BREXIT: SOME IMPLICATIONS FOR CIVIL AVIATION Chris Lyle, FRAeS - - PowerPoint PPT Presentation

BREXIT: SOME IMPLICATIONS FOR CIVIL AVIATION

Chris Lyle, FRAeS [] February 2017

BREXIT: SOME IMPLICATIONS FOR CIVIL AVIATION

Chris Lyle, FRAeS 5 April 2017

Europe and the UK

1951– Establishment of European Coal and Steel Community (UK rejects on grounds of “supranational” authority) which evolves through the Treaty of Rome in 1957 into the European Economic Community (6 States) 1963 , 1967 – De Gaulle vetoes UK entry as “insular”, “incompatible” 1973 – UK, Denmark and Ireland join 1981, 1986 – Greece, then Portugal and Spain join

Europe and the UK

1992 – EEC Becomes European Union, Euro introduced – European Economic Area agreement for extension of free movement of persons, services, goods and capital to EFTA States (accepted by Iceland, Liechtenstein and Norway, rejected by Switzerland through referendum) 1995 – Austria, Finland and Sweden join EU – Schengen Agreement on borderless territory, currently acceded to by 22 EU States (not UK) and 4 other European States 2002 – Euro replaces 12 national currencies (not £) 2004, 2007, 2013 – 10, 2, 1 States join EU, for a total

• f 28 States

The road to invoking Brexit

23 June 2016 – UK referendum supports (51.9% to 48.1%) July 2016 – New PM and Cabinet agree to invoke Article 50 of 2009 Lisbon Treaty (never before used) “by end March 2017” which would start a maximum two year withdrawal process July 2016 to January 2017 – Successful legal petition on need for prior action by UK Parliament 17 January 2017 – UK PM indicates “hard” rather than “soft” Brexit (an inevitability given position of the

• ther 27 EU States?)

28 January - 13 March 2017 – Parliamentary consideration (PM presents “White Paper” with objectives on 2 February) 16 March 2017 – Royal Assent 29 March 2017 – UK invokes Article 50

The Brexit process

29 March 2017 – Two year time limit begins 5 April 2017 – EU Parliament passes a motion on negotiations 29 April 2017 – Summit of EU27 States to discuss UK withdrawal Negotiating positions established and negotiations proceed Draft deal to be put to EU27 Council of Ministers and thence approval by at least 20 EU27 countries with 65% of EU27 population, followed by ratification by EU Parliament Extension of the two year deadline subject to similar EU approval process Failure on agreement results in the exiting State falling out of the EU with no new provisions in place UK Parliament will review a deal

Broader issues may be on the table, eg security, nuclear shield, territorial fishing rights, status of Gibraltar If UK revokes Article 50 during two year period, it may be accepted subject to approval by all EU27 States and conditions to be specified, but after that UK would have to apply like any other country (Article 49 of Lisbon Treaty)

UK’s global trade in transportation services, 2015

Source: UK ONS, “The Pink Book”

Europe and UK, aviation

UK is a member of aviation agreements based on 35 shared pieces of EU legislation, a common regulator in the European Aviation Safety Agency (EASA) and a court acting as a referee on the shared rules, the European Court of Justice (ECJ)

For the 60th Anniversary of the Treaty of Rome in March 2017, 9 aviation associations issued a joint declaration entitled European aviation says “It’s time to stand up for the EU”

Europe and UK, air transport agreements

1987, 1990, 1992 – First, second and third air transport liberalization packages create a single aviation market amongst all EU States 2006 – European Common Aviation Area adds 9 more States “Comprehensive” agreements with third countries as a single trading bloc, presently with Canada, Georgia, Israel, Jordan, Moldova, Morocco, Ukraine, United States

• Negotiating with Australia, Brazil, New Zealand
• Mandates for negotiation with Algeria, Azerbaijan,

Lebanon, Qatar, Tunisia, Turkey, UAE, ASEAN bloc “Horizontal” agreements with a number of States to align legalities

