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March 09, 2018
Uncertain Times: The Brexit Effect on Airlines
By: John Luth

Waiting to see how Brexit will affect the aviation industry is like powerlessly waiting for history to unfold. As many of you know, the United Kingdom (UK) is set to leave the European Union (EU) at 11:00pm on March 29, 2019, just over a year from today. Meanwhile, airlines will soon be selling tickets for travel that they may not be able to accomplish because these flights will no longer be covered by “Open Skies” aviation agreements or, with respect to flights between the UK and the EU, flight frequencies that are not, as yet, agreed upon and ratified by those two governmental groups.

Brexit is a major unknown for aviation with far-reaching implications. On March 1, 2018, I had the honor to take part in the U.S. Chamber of Commerce’s 2018 Aviation Summit “Brexit and the Economic Outlook for Aviation” panel with Robert Crandall, former CEO of AMR, as moderator. As you’d imagine, it was a lively discussion. Please allow me to share some insights from our panel’s discussion.

Navigating potential turbulence

First, it is impossible to say for sure whether the UK will exit or remain in the EU, so uncertainty remains the only constant for the foreseeable future (i.e., for at least a number of months, or even calendar quarters). If the UK ultimately completes its departure from the EU, the implications for aviation cut deeper and faster than any other industry. Literally overnight, absent some form of “Transition Agreement,” flights by UK carriers to or within the EU, and flights by EU carriers to, or within the UK, will need to be suspended, leading to unhappy travelers, job loss and major impact to the bottom line—not to mention strained relationships among governments.

There are three overriding agreements on the table among the involved parties:

US-UK – As of March 29, 2019, the UK will no longer be a party to the US-EU Open Skies agreement. The United States and UK must negotiate a new Open Skies treaty, which has never been done before. Currently, the US-EU agreement is only being “provisionally applied” because it hasn’t been fully ratified by all EU signatories. If a formal agreement were not in place by March 29, 2019, the “Bermuda II” agreement—which was considered highly restrictive compared to current agreements—would take effect. The US and UK are reportedly well along toward putting in place a new bilateral aviation agreement, so most observers are fairly relaxed about this solution.

US-EU – Historically, having the UK folded within the US-EU Open Skies agreement has been a benefit to the US given that it gave US carriers more access to Heathrow, albeit with limitations still existing in the form of limited availability of prime slot pairs. When Heathrow drops out of the equation (via Brexit), the US-EU bilateral aviation agreement does not offer the same benefits to the US – and notably this agreement has not been ratified by all EU signatory countries. However, most observers believe that the US will not seek to enter a renegotiation of this agreement.

EU-UK – The real problem lies in the need for a new arrangement to govern flights between the EU and UK countries. Unfortunately, very little progress has been made between the UK and EU negotiators tasked with negotiating a new aviation agreement. This heightens uncertainties for the American-British Airways and Delta-Virgin joint ventures in terms of traffic rights to carry passengers beyond Heathrow to/from the EU. Those joint ventures represent more than two thirds of the traffic between the US and UK and over half of those passengers flow on to the EU or from the EU on to the US.

A new bilateral agreement is needed to allow UK and EU carriers to fly between their two territories. That might be accomplished, as an example, by allowing the UK admission to the European Common Aviation Area (ECAA) similar to countries like Norway and Iceland. Furthermore, an additional “horizontal” agreement would need to be established to allow EU carriers to originate transatlantic flights from the UK.

As highlighted by Bob Crandall and my fellow panelists, Brexit will also raise a number of other issues for carriers operating to and within the UK and EU, whether based in those jurisdictions or in other countries. These include safety regulations (e.g., will the UK continue to be subject to EASA’s jurisdiction?), application of the EU’s Emissions Trading Scheme to UK airlines, rules governing the movement of aircraft parts, and possible restrictions on the hiring of EU and UK citizen employees, with language and other required skills on each other’s jurisdictions.

The fundamental issue is what will cause the UK and EU negotiators to be motivated to put these negotiations into high gear? And, even if a Transition Agreement can be reached in rapid fashion, however unlikely that seems right now, will such a Transition Agreement require ratification by all 27 EU signatory countries in order to take effect?

What seems clear is that the EU-UK aviation solution will likely not be in place for a number of months, and may very well “come down to the wire.” Considering the major impact of Brexit on the global aviation industry, the panelists all concurred that a Transition Agreement is needed as soon as possible. A point I made to during the panel discussions is the direct relationship between air service and a country’s GDP. In this case, economic activity associated with both business travel and tourism may be measurably impacted should such a Transition Agreement not be put in place rapidly.

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