Brexit scenarios for business aviation - January 2018 - For EBAA - GBAA
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1 Foreword by Brandon Mitchener, CEO, EBAA On the 23 June 2016, the UK voted for a future relationship. It is our hope to leave the European Union. This and aspiration that this phase places the decision will result in a new relationship views and concerns of business aviation between the twenty-seven remaining at its core. members of the European Union and the United Kingdom. Business aviation contributes a total of 192,000 jobs to the European economy On the road to that new relationship directly, with an additional 182,000 numerous challenges must be overcome estimated to be generated indirectly. and agreed upon. This report aims to The sector generates EUR 42bn in place the challenges of the Business Output, EUR€15bn in Gross Value Add, Aviation sector firmly at the heart of benefiting a number of economies across discussions between the EU and the the EU. Germany, the UK, Italy and UK. It presents the current relationship France are key locations where business between the EU and the UK before aircraft operate, and it is paramount presenting six scenarios for a future one. that this business activity continues It maps out the key topics of interest uninterrupted after Brexit. for the business aviation industry - traffic rights, ownership and control, The EBAA looks forward to working with Value Added Tax (VAT) / Customs duty negotiators in both Brussels and London and the future relationship with the to ensure the specific expectations of the European Aviation Safety Agency (EASA) business aviation sector are appreciated, – analysing how these topics would fare and that any future agreement is mindful under a future scenario. of the very direct consequences that could arise for our sector and the European Following the publication of the businesses and citizens we serve. Joint Report of the EU and UK Brexit negotiations on 8 December 2017, and Brandon Mitchener the approval of the European Council CEO, European Business to move to phase two of negotiations, Aviation Association negotiators must now agree a framework
Contents Section 1 Section 2 05. 09. 10. 11. 12. 13. Executive Overview Introduction Current UK Brexit models Types of business summary aviation aircraft operation relationships Section 3 15. 18. 19. 19. 19. 23. Traffic rights Ownership and VAT / Customs European Aviation Other Brexit: Impact of 6 control duty Safety Agency possible models (EASA) 24. 25. 28. 30. 33. 39. Model 1: Maintain Model 2: Join Model 3: Negotiate Model 4: Join Model 5: Revert to Model 6: Negotiate status quo the European a UK-EU bilateral the European previously agreed new ASAs Economic Area aviation agreement Common Aviation bilateral ASAs (no with EU and / on the Swiss model Area (ECAA) “aviation deal”) or individual Member States Annex 1 Annex 2 Annex 3 Annex 4 Annex 5 39. 43. 47. 61. 65. 73. Other Business aviation: Traffic rights Ownership and Customs duties / European Aviation arrangements Key types of control VAT Safety Agency aircraft operations
3 Annex 6 Annex 7 Annex 8 Annex 9 79. 83. 87. 91. Air traffic The Cape Town Other relevant Conclusion – management / Convention EU law Summary table Single European Sky ATM Research project
Section 1 Following the Joint Report of the EU and UK Brexit negotiators on 8 December 2017, the aviation industry might be forgiven for issuing a collective sigh of relief that, nearly nine months after the triggering of Article 50, discussions will finally move on to the future trading relationship between the EU and the UK. However, there is of course a huge models” for aviation, which are: also discussed extensively in this report. amount of work to be done, and three dangers for the business aviation sector. 1. Maintenance of the status quo. By way of brief summary we note some The first is that, on the basis of the of the points and conclusions reached in 2. The UK joins the European Economic this report in respect of these four areas: EU’s negotiating stance that “nothing Area (EEA). is agreed until everything is agreed” Traffic rights the future relationship in respect of 3. Negotiation of UK-EU bilateral. aviation will not be subject to any form aviation agreement (Swiss model). –– Operating licence holders enjoy of bespoke standalone arrangement but unfettered access to intra-EU routes will need to be part of an overarching 4. The UK joins the European Common free trade agreement. The second is Aviation Area (ECAA). –– This includes 7th freedom (e.g. UK that negotiators may come to a deal operator: Amsterdam-Lyon) and 9th 5. No “aviation deal”: reversion to freedom (e.g. UK operator: Milan- relating to the airline industry without previously agreed bilateral air Rome) routes consideration of the needs of the services agreements (ASAs). business aviation sector, which are –– Only models 1 (status quo) and 2 (EEA) not necessarily the same. Regulation 6. Negotiation of a new ASAs with EU would preserve the existing regime of the business aviation market has and / or individual Member States. traditionally followed in the slipstream –– Model 3 (Swiss model) – does not of the wider aviation industry, and This report analyses the impact of include 8th and 9th freedoms there is now an opportunity to raise each of these models in four main (“cabotage”) specifically the requirements of this areas in particular: unique sector. –– Model 4 (ECAA) – 3rd and 4th 1. Traffic rights / market access. freedoms available immediately, intra- The third danger is that liberalisation of EU 5th freedom available at Stage 2, the air transport sector in the EU, which 2. Ownership and control. and full market access only at Stage 3 by general consensus, and ironically, is 3. VAT / Customs duties. one of the EU’s finest achievements and –– Models 5 (revert to previous ASAs) and has been of considerable benefit, may be 4. European Aviation Safety Agency 6 (negotiate new ASAs) – likely up to partially or even wholly rolled back. (EASA). 5th freedom only The purpose of this report is to examine The wider impact of EU membership The following should also be noted: what a future regulatory environment is not of course limited to European between the EU and the UK in relation –– 1956 Paris Agreement: this covers markets, as the EU has negotiated to the business aviation market may non-scheduled routes but only for 24 various multilateral Air Transport look like, in order to arm EU and UK Contracting Parties (including the UK) Agreements with third countries on negotiators with the background and certain restrictions apply behalf of the UK. Upon leaving the information they may require. On the EU, the UK will automatically cease –– Private flights largely unaffected basis that negotiating strategy must be to be party to those multilateral informed by (to use military parlance) agreements and will have to negotiate selection and maintenance of the aim, new arrangements with those third this report focuses on six possible “Brexit countries. This “external dimension” is
