Brexit: what the newly announced deal means for aviation
Finally, some clarity on the detailed post Brexit arrangements
The full text of the "Trade and Cooperation Agreement" between the EU and the UK that was announced on Christmas Eve has now been published.
For anyone that is having trouble sleeping, all 1,246 pages can be downloaded here.
I can't say I have read the whole thing, but I have at least skim-read the main body of the agreement, which runs to 409 pages. I read more thoroughly through the 25 pages of the main body which relate to aviation. Interestingly, that is almost twice the 14 pages devoted to fisheries, which was famously a long running sticking point.
For anyone not interested in the gory details, my overall summary is that not very much will change for aviation as a result of Brexit. The agreement remains a very liberal one and potentially tricky issues such as ownership and control have been side-stepped, at least for now, by grandfathering existing carriers.
But if you want more, I've tried to summarise what I think are the most important bits of the agreement as is relates to aviation and discuss the implications.
Let us start with the so called "freedoms of the air", which regulate which routes carriers are allowed to operate and to sell seats for.
Traffic rights
As expected, when it comes to so called “third and fourth freedom” rights, the new agreement is very liberal. There are no restrictions on the ability of EU carriers to operate to the UK, or on UK operators to fly to points in the EU.
The first big change is the elimination of "cabotage". A UK airline is no longer allowed to fly EU routes that do not have a UK airport at one end of them. Likewise, EU carriers are not now allowed to operate domestic UK routes. This has always been expected and UK airlines like easyJet that did a lot of EU flying that didn't touch the UK have set up EU based subsidiaries to get round this restriction. EU airlines like Ryanair have set up UK subsidiaries to allow them to continue to fly domestic UK routes.
The second big change is that many third countries (like the US) had agreed air services agreements with the EU which treated all EU carriers equally. The UK will not be part of EU agreements going forward and EU carriers will not be part of UK agreements. That ends the right for Lufthansa to fly to the US from the UK and British Airways to fly to the US from Germany. Not that either of them did that, and I can't actually think of any cases where these rights were being used in practice.
Likewise, there are no 5th freedom rights on the passenger side, so Air France can’t operate a through flight via London and pick up passengers for Los Angeles. Again, I’m not aware that any were being used. There are provisions for 5ths on the cargo side be agreed on a bilateral basis between the UK and member states.
Ownership and control
This was always going to be the most contentious issue. What does it mean to be a "UK airline", and thereby benefit from the freedom to fly to the EU from the UK? There are three tests in the new agreement. A UK carrier must:
1. Be owned, directly or through majority ownership, and effectively controlled by the UK, its nationals or both
2. Have its principal place of business in the UK
3. Hold an air operator certificate issued by the UK and be under the UK's regulatory control
The tests are replicated for EU carriers, substituting “EU” for “UK”.
It is the first of these tests, the "ownership and control" issue that risked creating the biggest issues for existing operators. British Airways is owned by IAG, a Spanish company, which in turn is not majority UK owned. For Iberia to remain an EU carrier and British Airways to be a UK carrier and therefore be allowed to fly to the EU, ownership of the two could not be the same.
It was always unthinkable that the EU would ban British Airways from flying from the UK to the EU on the grounds that it wasn't British. Especially when the reason it wasn’t "British” was because it was partly owned by EU nationals. So there is an extra provision in the agreement that allows a UK carrier to be majority EU owned, or majority EU + UK owned and still qualify as a UK carrier, as long as it passes the other tests. This only applies to existing operators, so in that sense it is a "grandfather clause".
Interestingly, there is no equivalent provision for EU carriers. They need to be EU owned and any UK ownership doesn't count towards that.
The potential issue of British Airways not being counted as British applies to air services agreements with non-EU countries as well. Some, but not all, of these air services agreements have been turned into EU-wide agreements over the years. Notably, the US agreement is one such. The UK has been busily negotiating new UK air services agreements to replace the EU ones. Those agreements have largely replicated the terms of the EU agreements, but swapping "UK airlines" for "EU airlines". So the same potential issue arises here. Is British Airways a "UK airline" if it is not majority UK owned? For that reason the UK has either been pushing “principal place of business” and “UK air operator certificate” as the only tests, dropping ownership requirements. Or where that has not been possible, negotiating a similar "grandfather clause" which allows EU shareholdings for existing operators to be treated as "British" for the purposes of the ownership test.
Some countries have never agreed to move agreements into "EU-wide ones" and continue to insist on national ownership and control rules. So British Airways needed to demonstrate its Britishness despite being part of IAG. Likewise, Iberia also needed to remain Spanish and Aer Lingus to remain Irish. "National control structures" were therefore put in place at the time of the creation of IAG to allow this. Brexit should not be an issue for such countries as nothing has really changed.
The final ownership and control issue created by Brexit relates to EU carriers continuing to remain EU "owned and controlled" once UK shareholders no longer count towards the ownership test. One solution to this is simply to move the UK into the "foreigners" category and take steps to ensure that the EU shareholding remains above 50%. That is a route that some such as Lufthansa have taken. There are no operational implications as such, but no company wants to restrict its access to the London capital market if it can avoid doing so.
