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UK Aviation after Brexit

Serving almost 76 million passengers in 2016, London Heathrow is Europe’s busiest airport. The decision by the UK government in October last year to support a third runway to be built by 2025 — after eight years of political squabbling — should pave the way for further growth.

But does it?

While a third runway might address the crucial capacity issue that is currently holding back the airport from serving more customers, the future of aviation in the country will also depend on, like almost all other aspects of the British economy and life, the terms of Brexit. And those are yet unknown.

International aviation is based on terms agreed between different countries in so-called air service agreements (ASAs).

In the early 2000s the European Court of Justice had ruled that any ASA between an EU member state and a third country needs to be open to airlines from all EU states. On that basis member states renegotiated around 340 bilateral ASAs in the past fifteen years to make sure they comply with the court ruling.

More and more often, the European Commission (EC) also took over as direct negotiator with countries outside the Union. Instead of leaving it to each member state to amend their respective bilateral ASAs, the EC negotiated new agreements with third countries that would cover all EU members. To date, the EC has negotiated new horizontal agreements with 41 countries, representing 670 bilateral agreements.

The implications for aviation in the UK in a Brexit-context are twofold: firstly, the country will need to come up with a plan to deal with those arrangements the EU has in place in the name of its member states. Most likely the UK will have to negotiate its own bilateral agreements with third countries currently covered under EU-wide horizontal agreements. And secondly, the UK will need to negotiate an ASA with the EU to address their future relationship in the skies.

Replacing the US-EU Open Skies agreement

One — crucial — example for an ASA negotiated by the EC in the name of EU member states is the Open Skies agreement with the United States. From the UK perspective this ASA, which came into effect in 2008, replaced the bilateral US-UK Bermuda II agreement, which had limited transatlantic competition from London Heathrow to just two US and two UK airlines.

It was the EU-US Open Skies agreement that opened up the market for competition as it exists today. Without Open Skies, disrupters like Virgin Atlantic would not challenge incumbents for routes to New York and other US destinations.

That’s why not replacing Open Skies, or doing so with an agreement inferior to the current arrangement, could have serious consequences for Heathrow as the dominating international airport in Europe.

Open skies

To find out how aviation experts expect this to play out Euromoney Institutional Investor Thought Leadership teamed up with Deloitte to survey more than 400 aviation experts globally.

Specifically, we wanted to know whether experts expect the UK to negotiate agreements that are, in essence, similar to the existing US-EU Open Skies agreement. We asked this question with regard to a future UK-US agreement, and to a UK-EU agreement.

The good news is: most of the respondents to our global survey think such agreements will come in the foreseeable future. Only 23% believe reaching agreement with the US will take longer than four years or not happen at all.

Less optimism about a deal with the EU

Interestingly, our survey panel — more than two thirds of which are C-level, VPs and senior directors — takes a somewhat more pessimistic view when it comes to a deal with the EU. 5% think the UK won’t be able to negotiate a deal with the Union at all (only 2% think so for the US), and 18% believe it will take longer than four years.

This expectation, that it will be harder to negotiate a deal with the EU than with the US, is confirmed even by those who generally think deals can be struck within the foreseeable future: Only 37% expect a deal with the EU to come within two years, versus 40% for a deal with the US. And, in line with this finding, 42% believe a deal with the EU will take between two and four years, but only 37% think so for the US. In short: Our panel thinks it will be easier and faster to get a deal with the US than with the EU.

If panellists are correct in their predictions, this could be bad news for Heathrow and the wider UK aviation industry. Europe is by far the most important destination for flights from the UK. According to the latest available data from the UK Civil Aviation Authority (for the rolling year ending Q1 2016), 61% of UK flights originate from or go to Europe. Only 9% of routes connect the island with North America.

In addition to the impact of Brexit, our report “Game Changer not Game Over” also looks at the challenges facing aviation and aviation finance in particular in light of upcoming international tax reform. The report can be downloaded for free from the Euromoney Thought Leadership website.

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