Brexit: trade in non-financial services Contents

Chapter 7: Air services

Air services in the UK

202.Air services are a key part of what the ONS defines as ‘transportation services’, namely services associated with the international movement of goods (for example, freight shipping, road haulage and air cargo) and the international movement of people (through air passenger, road and rail services).277 Imports are transportation services provided to UK citizens and businesses by firms based in other territories—for example, if a Scottish distillery uses a French airline to transport whisky from Scotland to France. Conversely, exports reflect transportation services provided by UK business to citizens and businesses based abroad—for example, if a Spanish farmer uses a UK airline to transport vegetables from Spain to the UK.

203.According to the ONS, globally in 2015 the UK exported £24.1 billion worth of transportation services. Approximately two-thirds of the value of these exports consisted of aviation services (£16.4 billion).278

Figure 8: The UK’s global trade in transportation services 2015

Bar chart showing value of gloabal imports and exports in 4 areas of transportation for 2015

Source: ONS, The Pink Book: 2016, Chapter 3.2 Trade in services, (29 July 2016): https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/datasets/3tradeinservicesthepinkbook2016 [accessed 1 February 2017]

204.The British Air Transport Association (BATA) told us that the “UK has the largest aviation sector in the EU and the third largest globally, after the USA and China”.279 The International Air Transport Association (IATA) said that the UK’s air market was “dominated by outbound traffic”, which accounted for “just over two-thirds of total flows”—in 2015, there were 53.9 million visits overseas by UK residents, compared to 26.2 million visits to the UK by overseas residents.”280

205.IATA highlighted the importance of the aviation sector to the UK’s economy, noting that it contributed £55 billion to UK GDP in 2015 and supported 945,000 jobs in the UK. They said the average employee generated £84,000 in GVA annually, which was “over 60% higher than the whole economy average in the UK”.281

206.Aviation services also enable wider economic growth in the UK. Brian Pearce, Chief Economist at IATA, said people used air travel “as a means to an end for a business trip, a holiday or for accessing suppliers or markets”, and described the air transport network as “essentially, an infrastructure asset to enable the success of users, such as the City of London” and “high-tech industries”.282 We also note that air services provide an important means of transporting cargo (thus facilitating trade in goods). BATA told us:

“Around 2.3 million tonnes of cargo pass through UK airports annually, with 40% of the UK’s trade with economies outside the EU, by value, transported by air. In 2014, the total value of tradable goods carried through UK airports exceeded £140 billion, with Heathrow the UK’s biggest port by value of goods transported.”283

207.The EU is also the single biggest destination market for the UK, accounting for 49% of passengers and 54% of scheduled commercial flights.284 According to ONS, in 2015, 46% of all the UK’s exports and 56% of all the UK’s imports in transportation services were associated with the EU. The UK had a £1.1 billion deficit in transportation services with the EU in 2015, importing more services from EU based transportation providers than it exported.285

Frameworks for trading air services

208.Dr Barry Humphreys CBE, founder of BKH Aviation, explained that aviation had “always been treated differently from other industries in global trade”, and was “never part of the WTO” or of bilateral FTAs:

“What evolved was a series comprising many hundreds, if not thousands, of treaties, international air services agreements, between countries which governed how aviation operated and was allowed to operate.”286

As we explain below, these complex bilateral air services agreements were abolished by the EU during the extension of the Single Market to air services.

209.Dr Humphreys believed that the broad objective for industry post-Brexit would be to “remain as close as possible to the status quo … [we] have to look at the various models that are available or might be created to see how close they come to meeting that objective.”287 These models, as described by the IATA, appear to be:

European Common Aviation Area agreement

210.The EU Single Market in aviation is effectively extended to third countries (such as Norway, Iceland, Liechtenstein, Switzerland, Croatia, Macedonia, Albania, Bosnia and Herzegovina, Kosovo, and Montenegro) via the European Common Aviation Area (ECAA) agreement. Under this agreement, airlines of signatory countries have full market access to fly between their territory and anywhere in the EU, and to provide flights between and within EU Member States, in exchange for accepting the EU acquis relating to aviation. The ability to fly domestic routes in another territory, and to fly between two territories without landing in one’s own territory, are referred to under the Chicago Convention as the seventh and ninth Freedoms of the Air.289

211.Dr Humphreys said that, whereas bilateral air service agreements tended to be “quite restrictive”, what the EU did was to “strip away all those restrictions and create a Single Market where any airline of any member state could operate freely and not be limited in any way”. The UK “was a major supporter of the creation of the EU internal aviation market”, and had “fought very strongly for some time” to “introduce the internal market against strong opposition from some other Member States, such as France and Germany”.290

212.The benefits of the Single Market in air services are clear. Sophie Dekkers, UK Country Director at easyJet, said the “liberation of the EU aviation market was part of the growth and the basis on which we grew as an airline and low cost [travel] grew within Europe”. She noted that “average fares are now down by 40% in real terms” since 1996, and “numbers of routes have increased by 180%”.291 Dr Humphreys agreed that the Single Market in aviation had been “an enormous success; the improvement in competition and services for the consumer is there for everyone to see”. This was “now put at risk” by Brexit.292 More information on the EU Single Market in aviation is given in Box 12.

