Legal Experts Fear Major Brexit Disruption for Aviation

 - March 4, 2017, 10:57 AM

Eight months ago, Britain voted in a referendum to leave the European Union (EU), embarking on an uncharted path and plunging the business community as a whole into a spiral of uncertainty. By the end of this month, the UK government is expected to initiate the so-called Article 50 clause that will mark the point of no return in the complex Brexit process, through which the country will abandon its EU membership after a two-year period of negotations with the remaining 27 states.

Advocates of Brexit say the UK is poised to enjoy a golden age of economic independence in which industry and commerce will be free from the supposed shackles of EU legislation and regulation. However, since the referendum, the EU's political leadership has made it clear that the UK will be excluded from access to its single market if it refuses to honor existing agreements covering areas such as the free movement of labor. The UK's Conservative government is refusing to compromise, insisting that the country can thrive outside the EU by forging new trading alliances with countries worldwide.

The UK aviation industry—and its partners and customers in the EU—arguably face the greatest uncertainty from Brexit. For instance, how will UK-based commercial operators be able to fly for hire within the EU if they lose their cabotage rights? Will the UK remain a member of the European Aviation Safety Agency? If not, how will it replace EASA regulations with its own?

“There is no doubt that Brexit could be hugely disruptive to aviation from an operational and regulatory perspective.”

With those words Marko Ninkovic, head of marine and aviation claims for Brit Insurance, kicked off a seminar held January 26 at the Royal Aeronautical Society’s headquarters in London, hosted by the society’s Air Law Group. In front of an audience packed with aviation lawyers and associated professionals, including legal representatives of leading UK airlines, speakers set forth their views on “Brexit: the Legal and Operational Implications.”

One issue the seminar highlighted is the lack of guidance so far from the UK government concerning aviation matters and the likely nature of the environment in which the post-Brexit UK aviation industry will find itself. As in all commerce, aviation companies are anxious to know what is intended for the sector so that they can be more confident in their own planning.

Compounding the problem is that the Brexit phenomenon is without precedent: to date only the territories of Algeria, Greenland and Saint Barthélemy have left the European Union since its precursor organization was established by the Treaty of Rome in 1957. Never has such an economic powerhouse as the UK opted out of such a major economic and political alliance.

Faced with this lack of specific policies for aviation, forecasters and planners in the aviation world can only look to the broader political statements that have been issued by the government. When it ruled out membership of the European single market the UK government signaled that the aviation industry would also face a "hard Brexit," being forced to withdraw from its Europe-wide associations and organizations.

Tim Marland, a barrister at Quadrant Chambers, remarked, “The harder the Brexit, the greater the potential impact.” That view is underlined by analysis conducted by IATA Economics. Not only is the shock to economic certainty huge in the case of Brexit—and to a lesser extent in the election of President Trump—but the "hardness" or otherwise of Brexit has an effect on the rate of future growth.

According to IATA’s analysis, the UK’s air traffic—itself a thermometer of GDP—will dip significantly as the immediate economic effects of Brexit take hold, a process that could take two years. Driving the downturn are the fall of sterling and the trickle of global business from London to other financial centers in the EU. This effect is partially offset by the greater number of visitors traveling to the UK to take advantage of lower prices, but as the UK’s air traffic comprises 55 percent outbound passengers (that is, UK-based passengers departing and returning to the nation) the overall effect is negative.

After the dip, IATA expects UK air traffic to grow again at a significant rate, in line with overall global traffic. However, in the case of a "hard Brexit" the recovery from the dip is forecast to take longer to achieve growth than is the case with a "soft Brexit," in which the UK retains many existing trade ties with the EU. That now seems unlikely to be the case and leaves the "hard Brexit" growth forecast lagging behind that of the "soft" option.

Is there sufficient time?

In addition to the lack of aviation-specific guidance is the concern that there is insufficient time to implement new rules and regulations. Disentangling 40 years of close cooperation with a trading partner that, on a wider economic scale, accounts for 45 percent of the UK’s exports and 55 percent of its imports is not a process that can be undertaken overnight. History has shown that trade deals can take many years to bear fruit.

“The easiest way forward is just to replicate all the EU laws in the UK,” remarked Professor Richard Williams, associate professor of Swansea University’s Institute of International Shipping and Trade Law, “which then begs the question: why have we done it?” Similarly, gaining access to EU markets via the separate mechanism of the European Economic Area (EEA) is also an unlikely route as it fails to meet the specific aims of the Brexit movement.

