish’ the UK in some way, but such an approach would be a strange and short-sighted way to launch a new long-term relationship with a major trading neighbour.
To summarise: in the absence of a complete breakdown in relations between the UK and EU, along the lines outlined by the French Minister, there is every reason to believe that eventually agreements will be reached which, to all intents and purposes, replicate all of the current aviation regulatory arrangements.
The main problem is not so much the policies which both sides are likely to pursue, but the short-term inflexibility of the Commission in refusing to allow informal technical discussions to take place in advance of a broader Brexit agreement. Potentially this is a serious matter, putting safety and continued air services at risk. So perhaps Mr O’Leary was right after all — we should be panicking, at least a bit.