Box 12: Single Market in aviation

The EU Single Market in air services was created as a result of three packages of regulatory measures put forward by the Commission in the 1990s. The final package removed all remaining restrictions on airline operators in the EU, creating the concept of a ‘Community carrier’ to replace national airline carriers. ‘Community carriers’ could access any intra-EU route and offer services to customers without prior authorisation or permission from authorities in those Member States. Accordingly, an airline based in the UK can offer routes not just from the UK to any other EU Member State, but also routes between other EU Member States (without having to fly via the UK), as well as domestic routes in other Member States. In order to be a ‘Community carrier’, airlines have to comply with the following requirements:

  • They have to be owned (greater than 50% ownership) and effectively controlled by an EU Member State and/or nationals from an EU Member State, and their principal place of business has to be located in a Member State.
  • They have to ensure the safety of their operations in accordance with the EU’s safety regulations, evidenced by the receipt of an ‘air operator’s certificate’.

Common EU rules have also been adopted on competition, safety, security, consumer protection and environmental protection in aviation.293 IATA listed over 140 pieces of EU legislation relating to aviation that are currently implemented in the UK, including those relating to the Single European Sky, SESAR,294 and the European Aviation Safety Agency (EASA). 295

EU membership also forms the basis upon which UK airlines access the aviation markets of some third countries. Dr Humphreys noted that the Commission had acquired “more and more competency to negotiate on behalf of the whole of Europe” for air traffic agreements with third countries.296 While the UK has 111 bilateral air services agreements with third countries, these are complemented or (in cases where two agreements exist for the same country) overtaken by EU level agreements, including with the US, Canada, and neighbourhood countries such as Morocco and Israel.297

213.BATA believed that ECAA membership would be the “most straightforward” option for the aviation industry. It would, though, require the UK to accept the EU’s aviation acquis, while having no direct say over its “ongoing formulation or future development”. This “could be interpreted as a severe restriction of the UK’s ability, post-Brexit, to develop and make our policy in this area”.298 IATA pointed out that while non-EU ECAA members (such as Iceland, Liechtenstein, Norway and Switzerland) were members of the EASA Management Board, they did “not have voting rights”.299

214.Witnesses also suggested that ECAA membership might not afford continuing access for UK air services to third countries. The Airports Operators’ Association noted that “only one EU multilateral air services agreement has been extended to EEA countries—the EU-US Open Skies Agreement”, and this was only “by mutual consent of both signatories”.300 Ryanair said that the Irish subsidiary of Norwegian Air had been “blocked for over 2 years from access to the US market”, even though this access “should be available without obstacle under the existing EU-US bilateral agreement”.301

UK-EU Bilateral Air Services Agreement

Access to the Single Market in aviation services

215.Outside the Single Market in air services, Ryanair told us: “In stark terms … traffic rights underpinning the bulk of air traffic to/from the UK will no longer exist”. Ryanair stressed that “specific political consent” through a bilateral UK-EU air services agreement would “be required for existing traffic rights to remain available”.302

216.To maintain its current operations, Ms Dekkers said easyJet needed “to be able to operate from the UK to the EU and from the EU to the UK”. It also needed to “enable EU to EU flying”, such as Paris to Milan flights, as well as “domestic flights within Europe”, such as flights from Paris to Toulouse. She said: “We operate all of those routes today and we would need a framework in place to support that going forward.”303 In written evidence, easyJet argued that “any restrictions on air connectivity would damage productivity growth via trade and FDI, reduce passengers’ choice and put upward pressure on air fares”.304

217.Ms Dekkers believed that issues around market access would be “resolved because the parties on both sides will be keen to maintain that connectivity”. She noted that easyJet were part of the Airlines of Europe group, alongside Air France, Lufthansa and KLM, and that the group was “lobbying European governments” to ensure a good outcome. Although she recognised that the competition offered by firms like hers was “always a challenge”, the conversations she had had with her counterparts suggested they were “all supportive of, reaching an agreement that will mutually benefit both sides”.305

218.IATA believed that “given the size and importance of the UK aviation market, the UK could expect to have some negotiating leverage”.306 However, Mr Pearce qualified this by saying that the interest of Member States in a comprehensive agreement depended on their own markets: in countries such as Cyprus and Ireland, the UK represented “50% of the seats”, whereas in France and Germany it was “less than 10%”.307 IATA also noted that Swiss airlines, despite a series of bilateral agreements allowing them to fly between EU Member States, could not provide domestic routes within another EU Member State.308 Ryanair observed that, outside the Single Market, the global market in air services was “characterised by protectionist behaviour and the slow, contentious negotiation of bilateral traffic rights agreements”.309