7 Ownership and control The risk of Brexit is: Majority UK owned Majority EU owned EU liberalisation in air transport created and controlled and controlled the concept of the “Community air carrier”, which is relevant to EU business Risk of losing “Community air Continuing status in the UK UK operators aircraft operators providing commercial carrier” status vis-à-vis the EU. will depend on future UK rules. air transport services i.e. chartering aircraft. Reg 1008 / 2008 requires a Ability to fly to and within Risk of losing “Community Community air carrier to be majority EU operators the UK will depend on future air carrier” status in the EU. owned and effectively controlled by EU UK rules. nationals. Only models 1 (Status quo), 2 (EEA), 3 (Switzerland) and 4 (ECAA – final stage only) apply common EU ownership and control rules. VAT / Customs duties EASA “Hard Brexit” scenario Current UK Government policy is that the EASA is an agency of the EU under The risks of a “no deal” (or “cliff edge”) UK will be leaving the EU Customs Union, Basic Regulation 216 / 2008. There is no scenario are: and will likely therefore need to establish appetite for the UK not being in the EASA its own standalone customs zone, aligned regime – it would be expensive and time- –– WTO rules do not provide a fall-back in some way with the EU zone. Absent an consuming to build up an alternative position for aviation. agreement, post-Brexit importation of a infrastructure, with considerable risk of –– UK operators would lose “Community business aircraft through the UK will not divergence. Norway, Iceland, Lichtenstein air carrier” status and therefore intra-EU automatically provide “free circulation“ in and Switzerland have been granted traffic rights (including 7th and 9th the rest of the EU (and vice versa). participation under Article 66 of the freedoms). Basic Regulation and are members of the Management Board without voting rights, –– EU operators with significant UK and EASA allows for numerous “Working shareholdings may fail Reg 1008 / 2008 Relationships” (e.g. Turkey.) It is likely that ownership and control test. the UK would follow one of these models, but would thereby lose influence over the –– If the UK re-introduces a UK O&C legislative process. A specific issue for non- requirement, UK operators with large commercial business aircraft operations EU shareholding could be at risk. is whether or not Reg 965 / 2012 Part-NCC –– EU aviation legislation would no longer will continue to apply to the UK post-Brexit. apply to the UK (unless specifically re-enacted). –– The UK may cease to be a member of EASA. Summary tables –– The UK will cease to benefit from The tables in Annex 9 summarise third country aviation agreements the conclusions of this report. concluded by the EU (e.g. US Open SkiesAgreement).
9 Section 2 Overview
Section 2 1. Introduction The eight annexes set out background material and further detail in relation to Following the United Kingdom’s exit from the following aspects of business aviation the European Union in March 2019, EU which will be particularly impacted by law will (subject to any agreed transition Brexit, five of which are also discussed in period) no longer automatically apply to this overview: the UK, leaving much uncertainty for the future of air transport, including the business aviation market. In order to Topic Section 2 - Overview Annex ensure continued access to liberalised air transport markets and a familiar regulatory environment, some form of Key types of aircraft operations Para 4 1 arrangement between the UK and the EU will be necessary to provide a suitable legal framework post-Brexit. Traffic rights Para 5 2 There has been much commentary in the media on the potential impact of Brexit on Ownership and control Para 6 3 airlines. By contrast, this report focusses on the current regulatory environment applicable to business aviation operators, Customs duties / VAT Para 7 4 and the potential impact of Brexit on such operators. This report consists of the main body and EASA (including licensing) Para 8 5 eight annexes. Air traffic management / Single In the main part of the report, we set out 6 European Sky ATM Research what we consider to be the six possible “Brexit models” for aviation, and analyse the impact of each of these models on The Cape Town Convention 7 business aviation, and in particular on the eight topics summarised below. Other relevant EU law 8
11 2. Current UK aviation relationships The UK’s current air services relationships, which will need to be addressed post-Brexit are as follows: Number of countries that UK has an air services relationship with through each type of arrangement Traditional bilateral Air Services Agreement (ASA) 111 EU internal aviation market (EU Member States) 27 EU internal aviation market (EEA Member States) 3 (Norway, Iceland, Liechtenstein) EU internal aviation market 1 (Switzerland) EU internal aviation market (ECAA Agreement) (Albania, Bosnia & Herzegovina, Macedonia, Montenegro, Serbia, 6 Kosovo) EU comprehensive Air Transport Agreements with third countries 7 (USA, Canada, Georgia, Israel, Jordan, Moldova, Morocco) Source: UK Department of Transport.
Section 2 3. Brexit models Certain of these options (for example, joining the EEA) appear to have already In our view, there are six possible post- been dismissed by UK Government Brexit models for the UK in relation to policy, as set out in Prime Minister European aviation generally which will be Theresa May’s speech in Florence on discussed further in Section 3 of this report 22 September 2017. For completeness in the context of business aviation: we shall in this report consider them I. Status quo: A deal is reached agreeing all, nevertheless, as each example is to full continuation of the present instructive and can inform debate as to status quo for aviation including what each of the UK and the EU might business aviation. aim for from a future relationship in relation to aviation. II. EEA: The UK joins the European Economic Area (“EEA”). We also discuss in this report the possible impact of Brexit on non- III. Switzerland model: The UK scheduled commercial traffic from the enters into a Swiss-style “packages UK to the US (and vice versa) and to agreement” with aviation as one of the other non-EU countries. packages. In this context we shall also discuss: IV. ECAA: The UK joins the European Common Aviation Area (“ECAA”). I. Transitional arrangements: under these it would be envisaged that the V. No deal: There is no special deal present status quo would continue for for aviation and the UK reverts a limited period pending negotiation to previously agreed bilateral Air and agreement of a long-term Services Agreements (i.e. before deal. This appears to be the UK EU liberalisation), the main result Government’s current preferred of which is that, to the extent they are position for the first two years after relevant, old bilateral regimes March 2019, but is not a solution or will revive. model for aviation as such. VI.New arrangements: The UK II. Comity and reciprocity: the legal negotiates a new Air Services principle of “comity and reciprocity” Agreement with the EU (not Swiss could be relied on to bridge the gap style i.e. not part of a ‘package while an agreement is reached. agreement’) (it being acknowledged that separate bilateral Air Services III. Separate deal: whether a separate Agreements with individual Member deal for business aviation might be States are unlikely to be permitted by achievable. the Council).
