Plane speaking on Brexit
28 / 06 / 2017
If Brexit means Brexit, what does it mean for the UK air cargo industry and its close relationship with the European Union (EU)?
Lawyer Tony Payne, a partner in the aviation practice of City of London-based DLA Piper, may not have all the answers but he certainly knows all the questions being posed by his air cargo clients as they ponder the ramifications of the UK referendum vote to leave the EU.
When Air Cargo News met Payne in the DLA Piper offices he was asked to consider what Brexit could mean for the European aviation scene.
“That is a challenging one to answer. Without wishing to sound like a lawyer, no one currently knows with any certainty what the landscape is going to look like.
“But if you ask me how I think it might evolve, then I believe that in the early stages we will see a decision from UK Government on macro political issues cascaded down to the ministries and ultimately, in the aviation industry, to its regulator, the Civil Aviation Authority (CAA).
“With the parameters outlined by UK Government, the CAA will then need to design and implement the regulatory framework.”
It could be argued that a single policy diktat is not flexible enough for the complexities of a global industry such as aviation, which could be regarded as a special case.
Says Payne: “Well, you could say the same thing for shipping or for retail or for banking. So long as the parameters are flexible enough, the UK CAA can create the best solution that is fit for purpose for UK aviation to preserve its prestigious position while encouraging investment and growth.
“So, what does a perfect world look like for the UK? In most cases, for UK operators, a perfect world means that we maintain the same access that we currently have to the European market, which is status quo.
“For foreign investors, particularly airline investors, a perfect world would include using this opportunity to relax the foreign ownership and control rules applicable to UK operators by virtue of the existing EU regulatory framework.”
Status quo might become dire straits, if Michael O’Leary, chief executive of low cost carrier (LCC) Ryanair, is proven correct.
He has already indicated that a ‘hard Brexit’, seeing the UK forced to leave the European open-skies system, would have an immediate consequence for the Irish Republic-based carrier.
Ryanair, says O’Leary, would then need to establish a separate UK company, of which Ryanair would be able to own a maximum of 49.9%.
Rival LCC, the UK-based EasyJet, is lobbying the UK government and the EU to “ensure the continuation of a fully liberal and deregulated aviation market within the UK and Europe”.
But as part of EasyJet’s contingency planning it has started a formal process to acquire an AOC (air operator certificate) to continue flying across invisible European borders.
Asked about accessibility, Payne says: “Look at the airlines who have an intra-country network, and in a passenger context that means Ryanair, for example, which has an Irish AOC licence but has significant cabotage operations, by way of example, within Italy, and so from Milan to Rome.
“As a non-EU member state these ‘seventh freedoms’ are the rights affected directly if you are not based in an EU member state.”
Payne continues: “There may be freight operators in exactly the same position, so if a non-UK express airline has flights between Edinburgh and London, they need to think about getting an operating licence, to ensure that they continue to have access to those markets.
“And if a cargo airline has a UK operating licence, then all of a sudden it could lose access to the internal market within Europe.” So, what does a UK-registered carrier do?
“They apply for a new operating licence in Europe.” But could the aviation equivalent of forum shopping provoke a frosty response from EU member state regulators?
“Potentially,” says Payne, but adds: “Across industries there are countries vying to take UK business, so I think it would play out that the UK has more to lose than many EU countries.
“From a purely revenue generation perspective and disregarding the strong views of ‘flag carriers’, why wouldn’t other member states say yes, they would naturally want business from the third largest aviation network in the world?”
If hard Brexit goes ahead and the UK-register loses its appeal, what could the Westminster government do to make it more attractive?
One option, suggests Payne, would be for the UK to relax the rules on foreign ownership and control of airlines, currently limited to 49% by European Commission regulations, and allow greater foreign ownership and/or control.
“An EU airline must be more than 50% owned by member state nationals and also controlled by EU nationals.
“Control can be further broken down into direct and indirect control and cover all facets of an airline’s business.
“It is a complex area of law requiring careful consideration to avoid operational interruption.”
However, the CAA does have some cards to play, in that it is seen as a very commercially-minded aviation regulator compared with those in other EU member states.
Says Payne: “In my opinion, the current view of the UK as a register is that the CAA is a very competent and experienced regulator as compared with some of their peers around the world whom simply have not had the experience of operating in as complex an open aviation market environment as exists in the UK.
“By that I mean in terms of the CAA’s understanding of aviation as a commercial industry. The UK and the CAA have gone through the privatisation of airlines, airports and air traffic control in a way that many European countries have not.”
It is undeniable that some registers are far less experienced in regulating a privately-owned flag carrier because the airline enjoys a much closer relationship with the state.
The CAA, in common parlance, has been there, done that and got the T-shirt.
Adds Payne: “So you have a very competent regulator, a system of law that is very transparent, and that means potential operators or investors typically know what you are going to get.
“And then of course there is the economic argument. The UK remains a strong hub from an aviation perspective, whether considered from a cargo or passenger viewpoint.
“So there are compelling reasons why you have foreign operators looking to continue to have a strong presence or get established in the UK.”
Looking beyond Brexit, to the wider regulator world, Payne reminds us that aviation is a global industry, so the participants need to worry about what policy decisions are being made, not just at the European Commission in Brussels but also through the International Civil Aviation Organization (ICAO) and other bodies.
He cites the ripple effect of the recent Federal Aviation Administration’s ban on fire-prone mobile phones aboard US flights, a ban quickly taken up by Europe and elsewhere in a matter of hours.
If you want to fly into EU airspace, you must obey EU regulations, whether an EU operator or not: “When the European Commission acts then operators listen, simply because it regulates a very significant piece of airspace.”
What is on his agenda for forthcoming regulation worldwide?
“An on-going and evolving topic continues to be unmanned aerial vehicles (UAVs). We will see developments as to the interaction between UAVs/drones and aviation generally. The UK leads the way in this domain.
“Given challenging global economic conditions, we are likely to see the continuing restructuring of airlines, whether through consolidation, opportunistic investment or embryonic new carriers. Based on many years of experience, this remains a delicate area to negotiate.
“A third thing is increasing interest in cyber issues and an increasing trend toward automation. Industry must maintain its operational integrity while continuing to harness advances in technology for the benefit of operations and passengers.