219.Recognising that failure to reach a comprehensive agreement was a possibility, Ms Dekkers noted that easyJet currently had two operating certificates, “a UK one and a Swiss one”.310 It was now taking steps towards “establishing an EU … air operating certificate”.311 This would “enable us to operate as a European airline and have a base within Europe”, thereby benefiting from European ‘Community carrier’ rights.312

220.In order to benefit from such rights, an airline would have to be majority owned and controlled by citizens in an EU Member State or in a state party to the ECAA Agreement. Dr Humphreys argued that, in a situation where a UK-based airline had to satisfy the requirement to become a ‘Community carrier’ post-Brexit, there might be only two options: either to have “different classes of share ownership”, or “forc[ing] shareholders to get rid of their shares”.313

221.The Minister for Aviation, Lord Ahmad of Wimbledon, noted that in the UK it was the job of the Civil Aviation Authority (CAA) to issue operating certificates, and that its counterparts in other EU Member States did the same. This would remain the case post-Brexit: “That is going to be very much a matter for [relevant aviation authorities] to determine in terms of their operating certificates for other countries.” In relation to easyJet, Lord Ahmad said it was a “publicly listed firm”, and “it would be inappropriate for me to suggest to a company what its share ownership should be”. He was “sure every airline will determine how it wishes to operate under the rules of any particular market it wishes to access”.314

222.More broadly, Lord Ahmad said the UK was “in a position of strength [and] it is of equal if not greater benefit to European operators to have access to the UK market”. He believed there was “a sense that continuing, uninterrupted access is in the best interests of both sides”.315

Access to third countries

223.BATA was concerned that the EU’s agreements with third countries could “potentially cease to apply to the UK” post-Brexit, requiring “the UK to negotiate a whole raft of separate bilateral agreements”.316 There was particular concern over the EU-US Open Skies agreement, which entered into force in 2008, and which allows US and EU airlines to fly from anywhere in the EU to anywhere in the US and vice versa.

224.Virgin Atlantic, whose joint venture with US carrier Delta Airlines accounts for 70% of its business, said: “There should be no limitations on flying between UK and US.” It also argued that negotiating continued access to the US should be given “equal priority to securing EU market access” and should not be seen as a “secondary concern”.317 In the absence of such an agreement, according to BATA: “Contingency plans [should be] agreed with the US administration to ensure that services can continue … to operate in the event that a new formal agreement is not in place by the time the UK leaves the EU.”318

225.Mr Pearce pointed to the wider significance of the EU-US Open Skies agreement for the UK economy: “We have a lot of joint business ventures across the north Atlantic, for instance, which hub over London, so those Open Skies agreements are a prerequisite for those structures.”319 The Government, he argued, should “protect the wider Open Skies [and] … third-country agreements”, and he recommended “early talks with the US”. 320

226.Failing a new agreement, Dr Humphreys believed the UK could fall back on ‘Bermuda II’, the US-UK agreement that predated Open Skies. But this was “such a restrictive agreement that I feel fairly sure that the United States and the UK would reach a new liberal agreement very quickly and relatively easily”. This, he believed, would “probably [be] very similar to the EU-US agreement”.321

227.Lord Ahmad told us that he had already “had many representations from, and meetings with, airlines that are not UK-based”, such as American Airlines.322 They had “made quite clear the importance of having continued and unhindered access to the UK as part of whatever future deal is struck”,323 and were “very keen to ensure not just a smooth transition but the kind of access that is currently enjoyed by airlines on both sides”.324

228.Lord Ahmad also outlined the UK’s existing bilateral air services agreements. These included “the likes of Brazil, Russia, India and China—the BRICS”.325 He had recently signed a Memorandum of Understanding (MOU) with the Chinese, “which has doubled … passenger services”, and was hoping to sign a similar MOU with India shortly.326

Negotiating strategies

229.Witnesses made a number of suggestions for the Government to include in its negotiating strategy on air services. First, it was argued that the Government should keep air services negotiations separate from wider EU withdrawal and trade negotiations. Mr Pearce said “one of the fears” in industry was that “air transport will get caught up in any horse-trading that might take place in the general trade negotiations”.327 easyJet argued that aviation “should be ring fenced from the final agreement”.328 In response, Lord Ahmad was “sure” that an agreement between the UK and the EU on air services “will form part and parcel of what is factored into the minds of our colleagues in Europe”.329

