The Leading Airport Magazine

Frontier Economics’ Dan Elliott explores the implications of the vote for the aviation industry both in the UK and across Europe.

Much of the wider Brexit debate has focused on whether the UK can negotiate continued access to the single market while refusing to sign up to the EU’s rules on the free movement of labour. Great emphasis has been placed by Leave campaigners on the UK’s ability to negotiate new trade agreements with the EU and other countries, and on the strength of the bargaining position that the UK may have in those discussions.

In aviation, these expectations will rapidly be put to the test. Achieving the most liberal outcome to the negotiations for the aviation sector will be of huge importance to business and consumers of all nationalities. But although it’s in everyone’s economic interests, it won’t be straightforward to achieve.

Then-UK Prime Minister David Cameron addressed easyJet staff at the airline’s London Luton HQ ahead of the UK’s referendum on EU membership. For easyJet, the loss of freedoms provided by the European Common Aviation Area would be unfortunate but not disastrous. It would not be difficult for easyJet to become an EU-based airline, although in the long run it would probably lead to a more significant rebasing of aircraft in mainland Europe.

Traffic rights

For both historical and – most importantly – technical reasons, aviation markets are highly regulated. Airlines’ rights to offer services between any two locations in two different countries are governed by specific agreements between the governments concerned. And – unusually in today’s world of multinational companies – these agreements relate specifically to the nationality of the owners (at least at the corporate level) of the airlines concerned.

The sector is, of course, also subject to extensive regulation related to security, safety, air traffic management and the environment. Many of these rules are pan-global, determined by the International Civil Aviation Organization (ICAO), the aviation agency of the United Nations. Where they are not, these standards need to be agreed between the parties determining the traffic rights, so that all countries know that the aircraft flying in their airspace are well-maintained, safely operated and not needlessly noisy. But they also need to make sure that the rules are not being used to block competition.

At present the UK is a member of the European Common Aviation Area (ECAA), which includes all the EU states plus some others, including Norway, Iceland and the non-EU Balkan states. Any airline predominantly owned by people or companies based in a member state is free to operate anywhere within the ECAA, without any restriction as to frequency, capacity, and so forth.

At present, both easyJet and British Airways count as UK-owned airlines. Both enjoy the full freedoms provided by the ECAA. The low-cost airline easyJet, in particular, has made full use of this freedom.

When the UK leaves the EU, without special arrangements the UK’s membership of the ECAA would lapse and these airlines would lose all their automatic rights to operate to, from and within the ECAA. Furthermore, their rights would also lapse on routes that are now governed by agreements between the third-party country and the EU (such as the EU-US “Open Skies” agreement).

However, it is important to note that these rights are reciprocal. US and other ECAA carriers would lose their automatic rights to fly to the UK.

Get a move on

For easyJet, the loss of rights would be unfortunate but not disastrous. It would not be difficult for easyJet to become an EU-based airline, although in the long run it would probably lead to a more significant rebasing of aircraft in mainland Europe. IAG already has a Spanish AOC through its ownership of Iberia, and by similar moves it could mitigate the effects on the group. But rights to fly between the UK and the rest of the world would remain an issue for both airlines.

So while the UK-owned airlines can mitigate some of the direct effects, they have clearly still been affected. Significantly, their Irish rival Ryanair – also exposed to the UK-specific effects, but less exposed to the wider EU rights issues – has seen less of an impact on its share price.

There is an urgent need for the UK to replace the traffic agreements that will, potentially, be lost as a result of Brexit, and it seems pretty obvious that the UK should seek continued membership of the ECAA. But it is far from clear that the UK can achieve this without signing up to common technical rules and without making significant concessions on economic integration.

The price of re-entry

The requirement that UK (re)sign up to a wide array of common regulations on safety, security, etc., is probably the least challenging obstacle. This might seem to run contrary to the desire expressed in the Leave campaign to free the UK from EU “red tape”. However, it hardly seems plausible that the UK would seek a bonfire of safety standards in aviation to make a point about sovereignty. And since much European regulation comes down from ICAO, it in practice applies whether the UK is in the EU or not.

A greater obstacle is the requirement that members establish a “framework of close economic cooperation” with the EU. So the central issue of the UK’s attitude to the free movement of labour could yet impede its ability to stay within the ECAA.

And there is a further risk. The ECAA is a multilateral agreement between the EU and its members, which means that – at least in theory – the UK’s membership may be blocked by any other member. One such might possibly choose to block membership with the idea of protecting its domestic airlines from more intense competition.

When the UK leaves the EU, without special arrangements the UK’s membership of the European Common Aviation Area would lapse and these airlines would lose all their automatic rights to operate to, from and within the ECAA. Furthermore, their rights would also lapse on routes that are now governed by agreements between the third-party country and the EU (such as the EU-US “Open Skies” agreement).

Alternatives

If the UK does not seek, or fails to gain, entry to the ECAA, other avenues are still open to it. It could negotiate a bilateral open skies agreement with the EU. Switzerland is not part of the ECAA, but enjoys virtually the same status by virtue of such an arrangement. However, it should be noted that this agreement is closely tied to other agreements concerning economic integration.

A further option would be to negotiate bilateral deals with individual EU countries. But the practical challenges for the UK would be huge, and it is not clear why individual member states would agree.

Similar problems face the UK when it comes to transatlantic traffic rights. Again, it could try to remain a participant in the EU-US Open Skies agreement, as Norway is. Or the UK could seek to negotiate its own new bilateral deal. But it is reasonable to suppose that both the EU and the US would seek to drive a hard bargain. And unless it can find its way back into the ECAA, in future the UK will be negotiating one-on-one with the likes of China and the Gulf Co-operation Council, rather than as part of a trading block of 500 million people.

And what happens if the UK fails to reach an agreement with the EU or other countries, before it leaves?

In the immediate term it is likely that the UK would seek to sign MoUs with those countries it had failed to negotiate an agreement with, extending current arrangements until such time as a new agreement could be reached. This could work as a stop-gap, but would inevitably merely delay the decision point.

Ryanair famously ran a “Fly home to vote Remain” advertising campaign ahead of the UK referendum, with the airline’s CEO Michael O’Leary vociferous in his support for the UK remaining in the EU. Following the Brexit vote, Ryanair – exposed to the UK-specific effects, but less exposed to the wider EU rights issues – has seen less of an impact on its share price than the UK-owned airlines.

Conclusions

For UK aviation, securing its place in the ECAA and in the EU-US Open Skies Agreement would appear to be the key objective for the forthcoming Brexit negotiations. This outcome is important not just to the UK but to consumers right across the EU, to maintain the momentum of growing competition in aviation markets.

As a key first step, the UK should signal early on that it is prepared to continue to conform to all the relevant international standards that underpin the ECAA. The remaining challenge will be to reach agreement on the meaning of “close economic cooperation” in a way that reconciles Brexit with membership of the ECAA. Full membership of the single market is not required, but what needs to be thrashed out is ‘how close is close enough?’

The most important point for all sides to remember is that less competitive aviation markets would mean higher ticket prices for all passengers, not just the British, further reducing demand and connectivity – creating a feedback loop that would damage the European economy as a whole, and in particular those businesses that make most use of aviation.