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Newsletter – Flying into the Unknown: The UK’s Air Transport Relations with the European Union and Third Countries Following “Brexit” ( Part 1 )

 

Flying into the Unknown: The UK’s Air Transport Relations with the European Union and Third Countries Following “Brexit” ( Part 1 )

 

  1. INTRODUCTION

The United Kingdom has been a member of the European Union (EU) since 1972. The constitutional principle of parliamentary sovereignty and the UK’s dualist approach to international law meant that EU law required implementation in national law. The European Communities Act 1972 gave EU law direct legal effect in the UK. Ever since then, EU law has been an integral part of the UK’s legal system, shaping its industry and being shaped by it. Forty-four years later new solutions are being sought, this time to distance that UK and its industry from EU law.

Withdrawal from EU membership under Article 50 of the Treaty on EU takes place from the date of entry into force of the withdrawal agreement or, failing that, two years after a notification withdrawal is given the Council, and there will be no change to the existing legal framework within such time and until the European Communities Act 1972 has been amended or repealed.

  1. THE EU INTERNAL AVIATION MARKET

2.1. Market Access

In the context of a traditionally highly regulated industry it is remarkable that the EU managed to almost completely liberalize and denationalize intra-EU air services in a rather short period of time. The UK was a keen proponent of and stimulus for the creation of the EU internal air transport market, and its airlines and people have benefited from access to this unique commercial and regulatory environment. The EU is the UK’s biggest destination market, accounting for 49% of passengers and 54% of scheduled commercial flights.

Following withdrawal from the EU, air carriers holding an operating licence issued by the UK Common Aviation Area (CAA) will lose their status as ‘Community air carriers’ for the purposes of EU Regulation 1008/200/ (hereinafter ‘Regulation 1008’), and thus will no longer be able to enjoy the rights to fly between any two points in het EU under the Regulation. If no arrangements are put in place, old bilateral air services agreements between the UK and the other EU Member States, which have been overtaken by EU liberalization for the matters covered by Regulation 1008 and have hence been dormant for years, should become effective again, provided they have not been terminated. Where agreements have been terminated, existing services may continue on the basis of ‘comity and reciprocity, a principle of international law that allows the continuation of rights and obligations of the parties to a former agreement until a new agreement is reached.

The UK concluded a series of restrictive bilateral agreement with other EU Member States in the 1950s which share a common structure; the main text of the agreement contains a general provision on the exchange of traffic rights, followed by articles on matters such as charges, use of facilities, importation of fuel, recognition of certificates, modification, termination and registration of the agreement with International civil Aviation Organization (ICAO), and ends with a Route Schedule, setting out the routes on which principally third and fourth (and less frequently fifth, sixth and seventh) freedoms are exchanged. An amendment of the main text of the Agreement normally requires ratification and becomes effective one month thereafter, whereas the modification of the route Schedule may take place by an exchange of diplomatic notes.

If the old bilateral agreements were to become effective again, they would provide a sufficient legal basis for most third and fourth freedom services; seventh and ninth freedom services would no longer be automatically permitted, which could significantly affect the operation of low cost carriers.

Relocation from the UK to an EU Member State for the purposes of preserving traffic rights would be significantly more difficult, as it would require the airline to go through the whole process of obtaining an operation licence and air operator’s certificate (AOC) from a continuing EU Member State.

Operators with a licence issued by another Member State but a base in the UK are likely to be less affected, as they would continue to have access to the intra-EU market, but rights to operate services between the UK and points in het EU would no longer be automatically assured. This may give the UK a fair amount of leverage in negotiations with the EU, whether deployed to secure UK carriers access to the intra-EU market or in the more general context of establishing the UK’s participation in the internal aviation market.

2.2. Airline ownership and control

Under Regulation 1008, an EU carrier must be more than 50% owned and effectively controlled by Member States and/or nationals of Member States. If this requirement were no longer to apply to UK-licensed carriers, the UK would be free to change to a more restrictive or more liberal ownership and control rule.

