Brexit up in the air: implications for aviation as the UK votes to leave the European Union

*A poll conducted by Survation and published 17-Jan-2016 indicated that 42% of UK respondents were in favour of leaving the EU, 38% were in favour of remaining, and 21% were undecided.

(NOTE: This unamended CAPA report was first published on 22-Jan-2016. CAPA will next week be producing a global wrap of the implications of the UK's 23-Jun-2016 vote to exit the EU. On that day, the popular vote was 51.9%-49.1% in favour of leaving the Union. For the short term the key word is "Uncertainty")

Please see also:

Brexit and aviation Part 2: lower air traffic, economic uncertainty. UK-EU relations up in the air

Brexit and aviation Part 3: Importance of Asian models and liberalisation moves will be accelerated

The EU has a liberalised aviation market

The biggest source of benefits to UK aviation from EU membership is in the area of traffic rights and the nationality of airlines. Any airline owned and controlled by nationals of EU member states is free to operate anywhere within the EU without restrictions on capacity, frequency or pricing.

The creation of the liberalised internal aviation market was one of the most important catalysts behind the rapid development of LCCs in Europe in the 1990s. Today, the extensive pan-European networks of Ryanair, easyJet, Vueling, Norwegian and others are built upon this free access.

Of course, Norway is not part of the European Union, but Norwegian Air Shuttle has equal access to the internal European market for air transport, thanks to the European Common Aviation Area (ECAA).

ECAA could offer a route for UK airlines to access the single aviation market, post-Brexit

The ECAA extends the liberalised aviation market beyond the EU member states to include Norway, Iceland, Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Kosovo. The ECAA covers 36 countries and 500 million people. Norway and Iceland (and Liechtenstein) are also part of the European Economic Area, which extends the EU's wider single market to these non-EU countries.

If the UK were to leave the EU, its airlines would no longer enjoy automatic access to this market, although the UK might be expected to negotiate continued access. The most obvious way for the UK to do this would be to participate in the ECAA Agreement in the same way as countries such as Norway currently do.

ECAA requires acceptance of EU aviation laws and "close economic cooperation" with the EU

The Agreement provides for expansion of the ECAA to include other countries that are happy with two broad conditions. Firstly, they must be prepared to accept EU aviation laws and, secondly, they must establish a "framework of close economic cooperation, such as an Association Agreement" with the EU.

It may seem reasonable to assume that the UK would be prepared to continue to accept EU aviation laws, since it does currently. A similar logic would also suggest that the UK would establish continued close economic cooperation with the EU.

However, neither of these assumptions can be absolutely cast iron. Would a UK that has just decided to leave the European Union necessarily be happy to sign up immediately to a return to many of the EU's provisions?

The UK might not be guaranteed ECAA membership

In addition, while the ECAA Agreement seems to allow countries that are not EU member states to become part of the single aviation market, provided that they accept the two conditions noted above, it is not totally clear that this is automatically guaranteed.

The ECAA Agreement is a multilateral agreement between the EU, its individual member states and the additional states that form part of the single aviation market. It may, at least in theory, be possible for any one of the signatory nations to object to modification of the agreement that is proposed to allow the UK's continued participation after leaving the EU.

It was one thing to extend the ECAA to a number of relatively small countries that provide additional market opportunities for EU airlines, but whose own airlines pose little competitive threat. (Norwegian is an exception but its growth has surprised some, and Norway had to be allowed in for the sake of the tri-national airline SAS.)

It would be a different thing to guarantee continued pan-European access to low cost UK airlines such as easyJet, which have caused significant competitive damage to European legacy airlines. Although Europe's largest LCC Ryanair, as an Irish airline, would continue to have access to the European market, the UK's ejection could cause Ryanair difficulties operating in what is its largest country market. Little wonder that Ryanair CEO Michael O'Leary is backing the UK's continued EU membership.

The UK's future exclusion from the ECAA may currently seem far-fetched, but there is precedent for powerful voices in European aviation to attempt to use the bilateral air services framework to raise protectionist barriers to competition (witness the debate over the Gulf airlines).

It certainly seems fair to say that the UK's status with respect to the single aviation market, in the event that it were to leave the EU, is at least to some extent uncertain. The ECAA Agreement contains no explicit clauses clarifying what would happen to a member state that ceased to be part of the EU.

The UK would still have to comply with a wide range of EU rules

The areas of EU aviation law and regulation that the UK would likely need to submit to, as part of the ECAA, are extensive. They include market access, safety, security, air traffic management, the environment, social (labour) issues, consumer rights and the economic regulation of airports.

The EU's new Aviation Strategy proposes changes in many of these areas, but only EU member states have a say on such developments. Non-EU participants in the ECAA have to take it or leave it.

See related report: New EU Aviation Strategy avoids key issues as Asia Pacific and Middle East claim the future

In addition, broader EU rules in areas such as state aid and competition, so not just limited to aviation, would still apply to the UK.

Of course, the UK currently operates according to EU rules in these areas, and might not be expected to object to continuing to do so. However, with the passage of time, it is not inconceivable that the UK might decide that developments in one or more of these areas were not in its self-interest.

