Brexit update for aviation

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Aviation is one of the sectors most vulnerable to the impact of the UK leaving the EU as air transport services (including air traffic rights) are excluded from the WTO General Agreement on Trade in Services, meaning that there is no fallback arrangement in the absence of agreement between the parties. It will therefore come as a relief to many airlines that EU contingency legislation was published on December 10, 2020. It bears many similarities to that published in March 2019 to ensure basic connectivity in the event of ‘No deal’. Details of that contingency legislation were summarised in a previous Legalflyer article here.

This article looks at the latest EU contingency legislation, as well as other issues resulting from the UK’s exit from the EU which still need to be addressed, such as air traffic rights with third countries and the UK’s approach to emissions regulation. It is important to note that the situation remains fluid. Airlines and other aviation businesses will need to closely monitor developments as further information emerges.

Air Transport and Aviation Safety Agreements between the EU and UK

Notwithstanding the UK’s departure from the EU on January 31, 2020, under the terms of the withdrawal agreement’ the status quo has largely been preserved during an agreed “implementation period”. During this time, the UK has, to an extent, still been treated as an EU Member State, subject to and benefitting from EU law.

However, the UK must now either reach agreement with the EU on its future relationship or leave on December 31, 2020 with ‘no deal’.

On February 27, 2020 the UK Government published a paper setting out its negotiating objectives for the UK’s future relationship with the EU (UK Negotiation Objectives). This in turn had followed the publication on February 25, 2020 by the EU of its own negotiating directives (EU Negotiation Directives) as discussed in our blog post here. The EU’s draft text of the Agreement on the New Partnership with the United Kingdom of March 18, 2020 translates the EU Negotiation into a legal text, in line with the Political Declaration agreed between the EU and the UK. The EU’s proposed draft Agreement covers all areas of the UK’s future relationship with the EU, addressing both air transport and aviation safety in two chapters. The UK Government responded with two draft legal texts of its own - an air transport agreement and civil aviation safety agreement both published on May 19, 2020. It is clear that it is in the interests of both the UK and the EU to reach an agreement on aviation: however significant differences in approach remain as evidenced by these texts.

The UK Government seeks a “Comprehensive Air Transport Agreement” with “liberalised market access for air services on a reciprocal basis, close cooperation to maintain high aviation security standards and collaboration on air traffic management to ensure interoperability between UK and EU airspace”. As a minimum, the UK Government aims to ensure a right for EU and UK airlines to operate to and from the UK and EU destinations with no limits on frequency and capacity.

The EU Negotiation Directives assume that any such agreement would need to ensure a basic level of connectivity, but require the UK to adhere to “level playing field” commitments, particularly with regard to competition, in order to secure access to EU markets and also that the EU internal market for air transport services should be preserved. They emphasize that the UK should not benefit from air traffic rights to the same extent as EU members.

In short it is apparent that if air traffic rights are to extend beyond the basic (1-4) freedoms of the air and if commercial concessions in other areas such as wet leasing and code sharing are to be achieved, then the tensions between the UK’s desire for regulatory independence and the EU’s desire for regulatory alignment as a means of ensuring fair competition will need to be resolved.

While the UK and the EU continue to focus on their overall future trading relationship, the position with respect to a UK-EU Air Transport and Aviation Safety Agreement remains unclear. In October 2020 it was reported that Grant Shapps, the UK Secretary of State for Transport, told an ABTA convention that, in addition to the right to provide services between the UK and EU, “we are rather exploring some limited additional flexibilities for both road and air that would be of benefit to both sides. We hope the EU will engage with these”.

Air traffic rights with third countries

As well as intra-EU air traffic rights, the UK benefits from the air traffic rights negotiated at the EU level with third party countries, including the important EU-US Open Skies Agreement. In the Withdrawal Agreement between the UK and the EU, the EU agreed to notify the international counterparties to those agreements to treat the UK as if it were an EU member state during the Implementation Period although those third countries cannot be compelled to comply.

Traffic rights between the UK and the 111 third countries, including China, India and Brazil, with whom the UK has existing bilateral air service agreements to which the EU is not party, will continue to be governed by these bilateral agreements.

However, replacement air service agreements need to be agreed with the 17 non-EU countries with whom the UK has air traffic rights by virtue of the UK’s membership of the EU. The UK has already agreed a number of these replacement agreements, notably with Canada and the United States in November 2018, and continues to negotiate others. The UK Government’s full list of the status of these agreements can be found here.

Whether these bilateral air service agreements are as beneficial to the UK as the existing air service agreements concluded by the EU in conjunction with its member states is likely to vary.

For example, the US-EU Open Skies Agreement which the UK benefitted from pre-exit allows for liberal transatlantic travel between the US and the EU, using the concept of a “EU nationality” where an EU Member State can designate any EU airline to fly to destinations in the US provided that, amongst other things, the airline is substantially owned and effectively controlled by one or more EU Member States and/or their nationals. However, the model US Open Skies Agreement on which the US-UK air services agreement is based, only permits airlines substantially owned and effectively controlled by nationals of the designating state to operate relevant routes. Given the importance of the US market to UK operators and their ownership structures, this would be problematic for the UK incumbent operators, who often have ownership structures involving high levels of ownership or control within the EU but outside of the UK.

The UK has succeeded in protecting these incumbents, who, under the new agreement will be deemed to satisfy the ownership and control standards, provided that they were authorised by the US Department of Transportation as of November 28, 2018, and were (and remain) substantially UK, EU and/or EEA-owned. However this will not assist future operators of these routes.