UK will have to withdraw from all the above and negotiate “replacement” agreements bilaterally with EU27 or with EU27 States and with EU partner States

Implications for civil aviation

 Membership of institutions  Safety, Security and ATM  Environmental Protection  Economics (manufacturing, leasing,

regulation, operations) Considerable uncertainty remains regarding the precise details of the exit, for aviation as for all else

Membership of institutions

EASA – an EU body and linked to ECJ, UK could pay to continue (cf Norway) but would lose its vote ECJ – withdrawal by UK anticipated Eurocontrol, ECAC, ICAO – little change likely SESAR – joint initiative of EU and Eurocontrol, funded primarily by EC An administrative quagmire with UK influence on Single European Sky likely to diminish

Safety, Security and ATM

The UK “Great Repeal Bill” to “convert the acquis communitaire” (to be accompanied by “some 7 to 15” other bills and cover some 18 000 plus regulations) will presumably include import of 140 aviation-specific regulations on industry licensing, operations and safety oversight Common EU27 and UK rules and regulations likely to continue Security covered by Tokyo/Hague/Montreal Conventions EU airspace reform to lose momentum?

Environmental Protection

Noise and LAQ have EU rules but LHR Third Runway? Emissions, three parallel issues:

 EU ETS and ICAO CORSIA integration (including

intra-EC services and “stop the clock”)

 UK participation in EU ETS which covers EU

States plus Iceland, Liechtenstein and Norway (cf ECAA)

 US participation in CORSIA (may add to

concerns of Russia, China and India)?

Economics – Manufacturing and infrastructure

Some “unknown unknowns”: UK operations of Airbus, BAE Systems, Bombardier, Britten-Norman, Leonardo Helicopters (formerly Augusta Westland), Rolls-Royce, numerous parts suppliers; “passporting”, business aviation Redesign of immigration and customs facilities (but reintroduction of duty free for flights to EU27) Impact on third runway at Heathrow R&D reduced funding (eg European Horizon 2020 and “Clean Sky 3”) Spending and investment decisions?

As with all other economics issues, value of £ critical

Economics – Leasing

Over 40% of aircraft worldwide currently leased 14 of 15 largest aircraft lessors have operations in Ireland Over 50% of leased aircraft managed by Irish firms (skewing the country’s economic data significantly!) Irish corporate taxes low, inconsistent with EU tax harmonization and will lose UK ally in

• pposition (cf fine on Apple)

Economics - Regulation

The UK’s “Great Repeal Bill” and accompaniments will presumably include import as required of aviation-related legislation such as slot allocation, CRS, ground handling, air passenger rights (with watering down?), assistance to pax with reduced mobility, etc

Economics – Regulation

Replacement of EU-wide agreements would require bilateral agreements with almost all of 36 ECAA States and 9 with third States Better options would be:

 UK joining ECAA (cf Norway, but would probably have to

accept EEA provisions and would have to accept all current and future EU27 aviation legislation without having any influence on it) or

 a bilateral with EU27 (cf Switzerland, which had to accept

number of conditions including free movement of labour) Associate status for UK with EU27 cf Ukraine has been mooted but raises considerable uncertainties, notably for civil aviation

Economics – Regulation

Domestic operations by UK carriers in EU27 countries (eg easyJet Paris-Nice) will be prohibited (Article 7 etc

• f Chicago Convention)

International operations by UK carriers between EU27 countries and to/from EU27 countries with third countries (fifth freedom) may require separate negotiations and would probably be subject to reciprocity JVs, alliances and transferred/new AOCs may help (cf code- sharing as a means of getting round bilateral provisions)

Economics – Operations within Europe

ASK’s between UK and ECAA, 2016 Source: CAPA

Economics – Operations within Europe

EU destinations account for 49% of passengers and 54% of scheduled commercial flights from the UK Ryanair – 36% of intra-EU capacity to/from UK easyJet – 34% of intra-EU capacity within EU27 (bmi regional, Flybe similar) Costs in dollars (eg fuel, aircraft ownership) and Euros (eg EU ATC charges) a large proportion of airline expenditure

Economics – Operations within Europe

easyJet to set up a company in EU27 (with UK subsidiary for UK domestic operations), Ryanair in the UK?