On the other hand, cherry-picking elements of the overall EU deal would be extremely time-consuming, and it is unlikely it could be concluded within the two-year notice period, even without the issues associated with getting the 27 remaining EU member states to agree.

There is a mechanism by which the two-year deadline can be extended to buy more time for negotiation, but it requires a large majority of the EU heads-of-state to agree, and also requires ratification in the European Parliament. In the current political climate an extension is unlikely to be granted.

Access and Ownership

At present all EU operators enjoy considerable freedom to conduct business throughout the Union, but for those flying into and out of the UK that will change after Brexit. Regarding access for operators, what now seems likely is that on leaving the EU the UK will have to resurrect old bilateral access agreements with the individual EU member states. Many of these agreements remain on the statute books, but having been overtaken by EU-wide agreements are now obsolete and require renegotiation. However, they do at least provide a starting point for discussions. In some instances the bilateral agreements have either been repealed or never existed in the first place.

UK operators after Brexit will no longer have the right to fly between any two points in the EU, and seventh freedom/cabotage operations will no longer be possible. Moreover, flights between UK and EU destinations will be governed by two sets of regulations, meaning more paperwork and possibly new licenses. A clear danger is that the possible divergence of UK and EU regulations over time might further complicate travel between the two.

Ownership of operators is another area with serious ramifications. Currently EU "community carriers" have to be majority-owned by an EU national entity, but this would no longer apply to UK-based air carriers after Brexit. It could be that the UK relaxes its rules concerning ownership to stimulate business, although EU members might view this as a hostile action. Alternatively, a UK-only policy might be introduced, which could hurt UK-based carriers such as KLM UK, Thomas Cook and TUI, which are owned by EU companies. Access to the lucrative UK market for non-UK airlines that currently enjoy seventh freedom rights, such as Norwegian, Ryanair and Wizz, could also be affected.

Regulations and Air Traffic

Once out of the EU the UK will also likely be leaving the European Aviation Safety Agency (EASA). All regulatory issues will then be the purview of the UK Civil Aviation Authority, and it is likely that safety regulations will revert to those previously outlined by the CAA. However, the CAA does not have the manpower to rewrite all the required regulations, many of its former staff having transferred to the EASA. Bringing some back could alleviate the problem, but it is unlikely that the CAA will be able to fulfill demand in key areas such as certification.

There is some precedent for being a member of the EASA without being in the EU, as is the case with Switzerland and the non-EU EEA states (Iceland, Liechtenstein and Norway), but the political noises coming from the UK government suggest that this is less likely than complete withdrawal.

Air traffic is another area with implications, especially as the UK/Ireland airspace block currently handles 80 percent of all transatlantic air traffic. The UK is also a key part of the Borealis Free Route Airspace. As with regulation, there is some precedent to remain part of the European Single Sky, since Switzerland and the EEA states are included.

Legal Issues

Many other areas of the aviation industry will be affected by Brexit, such as passenger rights, accident investigation and aircrew licensing. It is expected that, in most cases, the current EU legislation will be taken in unchanged form into UK law, at least temporarily.

Transferring EU rules into English Common Law in itself is not regarded as being much of an issue, the conversion being handled under what is known as the Great Repeal Bill. However, some current EU laws cannot be matched by UK law automatically, and others are based on treaties that were signed by the EU on behalf of all member states.

Certainly the Great Repeal Bill raises major issues in terms of jurisdiction and enforcement. Currently the ultimate arbiter of EU law is the European Court of Justice, but that would not apply to a post-Brexit UK. In the enforcement of judgments, the UK would have to gain consent from EU states to ensure enforcement within those countries.

There is a considerable gray area concerning contracts, leases and the like that have been drawn up under EU law but that will fall under UK law after Brexit. Similarly, agreements being considered currently, while the UK is still a member of the Union, are also subject to some uncertainty.

Aviation lawyers such as Anna Anatolitou, a partner at Ince, are advising companies to revisit all their contracts to ensure that they are adequate for a post-Brexit world, to sort any claims that include an EU element now, and also to enforce any judgments that come under an EU ruling before the UK leaves.

A View from Europe

From the other side of the English Channel comes a generally sympathetic view, albeit tinged with some suspicion of how the UK will conduct its exit from the EU. There is some will, at least at the political level, to prevent the UK from cherry-picking the good bits of the EU, and there may even be some desire among member states to punish the UK for leaving.

Regarding the continued openness of aviation in Europe, John Balfour, consultant at Clyde, suggested that the UK’s best hope is “to convince the rest of the EU that’s in their interests. We should persuade our EU colleagues that it’s good for them too.” But a key worry for EU members at both the higher political level and in aviation is that the UK’s trade deals with other nations—notably the U.S.—could come into conflict with the Union’s interests when negotiating its own deals with the UK, especially if protectionist tariffs are introduced.

