The Law Office of JM Donnelly

Brexit

• Introduction

• Single Aviation Market

• Ownership and Control & IAG

• Impact on Ireland

• Conclusion

​

Introduction

Accession to the EU and participation in the single European aviation market has brought enormous  benefits to the Irish and UK aviation sectors. The removal of constraints on capacity, route access and fare-setting has facilitated the emergence of low budget carriers such as EasyJet and Ryanair. Ryanair now operates almost one sixth of intra-EU flights.  Deregulation has also brought about a cascade of mergers, privatisations and take-overs, greatly promoting innovation, competition and efficiency across the EU aviation sector.

​

The economic benefits generated by the air transport industry in Ireland is illustrated by the fact that it contributes €4.1 billion directly to Ireland’s GDP and further sustains 26,000 jobs directly. Air transport is also the lifeline of Ireland’s tourism industry, contributing €5.3 billion to GDP. 

​

In this article, it is intended to consider the implications for the aviation sector of the decision of the United Kingdom to leave the EU and now it will affect Ireland.

​

The Single Aviation Market

In order to preserve access to the singe aviation market, the UK would have to negotiate a bilateral agreement with the EU or opt to become a part of the European Common Aviation Area. In the absence of  an air services agreement between the UK and the EU or UK accession to the ECAA, British airlines would lose their current traffic privileges and be precluded from flying into many EU airports. However, the UK is not entitled as of right to adopt these solutions in order to preserve the status quo. The availability of a bilateral agreement would be dependent on the willingness of the EU to enter into such an agreement. With regard to the ECCA, it requires that the current signatories to the ECAA Agreement would agree to UK accession. Given the substantial cross-flows of traffic between the UK and the Member States, EU states may be chary about ousting the UK from, or limiting its access to, the single aviation market. However, even if the EU would be prepared to countenance a UK-EU bilateral or accession by the UK to the ECAA, it might well seek to circumscribe the traffic rights of the UK. For example, Swiss airlines are entitled to exercise only seventh freedom rights; if the UK were also denied eight and ninth freedoms then UK carriers would not be able to provide a service between between two UK cities.  

​

Chancellor Philip Hammond has announced that flights between the UK and the European Union could ‘theoretically’ stop on the day Britain officially exits from the Union. Whilst conceding that flight halting would represent the ‘most extreme scenario’, he warned that it was not beyond the bounds of possibility.  Ryanair’s Chief Executive, Michael O’Leary, has stated that the airline industry needs clarity on a UK-EU Brexit deal by the summer as that is when airlines publish their schedules for the year ahead. ‘Time is running short for the UK to develop a bilateral solution’, Mr O’Leary has warned. EasyJet has announced it proposes to establish a new Vienna-based airline in order to continue its European operations after Brexit. The British Airlines Pilots  Association issued a statement declaring that it is ‘utter madness for anyone to think that a Brexit ‘no deal’ would be anything but total disaster for our world leading UK aviation sector and beyond'.

 

EU chiefs have advised UK airlines to relocate their operations to the EU in order to avoid having their routes within Europe axed. It has been reported that executives at major airlines including British Airways, Ryanair and EasyJet have been warned by European officials that to operate inter-European flights airlines must have a ‘significant base’ in Europe.

​

Ownership and Control & AIG

It is a requirement of EU law that airlines operating in the EU be owned and effectively controlled by EU citizens. In relation to flights between the EU and third countries, such flights are regulated by bilateral agreements many of which require that only national air carriers of the bilateral partners may be designated to exercise the rights. (Following the Open Skies Judgment declaring that air services agreements cannot discriminate between Community carriers on the basis of national identity, the non-EU partner must agree a ‘EU’ designation clause in lieu of national ownership and control requirements). After Brexit, and in the absence of a bilateral between the EU and UK or UK’s accession to the ECAA, British airlines will no longer be compliant with EU ownership and effective control requirements and will thereby lose their EU traffic rights. But what will the implications be for the International Airlines Group (IAG)?

​

IAG is a multinational airline company including British Airways, Iberia and Aer Lingus. IAG is a listed entity and trades on both the London Stock Exchange and on the Madrid, Barcelona, Bilbao and Valencia stock exchanges. IAG has provided for ‘nationality structures’ to ensure that, in respect of British Airways, Aer Lingus and Iberia, the bodies of British, Irish and Spanish shareholders can be separately identified, thereby facilitating, if needed, realignment of the respective shareholdings. Several independent evaluations of the impact of Brexit on the ownership profile of IAG are suggestive of IAG falling below 50 per cent. In the absence of a special bilateral agreement between the EU and the UK, IAG will be forced to divest itself of part of the group or buy out up to a quarter of the shareholdings in order to maintain access to the EU market. IAG has provisions in its bylaws empowering it to force non-EU shareholders to sell their shares if the company faces the possibility of losing its EU traffic rights.

​

Impact on Ireland

Brexit will have a profound impact on Ireland, the fallout potentially producing ripple effects across multiple economic sectors including the aviation sector. Aviation is of enormous importance to Ireland as international connectivity is pivotal to its economic success and prosperity as a small island nation. In particular, the commercial and tourist interdependencies between Ireland and the UK may be jeopardised following the exit of the UK from the EU.  The very survival of Ireland’s aviation industry is inextricably intertwined with the maintenance of its traffic rights into UK Aerospace.

 

Even if the UK were to conclude a bilateral agreement with the EU, the traffic rights currently enjoyed could be curtailed, potentially affecting Irish carriers. The signs from the EU are ominous. Henrik Hololei, the Director General for Mobility and Transport has said that whereas there is ‘nothing I would love more than if our aviation relations would continue on the same basis..let’s not also mislead ourselves into thinking it would be the case’. The implications for Ireland cannot be under-estimated. Apart from the issue of its flying rights into UK airspace, Ireland' prospects for developing its aviation industry may be jeapardised by Brexit 

​

It is predicted that the current volume of air passengers—3.5 billion passengers in 2016—will double to 7 billion by approximately 2036. It also expected that the world aircraft fleet will rise from 22,000 aircraft (2016) to 44,000 aircraft, unleashing increased demand for pilots and aircraft maintenance engineers. Given Ireland’s position as a global hub for aviation, it is uniquely placed to exploit these opportunities for growth.  However, the country faces uncertainty because of the implications of Brexit and its potential to dampen demand for air transport services between Ireland and the UK. This coupled with the fact that Ireland is facing stiff competition from new entrants to the industry from the Far East is complicating Ireland's task in facing the challenge of expanding its aviation sector. How matters will ultimately pan out for Ireland will depend on whether the UK opts for a 'hard Brexit' (by which the UK would give up access to the single market and the customs union) or a 'soft Brexit' (by which the UK would preserve a relationship with the EU close to the existing arrangements).

​

Conclusion

UK Prime Minister, Theresa May, triggered Article 50 of the Lisbon Treaty on 29 March 2017. The UK has a two year time-frame for concluding an exit deal for leaving the EU. A deal must be approved by a qualified majority of EU member states and can be vetoed by the European Parliament. The terms of exit will be negotiated between Britain’s 27 counterparts and each Member State will have a veto over the proposed terms. Political leaders have said that the conditions will be severe to discourage other Member States from following the example of the UK. The exit negotiations are likely to be complicated and protracted. It

remains to be seen how UK’s exit from the EU will impact on Ireland’s aviation industry.

​