The EU Emissions Trading Scheme (EU ETS)

UK operators currently participating in the EU ETS must continue to comply with their obligations under the scheme during the Implementation Period and surrender applicable allowances by April 30, 2021. In addition the UK will no longer act as an administrator for the EU ETS. The EU Commission has reallocated the aircraft operators for whom the UK currently acts as administrator to another EU member state.

In terms of the UK’s future relationship with the EU following the end of the Implementation Period, the Political Declaration sets out the UK and EU’s agreement to “consider cooperation on carbon pricing by linking a United Kingdom national greenhouse gas emissions trading system with the Union's Emissions Trading System”. This would be especially desirable for the UK, as a linked ETS would mean a larger market with the potential to be more liquid and stable than separate emissions trading systems.

In June 2020 the Department for Business, Energy and Industrial Strategy (BEIS) published its intention to establish a UK Emissions Trading System with Phase I running from 2021 to 2030 (concurrently with Phase IV of the EU ETS), which would operate as a standalone system, but with the possibility that the UK emissions trading system (UK ETS) could be linked to EU ETS and the Swiss Emissions Trading Scheme (Swiss ETS).

The UK Government also published a consultation on the design of a Carbon Emission Tax as an alternative to a UK ETS, the response to which is expected before the end of 2020 – see our post on this here.

Where a linked scheme can be created, aviation will be part of both the linked and a standalone UK ETS, including domestic UK flights, flights from the UK to the EEA and flights from the UK to Switzerland (if agreement with Switzerland can be reached), with the aviation component of the cap calculated so that it is at least as ambitious as the UK’s proportional share of the EU ETS cap. For the UK ETS a single cap that includes both stationary and aircraft operators is proposed, with all allowances in the scheme being interchangeable between participating sectors, as in Phase IV of the EU ETS (which also runs from 2021 to 2030).

An added complication is the fact that the UK will also participate in the UN International Civil Aviation Organisation’s global offsetting scheme, CORSIA, although CORSIA does not apply to domestic routes while the UK ETS would. With UK aircraft operators already reporting their emissions in relation to international flights to the Environment Agency for CORSIA, the only additional reporting requirement to comply with the UK ETS would be to submit emissions data on domestic flights. However, aircraft operators are at risk of having to submit both UK ETS allowances and offset credits on the same routes – effectively paying twice for the same tonne of CO2.

In an effort to address this, the UK Government is reviewing how the UK ETS could interact with CORSIA to avoid the duplication of obligations between the schemes. This is already something being examined by the EU with respect to CORSIA and the EU ETS. The aviation part of Phase I of the UK ETS will be split into two sub-phases: 2021-2023 (Phase I(a)) and 2024-2030 (Phase I(b)), to mirror EU ETS aviation review periods and accommodate any amendments for CORSIA by the end of Phase I(a) at the latest.

No Deal Preparations

On December 10, 2020 the EU published draft contingency plans for the continued operation of flights between the UK and the EU if there is no deal between them, giving some basic comfort to airlines. The draft regulations address respectively connectivity (the 2020 Connectivity Regulation) and air safety (the 2020 Aviation Safety Regulation) and are based on two EU regulations which were published in March 2019 to facilitate basic connectivity and provide for a time limited recognition of certain certification issued by EASA to UK entities under the original ‘no deal’ scenario.

The majority of the content in the 2020 Connectivity Regulation replicates that in EU Regulation 2019/502 of 25 March 2019 (the Original Connectivity Regulation):

The 2020 Connectivity Regulation differs from the Original Connectivity Regulation as follows:

Certification in a No deal scenario

The 2020 Aviation Safety Regulation mirrors the Original Aviation Safety Regulation (EU Regulation 2019/494), which was published in March 2019.

However the 2020 Aviation Safety Regulation is more limited in scope – it acknowledges that many of the consequences of ‘No deal’ on certificates and approvals can be (and have been) addressed by stakeholders such as engineers, pilots and cabin crew, transferring their licenses to a civil aviation authority of one of the Member States, and for other stakeholders applying for EASA third country approvals.

The purpose of the 2020 Aviation Safety Regulation is to address issues around design certificates which have been issued before the end of the Implementation Period by EASA to UK design organisations, for which the end of the Implementation Period is more problematic. Until December 31, 2020, EASA will have been carrying out the functions and tasks of the ‘State of Design’ on behalf of the UK but once the Implementation Period ends those functions and tasks will be assumed by the UK CAA. In order to address this change, the UK has already enacted legislation to deem design certificates issued before the end of the Implementation Period as issued under the laws of the UK with effect from December 31, 2020.

In turn, the 2020 Aviation Safety Regulation ensures that the designs concerned by those certificates continue to be valid for use on EU-registered aircraft, allowing EU aircraft operators to continue using the products in their fleet. It does this by providing that EASA or EASA-approved design organisations are deemed to have issued the certificates covering those designs with effect from the day following the end of the Implementation Period.

The certificates concerned are certain type certificates, approval of changes to type certificates, supplemental type certificates, approvals in respect of repairs, European Technical Standard Order authorisations and design organisation approvals.

UK CAA Preparations

On its side, the UK Civil Aviation Authority (UK CAA) continues to plan for the scenario of no aviation safety agreements being in place at the end of the Implementation Period, with working assumptions which include that, after the end of the Implementation Period on December 31, 2020:

The UK CAA has confirmed that: