UK to relax aviation-ownership rules after Brexit, but outcome uncertain

UK airlines could be controlled by foreign investors after Brexit, under government plans to scrap EU rules that restrict the ownership and control of carriers by nationality.

The step will enable airlines to establish subsidiaries in the UK, and have them designated as UK carriers, subject only to restrictions of technical and financial fitness.

The change makes the UK one of the first countries in the world to drop nationality restrictions.

But how far the move presents investment opportunities will be constrained by how the EU in particular, and other states respond when signing trade agreements. Bilateral air-services agreements, which determine routes, frequently contain ownership and control provisions that might negate any step by the UK to liberalize ownership.

The change comes in a draft statutory instrument under the EU (Withdrawal) Act, the legislation designed to prepare the UK’s statute book for Brexit.

Currently, an airline must be at least 50-percent owned and controlled by EU nationals to qualify as a “community carrier,” and have unrestricted rights to fly any route within the bloc. The bloc has warned airlines that they may need to restructure their shareholdings if they want to keep their operating licenses in the event of a no-deal Brexit in March 2019.

Options

The UK had other options. It could have chosen to replicate the status quo and stipulate that UK-carrier status would be open to any airline majority-owned by a combination of UK and nationals from one of the EU’s 27 member states.

Alternatively, it could have introduced its own ownership requirements, and limited the award of licenses to airlines whose shareholder base is mostly British.

The UK could then have chosen to trade those restrictions away in bilateral negotiations. But this would potentially have prevented many major airlines from continuing to serve UK internal routes — such as London to Edinburgh — through a UK subsidiary after Brexit.

The decision to scrap the requirements entirely reflects a view in the UK Civil Aviation Authority that national ownership requirements are an “antiquated” hangover of the early days of aviation that aren’t seen in any other major industry.

A revamp in the rules could bring “much needed consolidation” to the sector, said Andrew Haines, the CAA’s then-chief executive, in a speech in December 2016.

“In a post-Brexit environment, relaxing the ownership arrangements UK-registered airlines currently have to comply, could present an opportunity to attract new equity from non-EU investors, which could potentially improve choice and competitiveness for consumers,” he said.

Routes

However, how far the changes revolutionize the sector will heavily depend on how the EU and other states respond.

The change will open UK airlines serving purely domestic routes to unlimited non-UK investment. That could mean, in theory, Qatari- or Chinese-owned airlines competing to fly between Manchester and Glasgow. But this isn’t a large market.

The government acknowledges that any Air Services Agreement governing routes between the UK and EU will likely continue to contain ownership and control provisions.

“Clauses in such agreements routinely specify that traffic rights under the agreement shall only be available to carriers meeting specific, but varying, ownership and control requirements,” says an explanatory memorandum published with the amendment to the law.

The same applies to other states that the UK seeks to strike aviation agreements with to replace EU agreements — such as the US or Israel.

At the same time, the UK’s dropping of nationality rules could encourage consolidation between UK and carriers in those countries.

How countries choose to respond to the UK’s move will reflect a balance between bringing tourism and inward investment by opening new and cheaper routes, against a wish to protect domestic airlines from competition.

The UK is seeking to be a trendsetter in international aviation, but the barriers to success remain in place: that is, flying rights are subject to international agreement, and in practice any decisions on ownership rules are political.