For example, UK airlines (and those of other EU states) have been vocal in lobbying on issues such as passenger rights and environmental measures, such as emissions trading, but they, and the UK government, have been able to influence the debate within an EU membership framework. If a future non-EU UK wanted to remain part of the ECAA, it would still be bound by EU rules, but would no longer have a voice in shaping them.

The UK, upon leaving the EU, would then have to establish close economic cooperation

Then there is the question of whether or not a post-EU version of the UK would seek to establish a "framework of close economic cooperation" with the EU? This question is fundamental, not only to its continued participation in the internal European aviation market, but also to its broader participation in the single market more widely.

This question has been aired in the UK, and the default assumption is that the UK would indeed prefer to retain access to the single market, but it is also the subject of some uncertainty. The UK referendum will not ask its citizens to decide on this question; it will ask merely whether to remain in the EU or not. (The exact wording will be, 'Should the United Kingdom remain a member of the European Union or leave the European Union?').

If the majority vote is in favour of leaving the EU, everything else is then up for grabs. So-called "Association Agreements" with the EU, which have to be ratified by each member state, typically offer non-EU countries tariff-free access to some or all EU markets (and financial or technical assistance), and often include a free trade agreement. In exchange, they generally require commitments to political, economic, trade, or human rights reform in a country.

In the past, such agreements have either been a staging post on the way to full EU membership, or a means for a non-EU country to have some of the benefits of the EU without committing to joining up in full. There is no precedent for a former member state entering into such an agreement.

However, it seems unavoidable that the UK would still need to be bound by a range of EU rules and regulations if it wanted to continue to enjoy any access to EU markets. Its membership of the ECAA would be conditional upon this.

Again, the question arises in connection with a UK that leaves Europe: how much Europe would this UK still want? Moreover, the mirror to this question also arises: how much of the single market would Europe still want to offer the UK?

The Switzerland model: a bilateral agreement with the EU

Another way for the UK to ensure that its airlines continue to have access to the EU's single aviation market would be to negotiate a new UK-EU agreement on a bilateral basis.

There is a precedent for this in the agreement on air transport between Switzerland and the EU as a whole, which was signed in 1999 and came into force in 2002. Domestic rights were originally excluded, but negotiations on this topic began in 2011. A free trade agreement between Switzerland and the EU was signed in 1972, and came into force in 1973.

But the Swiss bilateral ties it to other EU rules and principles, putting its aviation agreement at risk

The Swiss air transport agreement with the EU provides mutual market access for airlines of both parties and effectively binds Switzerland to much of the EU's aviation legislation. It was negotiated as a package in tandem with a series of other bilateral agreements, which all stand together.

If any one of seven bilateral EU-Switzerland agreements is terminated, including the one on air transport, then they are all terminated.

The provisions in these agreements included binding Switzerland to the four freedoms that form the foundations for the EU's single market. These are the freedom of goods, services, capital and labour. Following a 2014 referendum on the restriction of immigration, Switzerland risks breaching its agreement with the EU on the freedom of movement of persons. If this agreement is breached, it will effectively also terminate the air transport agreement.

The Swiss government is in the process of redrafting its immigration policy, in negotiation with the EU. Until this is complete, there remains some uncertainty hanging over the air transport agreement.

Whatever the final outcome, the Swiss example illustrates that it is possible to negotiate access to the single aviation market on a bilateral basis, but that the EU is also likely to demand at least some level of conformity with its four freedoms. Indeed, whichever mechanism is used by a non-EU country to access the single aviation market - via the ECAA or a bilateral agreement - there are likely to be significant conditions requiring the country to adopt many of the EU's rules and legislation.

UK could attempt individual bilaterals with each country, but this would be complicated

Rather than attempt a Swiss-style accord with the EU as a whole, the UK could possibly seek to negotiate, on a bilateral basis, new air services agreements with each individual member of the ECAA and Switzerland, or a chosen subset of them.

It seems very likely that it could agree unlimited open skies style access for its own airlines and those of the other countries on routes between the UK and each of these countries, for example between the UK and France or Italy.

However, in order to replicate fully the access to the single aviation market that its airlines currently enjoy, the UK would also need to negotiate with each country a web of fifth, sixth, seventh, eighth and ninth freedom rights. For example, these rights would be necessary to allow a UK airline to operate from the UK to Italy and then to continue from Italy to France, to operate between Italy and France without starting in the UK and to operate domestic routes in Italy.

This "multi bilateral" approach could potentially avoid the need for the UK to take on large chunks of EU rules, but it would also be far more complicated than dealing with the EU as a whole. Moreover, individual EU countries may not be willing to play along, given that they presumably would still hold the EU's principles dear, and that the UK would have just rejected many of those principles.

Beyond Europe, UK would need to replace EU-US traffic rights…

Beyond the internal European aviation market, a country's EU membership brings the benefits to its airlines afforded by air services agreements that are negotiated with third party countries at an EU level on behalf of all member states.

