The UK government's stated priority to withdraw from the jurisdiction of the European Court of Justice is likely to hamper swift agreement on sector-specific post-Brexit arrangements with the EU.
Outlook and implications |
|
Risks | Policy instability; Regulatory burden |
Sectors or assets | Aviation |
Gatwick Airport in West Sussex, United Kingdom.
PA.30458798
On 14 July, the United Kingdom's largest low-budget airline, EasyJet, announced that it would establish a second headquarters in the Austrian capital Vienna to mitigate the currently high levels of uncertainty regarding the post-Brexit regulatory framework for the aviation industry. Airlines offering flights from the UK to the remaining 27 EU member states or flights within the EU between member states other than the UK are currently fully reliant on EU policies to conduct business. EasyJet is likely to be among the most exposed companies in the aviation sector as it currently only holds an air operator certificate (AOC) for the UK, which also regulates EasyJet flights across the EU, and with Switzerland. In addition, in order to provide flights between EU member states, at least 50.1% of a company’s shareholders must be based in the EU. Other companies with high exposure to the UK market, such as Ryanair, face similar challenges that could lead to the relocation of certain business operations, job losses in the UK, and whole-business restructuring in terms of ownership, finances, and operational systems. Most issues affecting the aviation sector are regulated through the EU Open Skies Agreement and other regulations overseen by the European Court of Justice (ECJ). Given that UK prime minister Theresa May has announced that she is aiming to withdraw the UK from the ECJ's jurisdiction, this presents significant threats to UK aviation.
Progress on industry-specific regulations unlikely before mid-2018
According to the UK’s Civil Aviation Authority, the country’s aviation sector is the world’s second largest with an annual turnover of around GBP65 billion (USD84 billion). Although only parts of that overall turnover are exposed to Brexit, it is highly probable that the UK government will see the aviation sector as a priority in ongoing talks with the EU. However, the first rounds of negotiations that were launched in June focus on EU citizens’ rights in the UK and vice versa, the UK’s final EU budget contributions, and the border between the UK region of Northern Ireland and the Republic of Ireland. Trade and industry-specific regulatory set-ups are unlikely to be discussed before the first quarter of 2018, prolonging current business uncertainty.
In addition, the UK faces an early challenge from the EU's reluctance to negotiate future relations with the UK on a sector-by-sector basis instead of aiming for a more comprehensive deal. Various EU officials and leaders of the remaining 27 member states have already stated that the UK should not expect major concessions that would favour one industry over another. Although the EU clearly wants to avoid a negotiation strategy that could trigger conflicts between its member states, there is also likely to be very limited support for the UK entering a large number of distinct contracts to manage different parts of its economy. Such an approach has caused difficulties in Swiss-EU bilateral relations and the Swiss government is considering options to reform the legislative links between the two entities as a result. In addition, even if the EU were eventually willing to accept prioritising certain industries, to limit economic damage on both sides, it is likely that the bloc would demand a reversal of the UK's stance on the ECJ. This would be a highly difficult proposition for the current UK government to sell to its domestic electorate.
Outlook and implications
Although a UK government policy reversal regarding the ECJ's status within the aviation sector would be very positive for the industry, such a move would create a broad array of further challenges. For instance, other sectors such as the automotive industry, financial markets, energy, or agriculture would seek similar deals, which could be challenging to achieve and hamper progress on overall future trade negotiations between the UK and the EU. Moreover, if the EU were to make it difficult for the UK to keep its aviation sector running successfully, there would be a high risk of the UK applying reciprocal national measures making it difficult for EU airlines to access the British market. However, it is likely that the balance of power would favour the 27 remaining member states, which have a much larger combined aviation market to offer than the UK.
Both the UK and the EU are likely to prefer UK membership of the European Common Aviation Area and close post-Brexit links in the aviation sector. It is likely that countries such as Ireland and Spain, which are particularly intertwined with the UK within the sector, will be more willing to grant the UK certain concessions than other EU members with weaker links in aviation or to the UK overall. Regardless of the outcome of Brexit talks, decisions such as the launch of a second EasyJet headquarters in Vienna indicate the overall uncertainty faced by the aviation industry. It is likely that disruption to investments and business expansion will remain elevated for at least the next one to two years.