13 4. Types of business aircraft operations perspective. The reason for this focus is because the main impact of Brexit There are four principal types of business will be on the traffic rights available to aircraft operations: commercial business aircraft operators, I. Commercial air transport (Part-CAT). as opposed to operators / managers who conduct only private flights. II. Non-commercial operations with complex aircraft (Part-NCC). In our view Brexit will have very little impact on the (fairly unrestricted) traffic III. Non-commercial operations with rights available to business aircraft aircraft other than complex (Part-NCO). managers who conduct private flights only. This would include for example IV. Specialised operations (Part-SPO). operators who manage aircraft on These are described in detail in Annex 1 behalf of the aircraft’s owner without (Business aviation: key types of aircraft that aircraft being available for charter operations) below. or hire by third parties, or in-house company flight departments operating The characterisation and rules aircraft for the wider group company summarised above derive principally of which it is part and is cross-charging from EASA. Their applicability to the internally for the service. As discussed UK post-Brexit will depend on the in detail in this report, the main impact UK’s relationship with EASA, which on such operations will depend on is discussed in detail in this report, whether the UK remains subject to EASA primarily in Annex 5. For example, Part- rules or not, and the applicable regime NCC applies to EU operators of certain if not (for example, would Part-NCC or types of business aircraft, and to EU an equivalent apply post-Brexit?). The registered aircraft operated by foreign extensive discussion on traffic rights in operators. Clearly, if post-Brexit there is this report will be largely irrelevant to no agreement in place applying Part- non-commercial operations. NCC to UK operators and UK registered aircraft then Part-NCC would no longer be applicable in the UK. This report concentrates primarily on commercial air transport (i.e. (i) above). In this context, the report examines non-scheduled flights, the unscheduled nature of such flights being the principal characteristic of business aircraft operations from a traffic rights
Section 2 5. Traffic rights –– 1956 Multilateral Agreement on Commercial Rights of Non-Scheduled UK and EU business aircraft operators Air Services in Europe The adjacent table (Figure 1) is a This Agreement (also known as summary of the possible impact of each the “Paris Agreement”) operates of the “Brexit scenarios” on both UK independently of the EU legal and EU business aircraft operators with framework and liberalises traffic respect to traffic rights. rights for certain categories of non-scheduled flights. Due to the Non-EU Operators liberalisation of the EU air transport market within the EU in the 1990s and The position for non-EU operators is between the EU and its key aviation described below in Annex 2 (Traffic partners, the 1956 Agreement has rights), noting that UK operators gradually become obsolete, although themselves may become “third country it may provide a legal framework for operators” for these purposes in the the operation of certain non-scheduled event of a scenario where no deal is air services if no specific arrangement reached for aviation (and conversely is put in place by the time UK leaves EU operators may become “third party the EU. It is, however, limited in operators” in relation to flights from the scope, in particular it only applies to EU to the UK). civil aircraft registered in a Member Please note the following which may State of the European Civil Aviation apply unless superseded by a new Conference (“ECAC”). agreement: This Agreement is discussed in detail –– The Chicago Convention 1944 in Annex 2 (Traffic rights). Non-commercial non-scheduled operations have a right to operate 3rd (i.e. set down traffic) and 4th (i.e. pick up traffic) freedom flights to Contracting States under the Convention on International Civil Aviation of 1944 (the “Chicago Convention” or “Convention”),1 subject only to an advanced notice requirement. 1 The Convention on International Civil Aviation (the “Chicago Convention”), 7 December 1944, (1994) 15 U.N.T.S. 295
15 Figure 1 Access to routes Impact on other Possible models Likelihood Implications Impact on UK operators EU operators Maintain –– Unlikely scenario, –– No foreseeable change –– No foreseeable change –– No foreseeable change Figure 1 status quo considering that the from the arrangements from the arrangements from the arrangements other EU Member applicable as of Brexit applicable as of Brexit applicable as of Brexit States would have to date (30 March 2019) date (30 March 2019). date (30 March 2019). unanimously consent until a deal is reached. to this outcome. –– Uncertainty over the –– Contrary to the UK applicable dispute negotiating position. resolution mechanism. Join the –– Framework for –– Highly desirable –– Continued access to –– Continued access to European aviation is likely to be for both UK and EU the liberalised Single the UK and its internal Economic Area dictated by agreements operators; preserves Aviation Market based market based on Reg. in other areas, in full market access. on Reg. 1008 / 2008 1008 / 2008 (all nine (e.g. Norway) line with the EU’s (all nine freedoms freedoms available). –– EEA EFTA Member negotiating position i.e. available). States adopt majority –– EU non-scheduled negotiations are to be of “EEA relevant” –– UK non-scheduled commercial operators conducted as “a single EU law without commercial operators treated the same as package”: “individual having any influence treated like Community UK operators. items cannot be settled over the legislative operators with full access. separately” – no sector- process (creates by-sector participation sovereignty issues). in the Single Market. –– Contrary to the UK negotiating position: UK would have to keep all four “freedoms” without any restrictions, including free movement of persons. Negotiate a –– UK-EU bilateral aviation –– Good option for –– Flights to and from –– Flights to and from UK-EU bilateral agreement will likely securing 1st to 7th the UK: Swiss-style the UK: Swiss-style aviation be negotiated as part freedom rights, bilateral covers 3rd and bilateral covers 3rd and agreement of a larger package; but notable lack of 4th freedoms. 4th freedoms. standalone agreement “cabotage” rights (i.e. (e.g. Switzerland) –– Flights within the EU: –– Flights within the UK: is unlikely. 8th and 9th freedoms). Swiss-style bilateral Swiss-style bilateral –– Aviation regulated by –– Applies aviation acquis covers 5th and 7th does not cover 8th one of seven inter- interpreted in line freedoms. or 9th “cabotage” linked bilaterals, most with CJEU decisions freedoms – UK unlikely –– Flights within an EU likely including free delivered prior to to grant rights for Member State: Swiss- movement of persons the adoption of the commercial non- style bilateral does - contrary to the UK agreement. scheduled flights not cover 8th or 9th negotiating position. without reciprocity. “cabotage” freedoms. –– Swiss-style bilateral allows for separate regulation and no CJEU oversight.
Section 2 Figure 1 cont. Access to routes Possible models Likelihood Implications Impact on UK operators Impact on other EU operators Join the –– Contrary to the aims –– Supported by the industry. –– Flights to and from the –– Flights to and from the UK: European of Brexit – allows for a UK: ECAA Agreement ECAA Agreement covers –– Viable option; UK Common gradual grant of market covers 3rd and 4th 3rd and 4th freedoms from already applies full Aviation Area access in parallel with freedoms from the the onset. EU aviation acquis and increasing regulatory onset. could potentially be –– EU carriers able to operate (e.g. Serbia) convergence; requires fast-tracked to 3rd –– Flights within the EU: between the UK and any acceptance of EU stage under the ECAA intra-EU 5th freedom airport in the EU (including aviation law across all Agreement (i.e. full rights available in to / from other EU Member areas (NB importance access to the Single the 2nd stage and 7th States). of ‘sovereignty’ issues in Aviation Market) – freedom rights available Brexit debate). –– Flights within UK: ECAA effectively maintaining at the final stage. Agreement covers 8th or –– No automatic right to status quo. –– Flights within an EU 9th “cabotage” freedoms, join, other EU Member –– Securing 7th freedom Member State: full but only at the final stage. States may oppose UK’s and / or “cabotage” rights market access (including joining. will be challenging. “cabotage”) and right of –– ECAA generally aimed establishment only at the –– UK would have no at States increasing (not final stage. ability to shape EU decreasing) the level of legislation it is required association with the EU. to adopt. –– ECAA Agreement entered into force on 1 December 2017. Revert to / –– Simple fall back –– Depends on whether –– Flights to and from the –– Flights to and from the renegotiate option that can be previous bilateral UK: existing bilateral UK: existing bilateral bilateral almost immediately agreements have been agreements likely agreements likely provide Air Service implemented, but not suspended or revoked. provide sufficient sufficient basis for 3rd and Agreements all existing bilateral basis for 3rd and 4th 4th freedoms. –– Stable framework agreements may be freedoms. providing legal certainty –– Flights within the revived. for the continuation of –– Flights within the UK: existing bilateral –– Counterparties air services. EU: existing bilateral agreements do not cover may bargain for the agreements unlikely to 8th or 9th freedoms – –– Most existing bilateral exchange of 5th, 7th or exchange 5th and 7th UK unlikely to grant agreements are likely 9th freedom rights. freedoms. “cabotage” rights for to contain restrictions commercial non-scheduled –– Reversion is unlikely on designation, routes, –– Flights within the flights without reciprocity. scenario given the capacity, frequency and EU: existing bilateral regression from the pricing – a significant agreements do not liberalised regime step back from current exchange 8th and 9th currently in force liberalised regime. freedoms. (but not impossible –– UK-US Bermuda if no deal is put in II Agreement is place), success of particularly restrictive, renegotiation is providing for single uncertain. designation per route on most transatlantic routes, and restricted services to London Heathrow to two US and two UK airlines and limited 5th freedom services.
17 Figure 1 cont. Access to routes Possible models Likelihood Implications Impact on UK Operators Impact on other EU operators Negotiate –– UK-EU bilateral aviation –– The suitability of –– Flights to and from the –– Flights to and from the completely agreement will likely this arrangement is UK: exchange of 3rd UK: existing bilateral new bilateral(s) be negotiated as part entirely dependent and 4th freedoms is agreements likely provide with the EU and of a larger package; on what rights can be standard practice. sufficient basis for 3rd and / or individual standalone agreement negotiated, and with 4th freedoms. –– Flights within the EU: Member States is unlikely. how many States. exchange of 5th and –– Flights within the –– Likelihood wholly –– EU Member States 7th freedoms could UK: existing bilateral dependent upon would probably be be possible under agreements do not cover willingness of EU precluded from a comprehensive 8th or 9th freedoms – UK Member States and negotiating directly with agreement such as unlikely to grant “cabotage” third countries to the UK whilst the EU’s the EU-US Open Skies rights for commercial non- enter into new bilateral current Brexit mandate Agreement. scheduled flights without agreements. remains in force. reciprocity. –– Flights within the –– European Commission –– Negotiation is not EU: existing bilateral could be granted a a quick process. agreements do not mandate to negotiate exchange 8th and on behalf of the EU, 9th freedoms. precluding separate agreements with individual Member States. –– UK may be prevented from renegotiating agreements prior to formal exit from the EU making it more difficult to implement new agreement prior to exit.
