The US and the UK have executed a Memorandum of Consultations (MOC) and initialed an Open Skies air transport agreement that is largely patterned after the model US Open Skies agreement, but contains some unique provisions on airline ownership and control. Carriers and trade associations on both sides hailed the accord. Bridging these differences keeps the vibrant, changing, and lucrative US-UK transatlantic market free to meet burgeoning demand for air travel post-Brexit.
In addition to keeping the US-UK market open, the new agreement grandfathers European ownership and control of UK airlines—providing needed certainty for carriers that are increasingly multi-national. The MOC also acknowledges the broad authority and “long-established practice” of the US Department of Transportation (DOT) to waive ownership and control standards for limited purposes, when all countries involved are Open Skies partners. The new agreement, along with the recently announced UK-Canada Open Skies agreement, permits the UK to focus on the more thorny issue of reaching an agreement with the EU.
With respect to an UK-EU agreement, non-UK carrier rights within the UK and UK carrier rights intra-Europe remain up in the air. Absent a new agreement in just a few months’ time, for example, Ryanair may find itself unable to pick up British passengers and go beyond to EU destinations, nor able to serve Scottish and Northern Ireland cities from the UK. In like manner, Easyjet may have a hard time continuing to participate in intra-EU markets. To hedge their bets, Ryanair is seeking to establish an air operator’s certificate (AOC) in the UK and Easyjet is seeking a comparable AOC in Austria, while transferring UK pilot licenses to Austria. Skeptics contend that concerns over competition and air service will soon resolve apparent differences, but time is quickly drawing short.
In the meantime, no agreement has been reached as to whether the UK will continue to lend its considerable leadership and expertise to the European Aviation Safety Agency (EASA), and whether future EASA safety determination will bind the UK. Current certificates, licenses, and designations are likely to be grandfathered and given reciprocal recognition, but new rulemaking, certification, and enforcement remain highly uncertain, throwing further confusion toward an already murky situation.
As a result of Brexit, the UK must end its participation in the EU’s multilateral air transportation agreements, including the US-EU Open Skies Agreement, which allows for liberal transatlantic travel between the US, UK, and EU. The new agreement comes after months of negotiations, including offers by the US for a more limited Open Skies deal than the current US-EU Open Skies Agreement. The new agreement generally follows the model US Open Skies agreement. It will need approval from both governments and the US delegation confirmed it will work with the UK and EU to identify an appropriate mechanism to continue the application of the US-EU Open Skies Agreement to the UK during the Brexit implementation period.
The significance of this agreement is not what it provides, but what it avoids. First, and most importantly, it prevents a reversion to the 1977 Bermuda II agreement, which limited the number of airlines, flights, and capacity between the countries. Under the new agreement, US and UK airlines will continue to determine the extent of their services between the two countries, thus letting the market determine what service is needed. Importantly, US airlines will continue to be able to use the UK as a gateway hub into Europe and cargo carriers will continue to enjoy 7th freedom rights to other countries. Absent a new US-UK agreement, presumably both parties have turned the US-French renunciation example, and resort to a system of “comity and reciprocity,” with no growth or new entry permitted into the market.
Second, the new agreement grandfathers foreign ownership and control of UK airlines currently providing transatlantic service, meaning that UK airlines will not have to restructure their current ownership to continue to qualify for transatlantic travel. The model US Open Skies agreement typically requires “substantial ownership and effective control” of an airline by citizens of that airline’s country. However, under the US-EU Open Skies Agreement any citizen of the EU, Iceland, or Norway may own and control airlines throughout those countries.
The new agreement will give existing UK airlines permission to be substantially owned by European Economic Area interests. However, future changes in ownership and control cannot result in significant third country ownership and third country control cannot increase substantially, without DOT review and approval. The new agreement will also require UK ownership and control for new UK airlines seeking to enter the transatlantic market. However, the MOC recognizes that the DOT has broad authority and a long-established practice of granting waivers from the ownership and control standards with respect to foreign carriers for a limited purpose, particularly where the US has liberal and good aviation relationships with the carrier’s home country (e.g., UK) and the country of the carrier’s owner (e.g., an EU Member State) and where US carriers benefit from those relationships. UK carriers (and existing grandfathered carriers with substantial changes) may soon be applying for such waivers from DOT.
Third, the new agreement helps to preserve key airline alliances, which often depend on antitrust immunity (ATI) to provide incentives to maximize full cooperation and consumer benefits. The MOC explicitly recognizes that the agreement will continue to allow airlines to seek DOT approval for ATI to cooperate on scheduling, pricing, and other areas. This is also critical to existing transatlantic joint ventures and alliances that are premised on the US-EU Open Skies Agreement.
Fourth, the MOC and new agreement make clear that both countries will remain vigilant about ensuring access to airport slots, further competition, and new entry in the important transatlantic market. The MOC explains that the UK’s future strategy will include consultation with industry on the allocation of new airport capacity, as well as compliance with existing IATA Worldwide Slot Guidelines and other arrangements. With many low cost and value carriers adding capacity in this market, the parties wisely reached an agreement that keeps the market open and free.
While the new US-UK agreement and the new UK-Canada agreements are welcome developments, the industry will continue to closely watch the air transportation negotiations between the UK and EU. While the UK and EU have agreed to a non-binding declaration to ensure connectivity for airlines with Europe, the details have yet to be addressed. Absent an agreement in the next few months by the EU to an accord that ensures flexibility to carriers and provides consumers with choice and competition, airlines and consumers face significant disruptions in air service. And, carriers may delay or forego much needed new or expanded services to meet increasing customer demand.
The UK and EU negotiations also have implications for safety approvals. Since its inception, EASA has assumed most safety-related rulemaking and standards functions to standardize airline and equipment certifications across Europe. Brexit will result in the UK reassuming these functions for its carriers, a role that the UK CAA no doubt is prepared to assume. However, it remains unclear whether the two safety authorities will enter into a bilateral aviation safety agreement to recognize the certifications of other European agencies.
Aviation industry stakeholders and those looking to participate further in the industry, including investors, should closely follow the progress of the UK-EU agreement given this significant achievement made between the US and UK.