The ownership and control rule that was in force in the UK prior to the adoption of the EU rule was in some ways more restrictive, but more liberal in others. The Civil Aviation Act 1982 made it a condition for the grant of an air transport licence that an applicant be UK owned and controlled unless specifically exempted by the Secretary of State. This possibility of exemption should be contrasted with the position under Regulation 1008 where no exemption is possible. It is currently difficult to see why the UK would want to introduce a more restrictive rule instead of retaining the current EU ownership and control rule, not least for the purposes of facilitating access of airlines to capital, and it is possible that it might make the rule even more liberal by reintroducing the possibility of exemption.

The EU itself is considering ways in which the current rule could be relaxed further. Having investigated a number of recent cases involving foreign investments into EU airlines, was a dual national of Brazil and the United States) of  and bearing in mind the significant financial needs of airlines to operate efficiently in the highly competitive environment of the current global air transport market, the European Commission has recently publicly announced its intention to pursue the relaxation of ownership and control rules on the basis of bilateral air services and trade agreements with the longer term goal to address these issues at multilateral level. (In June 2015, TAP Air Portugal reached an agreement on the sale of 61% of its shares in consideration for an investment of EUR 338 million into the troubled state-owned carrier and the expansion of the airline’s fleet to fifty-three aircraft. The investment raised the Commission’s concerns as the leader of the consortium of Investors, David Neeleman)

The ICAO Air Transport Regulation Panel has proposed achieving such liberalization by shifting the focus to the principal place of business and effective regulatory control. The notion of the ‘principal place of business’ has been used in a variety of contexts in corporate and tax law. Although it is not always strictly defined, in the UK, a company’s principal place of business is usually considered to be the place where it is incorporated, and has its head office and senior management. The position is different in France and a number of other civil law jurisdictions, where the principal place of business is the place of a company’s ‘real seat’, i.e. the place of its central administration, where the entity’s legal and economic base is situated. In aviation, the concept is used principally to tie an operator to the regulator issuing its AOC and operating licence to ensure adequate safety oversight; the UK CAA therefore endorses ICAO’s suggested definition of ‘principal place of business’ which includes a link to the airline’s ‘substantial operations’, however, this may need further clarification in light of the growing practice of carriers to develop multiple hubs to streamline operations.

If the current rule is relaxed or at least retained, UK-licensed airlines which are currently majority owned by non-UK EU nationals could continue to hold their operation licence without any problem.

2.3. Horizontal agreements

A related question that arises in this respect is the position of the UK and its carriers under horizontal agreements entered into by the EU with third countries. Horizontal agreements are international agreements negotiated by the Commission on behalf of EU Member States aimed at bringing all existing bilateral air services agreements between EU Member States and a given third country in line with EU law. This is needed as the traditional national designation found in most bilateral agreements discriminates between carriers of that Member State and carriers of other EU Member States established in the former, in breach of the freedom of establishment set out in Art. 49 of the Treaty on the Functioning of the EU (TFEU). The horizontal agreement achieves this goal by replacing the clause of the bilateral agreements that allows the other party to withhold or withdraw operation permission where a carrier is not owned and controlled by nationals of the designating state with an EU designation clause, whereby the third country may not object to the designation of any airline owned and controlled by EU nationals. Alternatively, the EU Member State in question could amend each of its bilaterals separately, but this may be more time consuming and more difficult to achieve given the lesser negotiating power of separate EU Member States as compared to that of the Commission.

If the existing horizontal agreements or bilaterals modified thereunder are not revised, following exit from the EU, the UK would no longer be a ‘Member State’ under Art. 1(1) of the Model horizontal agreement, meaning that the third country need not accept: (1) UK designation of an EU AOC holder, (2) EU designation of a UK AOC holder and (3) an EU Member State designation of another EU AOC holder that is majority owned and effectively controlled by the UK. At the same time, unless the UK amends individually each of its bilaterals that has been modified to include an EU rather than UK national ownership and control clause, carriers from EU Member States would retain the benefits of EU designation under these bilaterals, although the UK arguably would not be obliged to designate such carriers.

Such an undesirable outcome can, at least from a legal point of view, be relatively easily avoided, as Art. 8 of the Model horizontal agreement provides a route for the inclusion of the UK in the list of countries benefitting from EU designation. The Commission has clarified that whilst EU Member States cannot refuse to designate a carrier licensed by an EU Member State on the grounds that is owned and controlled by nationals of European Free Trade Association (EFTA) States, as the European Economic Area Agreement (EEA Agreement) and the Swiss-EU Air Transport Agreement prohibit discrimination on the basis of ownership and control, EU Member States are not obliged to designate a carrier licensed by an EFTA State.

Thus, this would only ensure that UK nationals may own and effectively control a carrier established in the EU and holding an operating licence and AOC of an EU Member State. Arguably, the key benefit of EU designation is the ability of carriers of one EU Member State to benefit from the wider network of or more liberal bilaterals that another Member State has with the third country concerned. If UK licensed carriers are to continue to be eligible to be designated under other Member States bilaterals with third countries, a more substantial revision of the horizontal agreements in question, involving also the agreement of the other Member States would be necessary.

2.4. The single European sky

The Single European Sky (SES) is a complex regulatory initiative aimed at increasing capacity of European airspace and reducing delays and resulting losses for airspace users. The SES is multifaceted and its regulatory impact on a participating country is equally vast. The first legislative package consisted of four Regulations – 549/2004 of 10 Mar. 2004 laying down the framework for the creation of the single European sky, OJ L96, 31 Mar. 2004 1-9, 550/2004 of 10 Mar. 2004 on the provision of air navigation services in the single European Sky, OJ L96, 31 Mar. 10-19, 551/2004 of 10 Mar. 2004 on the organization and use of the airspace in the single European Sky, OJ L96, 31 Mar. 20-25 and 552/2004 of 10 Mar. 2004 on the interoperability of the European Air Traffic Management network OJ L96, 31 Mar. 26-42, covering, respectively, the institutional framework, the provision of air navigation services, the organization and used of airspace and the interoperability of the European Air Traffic Management Network. The first package envisaged the creation of functional airspace blocks (FABs), within which air navigation services would be provided bases on operational needs rather than national boundaries, the creation of a single European upper flight information region which will enable more efficient use of airspace, systems and personnel, as well as flexible use of airspace between civilian and military authorities.

All of these initiatives focused on increasing capacity, however, the lack of progress in the formation of FABs prompted the Commission to adopt Regulation 1070/2009, which shifted the focus from increasing capacity to increasing performance by setting up a Performance Review body, facilitating the formation of FABs, integrating European Aviation Safety Agency (EASA) in the safety-related aspects of SES, further developing the Single European Sky Air Traffic Management (ATM) performance scheme to ensure gate-to-gate performance improvements.

This makes ATM/Air Navigation Services (ANS) an excellent example of an area in which EU regulation has become so developed that reverting to national regulation would both be resource-intensive an result in fragmented regulation, which is certainly not the goal of the SES project. Commentators not that an effective implementation of SES requires realization of a performance-based and network approach to ATM in Europe and an overall appreciation of the pan-European dimension of SES. Given the UK’s role in, and the pan-European nature of, the SES, the UK’s continued involvement would seem appropriate.

Out of the nine FABs envisaged, the UK-Irish FAB was the first block to be established. It was formally set up in 2008 through the simultaneous signature of three agreements: an intergovernmental agreement, and agreement between the regulators, and an agreement between the Air Navigation Service Providers (ANSPs). The FAB handles 80% of North Atlantic traffic, and by 2012 enabled EUR 24.5m in savings, including EUR 17,8 in fuel savings.

National Air Traffic Services (NATS) is of the view that UK’s exit from the EU does not change the need for airspace modernization in the UK and has noted that it expects no changes as regards its participation in SES in the short term. (Brexit Fallout for Single Sky Remains Unclear, Air Traffic Management)

NATS will still have to comply with the requirements of the current regulatory targets within the UK-Ireland FAB, and will be intent on continuing to upgrade its technologies during the 2015-2019 regulatory period, including those developed through SESAR. As regards long term effects, commentators note, however, that whilst NATS may be freed from complying with stringent European ATM performance targets, a lack of adherence may place a question mark over its access to European funding for its national SESAR programme (Norway is part of SESAR, but contributes to its funding).

One way in which the operational efficiencies can be significantly increased is through the deployment of Free Route Airspace (FRA), particularly when implemented at the level of FABs, with the end goal of achieving this at a pan-European level. This concept allows an operator to plan its flight routing from entry to exit point within FRA regardless of the established system of airways or other constraints, except for prohibited areas and subject to airspace availability. Due to the complexity of European airspace, the deployment of FRA is a step-by-step process rather than a single act, which usually begins with limited implementation (e.g. during night hours) that is then gradually expanded.

NATS is a member of the Borealis Alliance, a group of nine ANSPs seeking to create a single FRA region through their respective FABs by 2021. Once fully implemented, the project, launched in 2015, is expected to result in annual savings of 70,000 tonnes of CO2 and EUR 15 million in management costs. Given that the UK-Ireland FAB handles most of the Atlantic traffic coming tot Europe, NATs is an integral part of the Borealis FRA project. It is therefore very important to ensure that, following the UK’s withdrawal from the EU, NATS has continued access to the capital and technology required to successfully implement this project on the pan-FAB level.

2.5. Safety and technical issues

The EASA now plays a central and crucial role in aviation safety regulation in Europe, and the UK has been a key player in this and its predecessor, the Joint Aviation Authorities (JAA). The JAA were created in 1990 to harmonize safety requirements and procedures in the field of aircraft design and manufacture, later extended to the operation and maintenance of aircraft, the licensing of personnel and organizations involved. At the time the Cyprus Arrangements were entered into, the JAA comprised thirty-three Member States, including fifteen EU Member States. This enabled harmonization of safety regulation on a pan-European scale, but came with the disadvantages of a loosely-structured organization with an informal status.

The JAA was eventually replaced with the EASA, which, pursuant to Regulation 216/2008 (hereinafter the ‘Basic Regulation’). Is an agency of the Community with legal personality. EASA assumed the remit of the JAA, which was initially expanded to include air operations, flight crew licensing, and the authorization of third country operators, and most recently to included aerodrome and ATM/ANS regulation. EASA’s rules in these areas originate as opinions addressed to the Commission and on adoption take the form of legally binding Commission Regulations. These are enforced by competent national authorities, but EASA is also empowered to inspect Member States and their nationals to monitor compliance with the regulations.

Formal participation of non-EU States in EASA was foreseen, but this did not prove to be possible under EU law. The solution found was for such countries to enter into Working Arrangements with EASA that allow for varying levels of integration of the relevant countries in EASA. A condition for such cooperation being the adoption and application of the Basic Regulation and its implementing rules, it is not surprising that different non-EU States have different status within EASA: EFTA States are full members of the Management Board; European Common Aviation Area (‘ECAA’) States may sit in on the Management Board as observers, but do not have a right to vote; countries that have signed Euro-Mediterranean Air Transport Agreement (EMAA Agreements) with the EU are not represented at the Management Board level, but have Working Arrangements with EASA on specific issues, such as the inspection of foreign aircraft at their airports and exchange of date within the Safety Assessment of Foreign Aircraft programme. These are tailored to the relationship between EASA and the relevant third country. For instance, the Working Arrangement with Turkey is broader than arrangements with other Pan-European partners and aims to extend key EASA regulations to Turkey in light of the country’s possible future membership in EASA. The Working Arrangement thus addresses the implementation by Turkey of EASA rules relating to initial and continuing airworthiness and the approval of organizations and personnel involved in these tasks, air operations, and flight crew limitations. See Working Arrangement between the European Aviation Safety Agency and the Turkish Directorate General of Civil Aviation the remainder of EASA’s partners take part in various Technical Cooperation Projects. In view of the leading role of the United States, Brazil and China in aircraft manufacturing, EASA entered into bilateral agreements with these countries to streamline type certification of aircraft and component parts by providing a mechanism for the reciprocal acceptance of findings of compliance during validation processes.