Section 2 6. Ownership and control State, but would still not be entitled to be issued an EU operating licence if it is not The ownership and control rules are majority owned and effectively controlled discussed in detail in Annex 3 (Ownership by Member States and / or nationals and control) below. These apply to of Member States. In the case of a UK ‘Community air carriers’ i.e. in the business business aircraft operator which is aviation context an EU business aircraft owned and controlled by EU nationals operator which is providing commercial air at present, its continuing status in the transport services. The principal place of UK would depend on UK rules going business of a ‘community air carrier’ must forwards, which some commentators are be the Member State which granted that suggesting may be more liberal than is carrier its Air Operator Certificate (“AOC”). currently the case under Regulation 1008 Further, one of the criteria for being a / 2008. ‘Community air carrier’ (and holding an EU operating licence) is that, under Regulation Conversely, it follows that an EU business (EC) No 1008 / 2008 (“Regulation 1008 / aircraft operator which is majority owned 2008”),2 Member States and / or nationals and effectively controlled by UK nationals of Member States must (i) own more could lose its status as a ‘Community air than 50% of the carrier and (ii) effectively carrier’ under Regulation 1008 / 2008. control it. The principal disadvantage of losing status Following a scenario where the UK leaves as a ‘Community air carrier’ is losing the EU with no new agreed arrangements access to the liberalised commercial air being in place, a UK business aircraft transport market in the EU, as discussed operator will not be entitled to remain or in detail in Annex 2 (Traffic rights). become a ‘Community air carrier’, as its principal place of business will be in the UK (and therefore outside the EU) and its AOC will have been issued by a country which is not an EU Member State. That operator could endeavour to set up a principal place of business in the EU, and obtain an AOC from the relevant Member 2 Regulation (EC) No 1008 / 2008 of the European Parliament and of the Council of 24 September 2008 on common rules for the operation of air services in the Community (Recast) (OJ L 293, 31.10.2008, p. 3)
19 7. VAT / Customs duty 8. European Aviation Safety Agency (EASA) It is current UK Government policy that the UK will be leaving the EU Customs When the UK ceases to be a Member State Union. In summary this will have the of the EU, absent a special arrangement, following consequences in relation to it will no longer be a member of EASA. To VAT and customs duty as applying to what extent UK operators of UK-registered business aviation: aircraft would be affected will largely depend on the UK’s membership of or I. The rules in relation to VAT / Customs relationship with EASA. duty above will continue to apply in the UK (and in The Isle of Man) post- EASA is discussed in detail in Annex 5 Brexit, at least during an interim period (European Aviation Safety Agency). pending any amendment. 9. Other II. However, these rules would apply to a In this report we shall also discuss the standalone separate UK customs zone. impact of Brexit on: III. The interpretation of and development i. Air traffic management and of these rules would no longer be EUROCONTROL – see Annex 6. subject to the jurisdiction of the Court of Justice of the European Union (the ii. The Cape Town Convention – see “CJEU”). The applicability of pre-Brexit Annex 7. CJEU judgments would be a matter for iii. Other relevant aviation law – see the UK legislature / courts. Annex 8. IV. Going forwards, it would be open to the UK to amend the rules or adopt new rules. V. An importation of a business aircraft through the UK / Isle of Man would not therefore automatically provide “free circulation” in the remainder of the EU – without a form of agreement being in place between the UK and the EU to allow for this. VI. The temporary admission rules applicable in the EU will in principle apply to UK registered business aircraft – as these will no longer be EU registered aircraft. Again, this is provided that there is no agreement in place between the UK and the EU providing for an alternative. The current applicable VAT / Customs duty regime and the possible impact to Brexit is discussed in detail in Annex 4 (Customs duties / VAT) below.
Section 2 Figure 1 Access to routes Possible models Ownership and control rules Customs duties / VAT European Aviation Safety Agency Join the European –– The EEA Agreement –– EEA EFTA States are not part of –– Member of EASA’s Management Economic Area incorporates Reg. 1008 / the EU Customs Union and EEA Board without voting rights. 2008 and preserves current is not a customs union. (e.g. Norway) –– “Loss of democratic control”: UK ownership and control rules. –– EEA Agreement establishes a applying EU safety regulations –– Norway, Iceland and free trade area: no tariffs on notwithstanding lack of control Liechtenstein considered as trade between the Contracting over the legislative process. EU Member States and their Parties (except for agricultural nationals as nationals of EU and fishery products). Member States for the purpose –– Ability to negotiate free trade of Reg. 1008 / 2008. deals with non-EU countries. –– Complicated “rules of origin” apply. Negotiate a UK-EU –– The EU-Switzerland Agreement –– Switzerland is not part of the –– Member of EASA’s Management bilateral aviation incorporates Reg. 1008 / EU Customs Union. Board without voting rights; agreement 2008 and preserves current –– The EFTA Agreement –– UK would have to apply EU ownership and control rules. (e.g. Switzerland) supplemented by a series safety regulations without –– Switzerland treated as an EU of bilateral agreements the ability to influence their Member State and its nationals establishes a free trade area contents and to vote on the as nationals of EU Member in certain goods and services proposed measures. States for the purpose of Reg. (i.e. limited access to the single 1008 / 2008. market). Join the European –– ECAA State Parties have to –– ECAA States not part of the EU –– ECAA State Parties in the 1st Common Aviation adopt the EU aviation acquis, Customs Union. transitional period may sit on Area including Reg. 1008 / 2008. the Management Board as non- –– ECAA Agreement does not voting observers. (e.g. Serbia) –– Full implementation of the contain provisions on customs air carrier licensing rules duties and VAT. –– As they progress to the 2nd and access to air routes in transitional period, the ECAA –– In preparation for their accession suspension until the end of the Joint Committee determines to the EU, ECAA State Parties 2nd transitional period. their precise status and align their legislation with the conditions for participation. –– National ownership and acquis. control rules apply until full implementation of the ECAA Agreement.
21 Figure 1 cont. Access to routes Possible models Ownership and control rules Customs duties / VAT European Aviation Safety Agency Revert to / –– Almost all bilaterals impose –– Bilateral Air Service Agreements –– Bilaterals do not usually renegotiate “national” ownership and may contain separate provisions contain provisions on bilateral Air Service control requirements. on customs duties (see for EASA membership. Agreements example Article 9 of the original –– UK would have to adopt its own –– UK would have to renegotiate UK-US 1977 Bermuda II rules on ownership and control. its participation in EASA. Agreement). –– UK commercial non-scheduled –– Possible cooperation on operators would have to the basis of a Working comply with nationality and Arrangement, separate ownership requirements from the bilateral. under the relevant bilaterals, which could pose a challenge to non-UK majority owned and effectively controlled air carriers. –– Scheduled UK operators would no longer benefit from EU designation under bilateral agreements of other EU Member States; the extent to which this would affect non- scheduled operators would need to be analysed on a case- by-case basis.
23 Section 3 Brexit: Impact of six possible models
Section 3 In this section of the report we will examine and analyse the impact of six possible models that may be applicable to the UK for aviation generally, and for business aviation, following the UK leaving the EU. Background material to the discussion in will need to be ready by October 2018 for oversight of the process. The Withdrawal this section of the report is contained in there to be sufficient time for ratification Agreement will need to be ratified by the the annexes. before the end of the two-year Article UK Parliament. 50 deadline. The UK Government has 1. Model 1: Maintain status quo repeatedly made clear that it wants the On the EU side, ratification will require full outline of a trade deal to be agreed an enhanced qualified majority among 1.1. Commentary in order to turn the transition phase into the remaining Member States. This The first possibility is maintenance of an implementation period that sees the means that no single Member State the existing relationship between the UK’s future trade relationship (based could veto the deal, but that it would UK and the EU in respect of aviation on a “deep and special partnership”) need to reach a critical level of support. generally, including business aviation, take shape rapidly after March 2019. (Specifically, it would need to be on a permanent basis following the UK’s The EU takes a different view: Mr Tusk agreed by 20 out of 27 Member States, departure from the EU. This assumes in his suggested guidelines to EU States representing 65 per cent of the EU that agreement is reached between the spoke only of holding “preliminary and population). In some cases approval by UK and the EU on the same basis as the preparatory” discussions on the future the Member States requires approval existing rules by the deadline for the UK’s relationship. If the EU gets its way and of regional parliaments as well as exit from the EU (whether 30 March 2019 forces the UK to negotiate a classic national parliaments: the deal will need or later, if the Article 50 negotiations are Free Trade Agreement from scratch to be ratified by a total of 38 European extended). It should be noted that Article it could easily take five to eight years, parliaments, each effectively having 50 only requires that after the end of the according to experts. The EU-Canada a veto. The European Parliament will two-year negotiation period there will be FTA runs for 2,000 pages and took 10 also need to approve the deal. This will an agreement on “arrangements for [the years to negotiate. The answer will in require a simple majority of its 751 MEPs departing Member State’s] withdrawal, part depend on whether the UK seeks (MEPs from the UK would probably be taking account of the framework for a high alignment model – in which the allowed to vote, because at this stage the its future relationship with the Union”. UK agrees to stay very close to EU rules UK would still formally be part of the EU). It is therefore possible for any deal and regulations – or opts to embrace maintaining (or, more accurately in such We do not discuss the impact on an independent trade policy for the UK. context, reverting to) the status quo to be business aviation operations in Europe As mentioned elsewhere in this report, agreed and implemented later, possibly of maintaining the status quo as clearly the EU’s approach (reiterated in the much later, with no deal or a transitional the current regime would continue to Joint Report of 8 December 2017) is that arrangement in place in the interim period. be applicable post-Brexit. Extensive “nothing is agreed until everything is relevant aviation legislation would clearly agreed” so it is unlikely that there will be The UK-EU Withdrawal Agreement (or need to be amended or supplemented: a special deal for the aviation sector, let however it will be described) will need to take but one example, the reference alone the business aviation sector, in the to set out the arrangements in three in the ownership and control clause of absence of an overarching trade deal – the distinct areas: (i) an exit deal – setting Regulation 1008 / 2008 would need to be UK will not be permitted to “cherry pick”. out the terms of the UK’s withdrawal, amended or supplemented so as to refer (ii) a new deal setting out an agreement The final agreement will need to be to nationals of a Member State and / or on the future UK-EU relationship or agreed by both parties: the EU side and the UK. some framework for that relationship, the UK as departing Member State. The and (iii) the rules for a transition / However, it should be noted that it major policies set out in the Withdrawal implementation period, if any. The may be the case that the status quo is Agreement will be directly implemented European Council summit in Brussels on maintained between the EU and the into domestic law in the UK by primary 22-23 March 2018 will assess what kind of UK in respect of the liberalised aviation legislation – not by secondary legislation trade deal can be expected. A final treaty regime now largely formulated in under the EU (Withdrawal) Bill. This will on withdrawal and transition (and trade) Regulation 1008 / 2008 (licensing and allow for Parliamentary scrutiny and market access) but that the UK leaves
25 the Customs Union and / or EASA. We accession by further parties and provides 2.2. Ownership and control discuss in detail below the implications a procedure for this in the agreement The EEA Agreement incorporates of the UK leaving the Customs Union itself. Regulation 1008 / 2008 and therefore and / or EASA (please see Model 5: Revert The implications of this external preserves the current ownership and to previously agreed bilateral ASAs (no dimension for UK business aircraft control rules. Going forwards post-Brexit, “aviation deal”) below). It should be operators are discussed further below if the UK were to join the EEA that would recalled that it is current UK Government in Model 5: Revert to previously agreed mean that the UK will be treated as an policy that the UK aims to maintain bilateral ASAs (no “aviation deal”) below. EU Member State and its nationals as full liberalised market access to the UK nationals of EU Member States for the Single Aviation Market when the UK There is a difficult timing issue for the purpose of Reg. 1008 / 2008. This would leaves the EU but will leave the Customs UK on all arrangements with third therefore mean that (a) a UK operator Union. parties which is that according to the would continue to be entitled to the 1.2. External dimension EU the UK may not legally enter into status of a “Community air carrier”, negotiations with third counties until regardless of whether it is owned and There is also, however, an external after it has left the EU. effectively controlled by UK or EEA dimension. interests, and (b) an EEA operator that 2. Model 2: Join the European is owned and controlled by UK interests First, separate arrangements will need to Economic Area would continue to be entitled to be a be agreed between the UK and the EEA The second option for the UK to follow “Community air carrier”. States (Norway, Iceland and Liechtenstein) as the UK will no longer be automatically would be to join the European Economic 2.3. VAT / Customs duties party to the EEA Agreement (or else the Area (EEA), thus following the model of old bilaterals with these States may be Norway, Iceland and Liechtenstein. The EEA is not a customs union and the revived and applied). EEA EFTA States are not part of the EU 2.1. Traffic rights Customs Union. As described in Annex Secondly, a separate arrangement will The main advantage of this model is 4 (Customs duties / VAT), the UK would need to be put in place with Switzerland that the UK would continue to have full therefore form its own separate customs as the UK will no longer be party to the access to the liberalised Single Aviation zone and an aircraft imported through EU – Switzerland Agreement (or else the Market, including all 9 freedoms of the the Isle of Man/UK would not (without old UK- Switzerland bilateral may be air (as to which see Annex 2 (Traffic any further agreement between the revived and applied). rights), through the application of UK and the EU) have “free circulation” Regulation 1008 / 2008. status within the EU. Conversely, an Thirdly, the same applies to the aircraft imported into the EU for “free relationship between the UK and the six This would mean that the existing circulation” in the EU would not have parties to the ECAA Agreement (Albania, regime will continue to apply, such that that status upon entry into the UK. Bosnia & Herzegovina, Macedonia, UK business aircraft operators would A UK registered aircraft would have Montenegro, Serbia and Kosovo). be treated the same as EU operators, “foreign carrier” status for the purposes and would continue to have the same of the EU temporary admission regime, Fourthly, as the UK will no longer be rights. Since all nine freedoms of the so the EU temporary admission rules an EU Member State it will no longer air would apply a UK charter operator would need to be analysed in relation be a party to the EU-US Open Skies would therefore continue to be able to fly to any UK registered aircraft entering Agreement, nor will it be a party to a 7th freedom route (for example Paris the EU with no intention to effect a full the other six agreements that the EU to Rome) as well as 9th freedom routes importation for free circulation within has reached with other countries to (for example Paris to Nice). Conversely, the EU. (It should be recalled that it is which the UK is a party by virtue of its EU non-scheduled commercial operators open to a “foreign carrier” to effect a full membership of the EU (Canada, Georgia, would continue to have the right to importation into the EU). Conversely, an Israel, Jordan, Moldova and Morocco). It continue to fly on 7th freedom routes EU registered aircraft entering the UK would be open to the UK to join these into the UK (e.g. an Italian business could do so under the UK’s temporary agreements as a non-EU State (similarly aircraft operator flying for charter from admission regime rather than being to Norway which has acceded to the Paris to London Luton) or out of the UK, fully imported into the UK, pursuant to EU-US Open Skies Agreement), with the as well as 9th freedom routes within the whatever applicable rules the UK will consent, of course, of the other parties. UK (e.g. a Maltese charter operator flying adopt post-Brexit. We note in this regard The US-EU Open Skies contemplates the from Farnborough to Edinburgh). that, as described in Annex 4 (Customs
Section 3 duties / VAT), when the UK leaves the 2.6. Commentary The option of joining the EEA appears to EU it is the UK Government’s intention have already been discounted by the UK The EEA envisages a high level of that the existing rules will be codified Government, as set out in Prime Minister integration between the Member States, in domestic UK legislation without Theresa May’s speech in Florence on 22 as the principal objective of the EEA amendment, but they would be subject to September 2017. In this speech Prime Agreement is to promote the continuous amendment and repeal going forwards. Minister May declared: “One way of and balanced strengthening of trade and approaching this question [of the future 2.4. EASA economic relations between the Parties, UK-EU relationship] is to put forward a with a view to creating a homogeneous As a member state of the EEA the UK stark and unimaginative choice between economic zone. would remain a member of EASA. two models: either something based on However, the EEA States are members The EEA Agreement does not provide European Economic Area membership; or of EASA’s Management Board without for gradual liberalisation, as envisaged a traditional Free Trade Agreement, such voting rights: it would therefore be by the ECAA or the EMAA Agreements, as that the EU has recently negotiated necessary for the UK to apply EU safety which means that if any part of EU with Canada. I don’t believe either of regulations notwithstanding a lack of aviation legislation required under these options would be best for the UK or control over the legislative process. It Annex XIII to the Agreement is not best for the European Union.” may be unpalatable for the UK to suffer adopted, no benefit under the Agreement By way of summary, the impact of the such a “loss of democratic control”. is obtained. In other words, it would be UK joining the EEA on the four principal necessary to apply EU aviation legislation 2.5. External dimension areas that we have been analysing is: in full. As an EEA Member the UK would For the UK to join the European be party to the ECAA Agreement Economic Area, it would have to apply but, because it would no longer be not only EU aviation legislation, but an EU Member State, the UK would most other EU legislation, including need to enter into arrangements that relating to the free movement of with Switzerland and with the seven goods, persons, services and capital, countries with which the UK’s current without having a say on the adoption of aviation relationship is governed by an this legislation. About 11,500 pieces of EU agreement (USA, Canada, Georgia, “EEA relevant” EU legislation have been Israel, Jordan, Moldova and Morocco). adopted by the EEA, including 260+ in Absent any such agreement the “no deal” the area of air transport. This may not scenario would apply to the relationship be politically acceptable in the UK given between the UK and these states, as that three of the objectives of withdrawal discussed further in Model 5: Revert from the EU and “red lines” are greater to previously agreed bilateral ASAs (no control over immigration, disapplying the “aviation deal”). jurisdiction of the CJEU and recovery of sovereign powers more generally.
27 Model 2 Join the European Economic Area UK operators EU operators Comment Traffic rights –– Continued access to the –– Continued access to the UK and –– Highly desirable for both UK liberalised Single Aviation its internal market based on and EU operators; preserves full Market based on Reg. 1008 Reg. 1008 / 2008 (all 9 freedoms market access. / 2008 (all nine freedoms available). –– EEA EFTA Member States adopt available). –– EU non-scheduled commercial majority of “EEA relevant” –– UK non-scheduled commercial operators treated the same as UK EU law without having any operators treated like Community operators. influence over the legislative operators with full access. process (creates sovereignty issues). Ownership and –– The EEA Agreement –– The EEA Agreement control incorporates Reg. 1008 / incorporates Reg. 1008 / 2008 and preserves current 2008 and preserves current ownership and control rules. ownership and control rules. –– UK treated as an EU Member –– Community air carriers treated State and its nationals as the same as UK operators. nationals of EU Member States for the purpose of Reg. 1008 / 2008. VAT / Customs rules –– EEA EFTA States are not part –– UK outside of the EU Customs of the EU Customs Union and Union; but part of the free trade EEA is not a customs union. area – no tariffs between the Contracting Parties. –– EEA Agreement establishes a free trade area: no tariffs on trade between the Contracting Parties (except for agricultural and fishery products). –– Ability to negotiate free trade deals with non-EU countries. –– Complicated “rules of origin” apply. EASA –– Member of EASA’s –– EU Member States are members Management Board without of the EASA Management Board voting rights. with full voting rights. –– “Loss of democratic control”: UK applying EU safety regulations notwithstanding lack of control over the legislative process.
Section 3 3. Model 3: Negotiate a UK-EU bilateral regardless of whether it is owned and regularise these relationships post-Brexit aviation agreement on the Swiss model controlled by UK or EU / EEA interests, are discussed further in Model 5 below in and (b) an EU / EEA operator that is relation to the “no deal” scenario. The 1999 Air Transport Agreement owned and controlled by UK interests between Switzerland and the EU could 3.6. Commentary would continue to be entitled to retain provide a model to be adopted by the UK. the status of a “Community air carrier”. It is questionable whether a Swiss- 3.1. Traffic rights style air transport agreement with the 3.3. VAT / Customs duties EU is achievable. Switzerland entered The benefit of this model is that it would Switzerland is not part of the EU into seven agreements each covering allow UK operators to enjoy access to the Customs Union. Following the Swiss a specific sector (including freedom EU internal air transport market without model would entail the UK leaving the of movement of people, which has requiring a high level of integration Customs Union (as noted above this is subsequently been rejected in a Swiss with the EU (though the EU-Switzerland consistent with current UK Government referendum in February 2014), and all Agreement does apply the whole of the policy), with the consequences, described of which are to be terminated if anyone EU aviation acquis to Switzerland, to be above in the EEA context. is breached (the so-called “guillotine interpreted in line with CJEU judgments provision”). It seems relatively likely prior to 1999). 3.4. EASA that a UK-EU air transport agreement However, in the case of Switzerland, Switzerland is within the remit of EASA. would not be negotiated on its own, but 8th and 9th freedoms of the air are not However, Switzerland is a member of as part of a larger package: as is well exchanged (and 5th and 7th freedom EASA’s Management Board without known, the negotiation position of the rights have only been exchanged since voting rights. With the same status it EU is that nothing is to be agreed until 2004). It is not therefore automatically would be necessary for the UK to apply everything is agreed, i.e. aviation will not permitted for a Swiss business aircraft EU safety regulations notwithstanding be the subject of a separate standalone operator to fly on a commercial route a lack of control over the legislative agreement but will be included in the between (for example) Milan and Rome, process. It may be unpalatable for the overall all-encompassing ‘new deal’ UK- nor is it permitted for an EU business UK to suffer such a “loss of democratic EU package. This could ultimately have aircraft operator to fly commercially control”. We understand that it is the similar disadvantages as the EEA model. between (for example) Zurich and UK Government’s intention to secure The impact on the principal areas that Geneva. A similar restriction could full membership in EASA including we have been analysing is: therefore apply post-Brexit to UK voting rights (not provided for in the operators (in respect of any route within EU-Swiss Agreement) so that it has a say an EU Member State) and EU operators (in in the adoption of technical and safety respect of any route within the UK). This regulations, not least as it takes part in would be a considerable restriction for the the manufacture of Airbus aircraft and UK operator in particular. component parts. Of course 8th and 9th freedom rights could 3.5. External dimension be exchanged on a reciprocal basis in a UK- Assuming that the Swiss-style bilateral EU Swiss-style agreement, but trade-offs in will be between the UK and the EU the other areas would seem likely. UK would need to negotiate and arrange 3.2. Ownership and control its relationships with the EEA States, Switzerland, the EFTA states and the The EU-Switzerland aviation bilateral seven countries with which the UK’s incorporates Regulation 1008 / 2008 current aviation relationship is governed and therefore preserves the current by an EU agreement (USA, Canada, ownership and control rules. Going Georgia, Israel, Jordan, Moldova and forwards post-Brexit, if the UK were to Morocco). As discussed in this report, negotiate a similar bilateral with the EU these are all countries with which the that would therefore mean that (a) a UK UK’s current aviation relationship is operator would continue to be entitled to pursuant to agreements reached by the status of a “Community air carrier”, the EU. The consequences of failing to
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