Aviation: a Brexit no deal is (a lot) worse than a bad deal

Algirdas Brochard // 5 July 2017

Theresa May’s famous catchphrase ‘No deal is better than a bad deal’ does not apply to aviation where a no deal scenario following Brexit would have dramatic consequences for the UK. As airlines plan their schedule 12 to 18 months in advance, it needs to be clear what agreements the UK will have with the EU, but also with other countries such as the US, post-Brexit by spring 2018 at the latest.


Contrary to other sectors, aviation is not part of the World Trade Organisation system. To establish flight routes, countries negotiate bilateral or multilateral agreements. These agreements can be either very restrictive (granting landing routes to only a few airlines a few times a week) or very liberal (giving airlines the freedom to choose the route and the frequency they want to operate on this route).


The aviation sector in the UK contributes £1 billion a week towards the UK GDP and generates almost £10 billion a year in tax revenues – mostly through traffic with continental Europe. Nearly one million people work in and around the industry. Additionally, the aviation sector is crucial for tourism and British exports. Indeed, nearly three-quarters of all visitors to the UK are travelling by air and nearly 40% of the UK’s exports, by value, use aviation to reach their destinations. These include high-value goods like jewellery and machine parts, as well as products that need to arrive at the customer quickly, like Scottish salmon or medicines.


The aviation sector is deeply integrated at the European level – an integration process that began in 1987 and resulted in the creation of the EU single market in 1993. Before this liberalisation, the industry was highly fragmented between national aviation markets and dominated by legacy carriers. The EU single market removed all restrictions for airlines flying within the EU. Today, EU airlines are not subject to any restrictions on the routes or the number of flights they want to operate within the EU and how much they want to charge for these flights.


If there is no deal with the European Union, the fall-back option for the UK aviation sector could be the pre-1987 restrictive bilateral agreements, often regulating fares, service provision and market entry (usually on international routes, only the flag carrier of each country was authorised to operate scheduled flights).


These agreements completely ignore the new airlines, including low-cost carriers, who have totally revolutionised the European skies by launching new routes and increasing competition on existing ones. Two statistics sum up what happened in the European skies since the creation of the single market: from 1992 to 2015, the number of intra-EU routes between the EU Member States has grown 303% from 874 to 3,522 routes. Second, during the same period, airfares have fallen on average by about 40%. To give just one example, the minimum price for a ticket from Milan to Paris was €400 in 1992 but has dropped to only €15 today.


Another crucial issue is that the UK will most likely need to renegotiate its agreements not only with the EU but also with at least 17 other non-EU countries such as the US, Canada, Norway and Israel. The EU negotiated these agreements on behalf of its member states and if Britain were to leave the single market, it could not remain part of these agreements. Today, around 85% of the UK aviation traffic is governed by these agreements.


One such agreement, Open Skies, between the EU and the US, which entered into force in 2008, allows European and American airlines to fly any transatlantic route. Were the UK to fall-back on the previous Bermuda 2 agreement, access to Heathrow could again be restricted to only two airlines from each country.


Other areas will be subject of reforms, too. The transatlantic One-world joint venture, between British Airways, American Airlines, Finnair and Iberia, for instance, is currently regulated by the European Commission and the U.S. Department of Transportation. Also, the European Aviation Safety Agency (EASA), an EU agency under the European Court of Justice (ECJ) jurisdiction, currently develops and monitors the implementation of new safety and environmental standards in aviation. Post-Brexit, the UK Civil Aviation Authority (CAA) will probably need to hire hundreds of staff to enforce aviation regulation and choose how closely it wants to follow EU regulation. The cost to copy the EASA is estimated at up to £400m over ten years. The Chief Executive of the CAA, Andrew Haines, previously said that there needed to be “a very strong case for the UK to step away from the EASA system entirely”.


So, what are the possible options for the UK post-Brexit?


As the UK is set to leave the Single Market, it needs to negotiate a comprehensive EU agreement. This would ensure that regulation enables fair competition; it also generally includes cooperation on safety, security, environment and economic regulation.


In the past, the EU has concluded two such types of accord: the first called a neighbourhood agreement aims at gradually opening up the respective markets and include countries into the Common Aviation Area (CAA) once the country fully implements EU aviation rules. The EU has signed such agreements with the Western Balkans, Georgia, Israel, Jordan, Moldova and Morocco.


The second, called a comprehensive agreement, is based on market access liberalisation, removal of investment barriers, regulatory cooperation and convergence. The EU has signed such agreements with the US, Canada, Morocco, Israel, Moldova, Jordan and Western Balkans.


Outside these two options, but surely the worst possible option, bilateral air services agreements exist between the EU and third countries. In this case, traffic rights, capacity, the frequency of air services, the number of designated airlines and other commercial agreements, such as pricing mechanisms, would have to be renegotiated.


The aviation sector is crucial for the UK economy and an agreement with the EU and other partners is key to insure a smooth transition for the industry. The schedule is tight for such negotiations and an extension to the current system should be considered if no final agreement is reached.

EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).


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