Following the UK’s departure from the EU, the Basic Regulation and the Implementing Regulations thereunder will no longer apply as a matter of EU law, which is why it would be important to arrive at a workable alternative arrangement to ensure the UK’s continued participation. Given the UK’s active role in and contribution to EASA’s rulemaking over the years, continued full membership in the Management Board would allow for the closest cooperation between the parties. Having fully implemented EASA rules as an EU Member State, the UK would meet the conditions for such membership. Maintaining the status quo or the closest alternative thereto may also be of benefit to the EU, bearing in mind the UK’s strong history of aircraft manufacturing and its important role in the production of airbus aircraft.

2.6. Other EU legislation

There is a great deal of other EU legislation relevant to aviation, concerning issues such as competition law, passenger rights, employment rights, data protection, consumer rights, the environment, safety, security, and airports. Each of these areas will require careful consideration, and many of these areas are themselves subject to changes proposed by the EU’s Aviation Strategy on 7 December 2015. To take but one example from the finance context as an example of the micro-level work that will be involved assessing and re-writing legislation, the government will need to look carefully at an possibly need to replace or amend the Cape Town Convention Regulation passed in November last year, in particular the specific issues of articles VIII (choice of law) and XI, alternative A (insolvency) on which the UK did not make declarations, given (full or shared) EU competence.

As a general rule, EU Regulations have direct effect in UK law, with no need for them to be re-enacted in national law. It is standard practice for the UK to introduce, by way of statutory instrument, implementing Regulations relating to EU Regulations, but the principal purpose and effect of these is enforcement – the creation of offences for non-compliance with the provisions of the Regulation. Consequently, once the European communities Act 1972 is repealed, none of the EU Regulations currently in force will have continuing legal effect; the statutory instruments will continue in force but will have no practical effect as the underlying obligations for contravention of which they create offences will no longer exist.

In theory, therefore, the UK will have the choice whether or not to re-implement EU Regulations in its domestic law – either verbatim or with modification or intended ‘improvements’. Hence, for example, Regulation 261/2004 on denied boarding, cancellation and delay of flights will no longer apply to flights departing UK airports (although it will of course continue to apply to flights to UK Airports from points in EU Member States), but it will be open to the UK to choose to re-enact it, either as it is or with modifications (e.g. by imposing a monetary cap on care obligations). However, in practice the UK’s freedom to do so may be limited if it wishes access to the internal air transport market, as the invariable model in all cases to date is that this is only granted as part of a package including the whole aviation acquis. Nevertheless, it is clear that the UK would not be subject to Court of Justice of the European Union (CJEU) judgments on Regulation 261/2004 following exit. Similar considerations apply to other controversial EU aviation Regulations such as the emissions trading scheme (EU ETS) which, following the ‘stop the clock’ derogation, only applies to intra-European flights; in the case of the EU ETS, however, it may will be the case that this will be superseded in the next few years by the market-bases mechanism to be recommended by ICAO at its General Assembly this October, which it is understood will be a carbon offsetting scheme. (The ‘stop the clock’ derogation does not apply to flights between the EEA and certain third countries closely connected with the EU such as Switzerland. It has thus been challenged by Swiss International Air Lines before the CJEU in the currently pending case C-272/15 Swiss International Air Lines AG v. The Secretary of State for Energy and Climate change, Environment Agency on the basis that it breaches the principle of equal treatment. It will be interesting to follow the case in the event that the EU Emissions Trading Scheme is not replaced by a global market-based mechanism and continues to apply, as thereupon the UK’s future relationship with the EU may put its airlines in a similar position to that of Swiss carriers)

For further information and comment, please contact Arthur Flieger (flieger@fliegerlaw.com, +32 3 238 77 66)

© 2018 A. Flieger – This publication is defined to provide accurate and authoritative information in regard to the subject matter covered. It is transmitted with the understanding that the publisher is not engaged in rendering legal, or any other professional services. If legal advice or other expert assistance is required, professional services should be sought. You can always contact A. Flieger at flieger@fliegerlaw.com.