OWNERSHIP (%) Airline EU UK EU27 easyJet 84 35 49 Ryanair 60 20 40

British Airways does not operate within EU27 but IAG (operational HQ in UK, incorporated in Spain) may need to disinvest shareholders in order to be majority EU27-owned and allow other IAG carriers to continue to operate EU requires airlines to be majority EU-owned and have a significant base on EU territory

Economics – Regulation and operations beyond Europe

Brexit will require renegotiation of trade deals with some 58 third countries Key air transport markets: EU-US “Open Skies” (2007, 2010, 2011), on which some JV anti-trust immunization is dependent (eg BA/AA and DL/VS) EU-Canada (2009) UK market dominated by outbound traffic EU-US agreement is potentially “plurilateral” and could thus re-incorporate UK In the IAG context, is BA majority owned and controlled by UK nationals? UK-US fallback could be 1977 “Bermuda 2” bilateral!

Economics – Regulation and operations beyond Europe

EU air carrier ownership and control provisions could require restructuring of IAG - Aer Lingus, Iberia, Vueling (short-haul low cost) and now LEVEL (long-haul, low cost) have AOCs in EU27 EU “horizontal” agreements should be readily acceptable for transfer into bilaterals with UK EU “comprehensive” agreements more tricky

“A heavier handed approach to airline Open Skies might give some lacklustre US carriers a breathing space but the passenger would inevitably come off worst” Prof Keith Hayward, FRAeS

Economics – the bottom line

Air transport demand tends to be correlated with GDP growth

Economics – the aviation supply chain

5 10 15 20 25 CRS Lessors Freight Forwarders Groundhandling Manufacturers Fuelling Travel Agents Catering Maintenance Airports Airlines Average ROIC 1996-2004 (%) 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Upturn ROIC divided by Downturn ROIC Average ROIC (LHS) Volatility in ROIC (RHS)

Economics – Aviation is NOT a silo

International air transport regulation STILL led by aviation institutions, although:

 Tourism is increasingly one of the world’s largest

industries, a key generator of jobs and economic growth, with 54% of international tourists reaching their destination by air

 Trade is a fundament of the world economy, and

35% by value is carried by air Time for revived air transport activity by the WTO?

Economics – Aviation is NOT a silo

A glimmer of logic from an interesting source:

 recent US airline CEO submissions to White House on

“unfair” subsidies to Norwegian and to Gulf carriers (Emirates, Etihad, Qatar Airways) reportedly rebuffed on basis of their use of American manufactured aircraft, American –based crews and their economic contribution to the US

 BUT, US domestic Essential Air Services program may be

withdrawn Northern Ireland Government is currently paying a three-year £9 millions subsidy to UA to continue BFS-EWR service

ICAO needs to promote more vigorously its Essential Service and Tourism Development Routes effort

Sustainability

 “We must overcome the legacy of

fragmented institutions established around single-issue ‘silos’ ” (UN Secretary-General’s High-Level Panel on Global Sustainability)

“The airline business is one which has

never yet seen a box it cannot think within” (an industry sage)

Time to break this mould!

Brexit

Beyond Brexit: More widespread political populism

An era of protectionism (eg TPP stopped ,TTIP and NAFTA in trouble, G20 Finance Ministers drop reference to free trade - and to climate change,UK influence in Europe reduced, etc), leading to

Skies wide shut?

The global economic regulatory context

 Air transport liberalization is isolated and

stalled

 Bilaterals still dominate in a multilateral world  Third and fourth freedom mentality is still

extant

 Institutional self interest prevails  And as for air carrier ownership and

control..….we remain in the dark ages The regulatory framework, already archaic and fractional , may become dysfunctional

Further information:

www.airtransporteconomics.ca

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