In the case of IAG, the company has argued that the "national control structures" it already has safeguard the Spanishness of Iberia and the Irishness of Aer Lingus, regardless of the ownership mix of the parent company. Spain and Ireland have confirmed that they support this interpretation, but the European Commission continues to argue the point.
The way EU law works in this area is that if IAG maintains its position and the European Commission does the same, the ultimate sanction is that the Spanish government would need to withdraw Iberia and Vueling's operating licence as a result of failure to comply with the EU's ownership and control laws, or the Irish government do the same for Aer Lingus. I guess other EU countries (for some reason France popped into my mind) might deny these carriers the right to operate to their country for the same reason. I think most people fail to understand that if that were to happen, it would be Spanish and Irish carriers that would be damaged, not BA. Internal EU politics make that quite unlikely, it seems to me.
However, this is obviously an on-going area of discussion. The UK-EU trade deal contains an extra article (AIRTRN.9) which says:
"The Parties recognise the potential benefits of the continued liberalisation of ownership and control of their respective air carriers. The Parties agree to examine in the Specialised Committee on Air Transport options for the reciprocal liberalisation of the ownership and control of their air carriers within 12 months from the entry into force of this Agreement, and thereafter within 12 months of receipt of a request to do so from one of the Parties. As a result of this examination, the Parties may decide to amend this Title."
Although the relevance of the issue is most obvious for IAG, many European carriers will struggle to keep their EU ownership percentages above 50% once the UK is excluded. Wizz, Ryanair and easyJet all have issues to manage.
Expect the lawyers to remain busy for a while.
Other provisions of the EU-UK agreement
Whilst traffic rights and ownership control have attracted the most interest, there is quite a bit more relating to aviation in the UK-EU agreement.
My summary would be that a lot of work has been done to maintain the benefits of a liberalised aviation sector, one of the most visible success stories of the European project. Many clauses in the agreement therefore have the effect of maintaining the status quo and limiting any increased costs and friction.
There are no capacity limits or old fashioned "pricing approvals" that are still found in some air services agreements. Provisions for code-sharing and blocked space agreements look to me to maintain all the commercially valuable rights.
Wet leasing, which can be an issue in such agreements continues to be permitted, but with a twist. Both UK and EU carriers can wet lease from other EU operators but my reading of the agreement is that EU carriers cannot wet lease on any kind of long term basis from UK operators. Similarly, the UK is limiting the newly created UK AOCs of European carriers from long term wet-leasing from their EU AOCs, something that Ryanair has already fallen foul of.
There is quite a lot of text devoted to non-discrimination, issues such as maintaining free movement of airline personnel and exemption from taxes, fees and duties for operational supplies. There are provisions relating to the regulation of airport fees and the right to self-handle. All of these have the effect of preserving the status quo, I think.
Safety and security
As you might expect, there is lots of text in this area. My take is that again, the approach is to maintain to status quo as closely as possible, but formally moving the system to one of mutual recognition with the UK having withdrawn from EASA. There is lots of language about ongoing co-operation, so I would assume policies will remain closely aligned.
Consumer protection
UK airlines will have been hoping that they might escape from some of the worst excesses of "EU261", a set of EU rules which regulate customer compensation for delayed or cancelled flights. That has been hugely costly for EU airlines and widely criticised by the industry as being poorly designed. The agreement includes language about on-going cooperation in this area, but is it quite vague, so maybe there is scope for the UK to move to a better designed system over time for tickets sold to UK passengers.
Other
Aviation is referenced in many other parts of the agreement, whether related to carbon-pricing, limitation of subsidies, data protection, exchange of information and so on. In each case, the agreement seems to me to preserve the status quo.
Final thoughts
The implications of Brexit for the aviation sector have been and will continue to be mainly felt through the broader economic impact. Four years and counting of uncertainty for businesses, large transition costs, negative effects on trade and so on. Many UK jobs have already been lost in financial services and the automotive industry as a direct result of Brexit and the UK has moved from one of the strongest performing economies in Europe to one of the worst, in large part due to these negative effects. With the new agreement now in place, perhaps the UK can at last start to move forward again.
As far as specific impacts on aviation go, the new UK-EU deal largely replicates existing arrangements. The most tricky issues arising from it relate to ownership and control restrictions, which are an anachronism. No other industry faces such restrictions and with the aviation sector in desperate need for capital as it rebuilds after COVID, moving to increase restrictions on funding sources for European carriers and forcing them to introduce shareholder unfriendly restrictions seems daft to me. We should be going in the opposite direction and I hope that the crisis could perhaps be a catalyst for this to be addressed on a global basis.
That will be a big task. But my old boss, Willie Walsh, likes a challenge. As the new Director General of IATA, perhaps he will finally be able to make some progress.