230.Secondly, witnesses highlighted the risk that the issue of Gibraltar could derail negotiations. The Airport Operators’ Association noted that Gibraltar Airport was “deeply concerned about any attempts by other EU Member States to exclude them from current and future arrangements between the UK and EU”.330 Indeed, negotiations on the Single European Sky II proposal are currently stalled, as Spain has pushed for Gibraltar to be excluded from the scope of the proposal. Dr Humphreys warned that Spain could hold up negotiations, noting that “experience so far has suggested that it might well be prepared to do that”. But he also pointed out that “Spain is highly reliant on air services and the UK is one of its major markets”, and that Spain will therefore have “some interest in ensuring that air services continue efficiently”.331

231.Finally, witnesses said it was imperative that, in the words of easyJet, “An agreement must be in place prior to the UK’s formal exit from the EU.”332 The Airport Operators’ Association said the “failure to agree a new air services agreement would seriously disrupt important trade and tourism links for the UK”.333 IATA, however, highlighted that such agreements took “certainly longer than 2 years” to negotiate, and that the Commission had a “growing backlog of uncompleted mandates”. They concluded it was “unclear whether the UK would be able to jump the queue”.334

Trading in the absence of a formal agreement

232.Leaving the EU without a bilateral UK-EU air services agreement in place would be, in the words of BATA, a “’clean break’ in aviation terms”.335 Ms Dekkers noted that aviation services were “not covered by the WTO”, so there was no “fall-back option”.336 Without a bilateral air services agreement in place by 2019, UK airlines would no longer have the right to fly to and from EU Member States under existing Single Market rules, or to fly to third countries, such as the US, under the terms of the EU’s Open Skies agreements. UK airlines would not be able to offer services between two EU Member States without flying via UK airspace, or to serve domestic routes within EU Member States. UK airlines would no longer be designated as ‘Community carriers’.

233.BATA said the UK would, in such circumstances, have to fall back on bilateral air services agreements (which predate the creation of the Single Market) with individual Member States. It was “questionable whether these old agreements would still be valid”, given that they were agreed before the EU extended its competence on aviation matters. They would also be “so out-dated” that they simply would “not be fit for purpose”.337 Ryanair noted that, in the case of Spain, there was “potentially no right to fly as the relevant bilateral agreement has been repealed”.338

Conclusions

234.The UK is a global leader in air services. This position has been cemented in recent years by the creation of the European Common Aviation Area (ECAA) and the Single Market in air services. Under this framework, the most liberal air services trade in the world has emerged, benefiting European consumers and businesses alike. The UK’s leading position and shared interests with the EU in this sector provide leverage for the Government to negotiate a good deal for the UK’s air services after Brexit.

235.Firstly, the Government urgently needs to clarify whether it intends future UK trade in air services with the EU to be conducted on the basis of membership of the ECAA, or on the basis of a separate comprehensive bilateral air services agreement. In the former case, it would be important for the UK to retain voting rights in EU agencies, such as EASA and SESAR (which is not the case for existing non-EU ECAA members), and to have access to existing Open Skies agreements.

236.A bilateral air services agreement, if it were to maintain the level of market access currently enjoyed by UK airlines, would need to provide rights for UK airlines to fly non-stop between EU Member States, and to fly domestically within EU Member States. The UK is likely to have leverage in negotiations, given the size of its aviation sector, but we note that there is no precedent for the inclusion of the right to fly domestically within an EU Member State in a comprehensive bilateral air services agreement.

237.The Government also urgently needs to clarify the UK’s position post-Brexit with regard to countries with which the EU currently has an Open Skies agreement, including the United States. Failing that, the Government should rapidly explore the potential of agreeing new bilateral air services agreements with major markets (such as the US) before the UK leaves the EU in 2019, or set in place a transitional arrangement.

238.There is no adequate ‘fall-back’ position for aviation services in the event that no agreement is reached with the EU. Air services are excluded from the WTO, and the pre-existing bilateral air services agreements between the UK and individual EU Member States may not be valid, given the EU’s extended competence in this area. It follows that, in order to avoid significant damage to the UK aviation sector, either a UK-EU bilateral air services agreement must be agreed before the UK leaves the EU in 2019, or a transitional arrangement must be adopted, to allow continuing UK participation in the Single Market for aviation pending conclusion of a comprehensive agreement.

239.Faced with the real risk that the UK may not achieve either of these objectives by 2019, airlines are considering registering part of their operations in other EU Member States. This will probably require them, after 2019, to comply with requirements that they be effectively controlled by shareholders from an EU Member State. In other words, they could cease to be UK airlines.

240.The airlines that gave evidence to this inquiry argued forcefully that the aviation sector should be prioritised, and that negotiations on a comprehensive bilateral aviation services agreement should be kept separate from the wider negotiations on withdrawal and the future UK-EU trading relationship. We note that a distinct bilateral deal in this area may be in the mutual interests of the UK and EU. However, negotiations on aviation services will still be just one element within a wide-ranging and immensely complex negotiation.





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