“The prevailing feeling in Europe is that it’s lose-lose,” is how Dr. Peter Urwantschky, a partner at Urwantschky Dangel Borst, described the effects of Brexit on aviation at the seminar. “The UK's leaving is seen as a great loss in Europe as it has pushed aviation in a liberal direction. This will be missed. Protectionism is a disease.”

Urwantschky noted that the initiative to harmonize European air traffic will be diminished without the UK, and that the UK was also a positive driving force within the EASA. “Overall there’s regret, but no thought of retaliation,” he concluded, but warned, “that could change if the UK enters into an anti-EU alliance with Trump.”

Uncertainty of Brexit Weighs on Operators

You have admire the mainly optimistic spirit of charter operators caught in the confusion of Brexit, but there is no escaping the underlying anxiety about the many unresolved issues swirling around the UK’s impending exit from the European Union (EU) and how it will affect the country’s business aviation sector. In fact, few want to go on the record to discuss the situation, but AIN was able to get some perspective from those on the front lines.

Luxaviation, based in EU member Luxembourg, acquired the UK’s London Executive Aviation in 2014. At the time, the British government had not confirmed there would be a Brexit referendum, and even if it had, few predicted that the country would vote to leave the EU. “I didn’t consider this at the time,” said Luxaviation CEO Patrick Hansen. “If we had, we might have been better off putting the money in the stock market. But, seriously, this is one of those situations where size does matter and operators smaller than us would not have the resources to deal with such a complicated situation.”

In addition to its UK air operator certificate, Luxaviation has AOCs in Luxembourg, Germany, France and Belgium within the EU. So it has the option of shifting its fleet to ensure market access even if UK operators are denied the rights to fly within an EU country or between two EU countries. “We can move our business around, but if you have only a UK AOC the worst-case scenario for Brexit is far more difficult,” Hansen said.

As the Brexit process gathers pace, UK operators with the means to do so may well try to establish AOCs in user-friendly EU states such as Malta. But he warned that this might not be straightforward: to hold an EU AOC, a company has to be majority-owned by an EU citizen, a rule that would exclude British citizens after Brexit. “So this could involve some complex restructuring of company ownership,” Hansen warned.

According to Richard Mumford, chairman of the UK’s BACA air charter association, the potential loss of traffic rights and uncertainty about how the country’s aviation industry will be regulated post-Brexit are the biggest concerns. “We don’t know what will happen, and we will have to wait until the end of the Brexit negotiations to be sure,” he told AIN. “But there is going to be an impact and it could make things more difficult and expensive [for UK operators].” In Mumford's view, the potential difficulties associated with Brexit strengthen the case for charter clients and operators to work through brokers since problem solving is a key part of the added value they bring to the market.

Somewhat ironically, there is now concern among UK companies that the regulatory environment could get tougher for them if they revert to the full jurisdiction of the UK Civil Aviation Authority (CAA), as opposed to the European Aviation Safety Agency. Historically, the CAA had a reputation for being one of the most rigorous (some would say pedantic and obstinate) regulators in Europe. “In reality, EASA regulations have been less of a burden for UK operators,” said Mumford.

“From an operator viewpoint, one of the biggest concerns is how much legislation will increase and whether we will still have rules such as flight- and duty-time limitations and maintenance approvals,” said BACA council member Neil Hannabuss, CEO of charter broker Freedom Air. “The main concern is how much this will affect costs. The businesses that will win under Brexit are those that are agile. I don’t necessarily agree that this favors large operators.”

Flight support company Flightworx—based at London Stansted Airport—confirmed that uncertainty about the final terms of the Brexit divorce settlement is taking its toll on operators. “There is real concern that there simply will not be time to adjust to the terms of the deal, and the [UK] government just doesn’t get how unsettling this is for companies,” said managing director Andy Shaw.

When negotiations between the EU and the UK are complete, the British government is supposed to present the deal to the country’s Parliament. However, the government has refused to clarify what would happen if Parliament rejects the deal. The concern is that by then it would be too late—and legally impossible—to try to change the terms of Britain’s exit from the EU.

Apart from other concerns, Shaw predicts pricier fuel for UK operators as a result of the continued decline of the British pound against the U.S. dollar. He also points out that many UK business aviation companies employ multilingual EU nationals, and that there are now doubts as to whether these people will be permitted to continue living and working in Britain after Brexit.