The most important of these is the so-called EU-US open skies agreement, which allows the airlines of both parties to the agreement to fly from anywhere in the EU to anywhere in the US and vice versa (although it does not allow access to domestic markets).

The agreement was effectively a pre-condition for the US to give antitrust immunity to the profit sharing joint ventures between EU and US airlines that lie at the heart of the three branded global alliances.

…by negotiating continued access to the EU-US open skies agreement

The UK, if it leaves the EU, will have to negotiate a means for its airlines to retain liberalised access to the trans-Atlantic market. Non-EU members Norway and Iceland are also parties to the EU-US agreement and it may be assumed that the UK could negotiate to enjoy a similar status to theirs.

…or through a new UK-US bilateral (with the EU's involvement)

Alternatively, it could seek to negotiate a new UK-US open skies-style bilateral, but this would not in itself give UK airlines the freedom to fly from, say, Paris to New York. It could also, for example, call into question Norwegian's rights to fly from the UK to destinations in the US in competition with UK airlines.

If it wanted to re-create synthetically the traffic rights environment of the EU-US agreement, after coming to a new UK-US bilateral, the UK would also need to negotiate with the EU and US to allow non-UK airlines to fly UK-US routes, and to allow UK airlines to fly EU-US routes.

Opportunities could arise for anti-competitive forces

British Airways and its parent IAG are currently firm advocates of competition and market liberalisation, but future scenarios could arise where UK airlines may lobby for a more restrictive stance on UK-US competition from non-UK airlines. Under such scenarios, the UK could feasibly look to retreat from a liberal trans-Atlantic traffic rights regime that continues to mimic the existing EU-US open skies agreement.

Again, although it may now seem that the most likely scenario is that the UK will renegotiate the same US traffic rights for UK (and EU) airlines as currently apply, there is at least some degree of uncertainty over the situation. The implications for the North Atlantic immunised joint ventures are unclear.

Moreover, the fragmentation of the existing EU-US open skies regime would provide more opportunities for anti-competitive forces to enlist the bilateral regime to raise protectionist barriers in the future.

UK would also have to replace other EU-level bilaterals…

In addition to the EU-US agreement, air services agreements exist at the EU level with a number of other countries, including Canada, Morocco, the Western Balkan countries, Jordan, Georgia, Moldova, Israel and Brazil (the latter is yet to be implemented), and negotiations are ongoing with Australia and New Zealand.

In Dec-2015, the EU launched an initiative to negotiate EU-level aviation agreements with a number of other countries, including Turkey, China, Mexico, Armenia, the Gulf Cooperation Council (GCC) States and, in what would be the first such agreement between two blocs of countries, the Association of South East Asian Nations (ASEAN) States.

If it left the EU, the UK would also need to negotiate new air services agreements on a bilateral basis to replace all these EU-level deals.

…and decide whether to replace EU nationality clauses in UK bilaterals

In addition to these EU-level agreements, there is still a large number of bilateral agreements between the UK and other, non-EU, countries (the same is true for all EU countries). In order to bring them into line with EU law, most of the agreements have been amended to replace references to UK ownership of airlines with references to EU ownership.

This means that the UK's bilaterals no longer discriminate against other EU airlines in terms of their rights to operate from the UK to the non-EU country. If it decides to leave the EU, the UK will then have to decide whether or not to retain these revised nationality clauses, which allow other EU airlines to compete with UK operators on international routes from the UK.

UK may not be able to pick and choose which parts of EU legislation to retain

In general, those who oppose the UK's continued membership of the EU, but who are in favour of continued access to the single market, object mostly to the freedom of labour. In particular, they are concerned about unlimited immigration into the UK from the newer EU member states, mainly in Central and Eastern Europe.

There are those who suggest that a post-EU UK would negotiate with Western European countries to continue to allow the free movement of people. However, it may not be so easy to pick and choose which parts of EU legislation the UK wants to retain, and in which territories, if it wants to retain access to the entire single aviation market.

Maintaining existing traffic rights may be the most likely post-Brexit outcome...

In summary, if the UK decides to leave the EU, the most likely outcome for aviation is that the UK will negotiate with the EU and other partners to maintain the status quo with regard to airline traffic rights, as far as possible.

However, this would likely require the UK to continue to accept a large proportion of EU rules and legislation, not only on aviation, but also on broader issues including its four fundamental freedoms.

Moreover, the UK would no longer have the same influence over these rules that its current status as an EU member state gives it. As Borge Brende, Norway's foreign minister, has observed, "Our arrangement . . . is that we have to implement all the EU directives. We are not around the table when these are discussed in Brussels."

…but there are important uncertainties and risks for airlines

If it wanted to be more selective about which rules to follow and which to reject, the consequences are unclear, but the situation could start to unravel, and this could threaten the UK's inclusion in EU markets, including the single aviation market.

This is a potential threat not only to UK airlines, but also to airlines from other EU states for whom the UK is an important market. Either way, the UK government will need to start planning for the exit the minute the referendum is concluded, if the outcome is a vote to leave the EU.