It has been reported that talks between the United Kingdom (UK) and United States of America (US) on a post-Brexit bilateral air services agreement (ASA) have encountered difficulties due to the US requirement that UK airlines operating these routes are “substantially owned and effectively controlled” by UK entities (rather than EU entities, as is the case under current arrangements). This poses issues for UK airlines with foreign ownership.
In this blog post we explore the issues surrounding this requirement and also look at the solutions which the UK might explore.
International commercial aviation operates under a complex web of bilateral and multilateral ASAs under which a state must designate one or more airlines to operate any agreed international route(s).
On 30 March 2008 the EU/US open skies air transport agreement (EU-US Open Skies) entered into force, superseding the bilateral ASAs that individual European Union (EU) Member States had historically concluded with the US.
EU-US Open Skies is a highly liberal agreement that provides for removal of restrictions on route rights. This means that a designated EU airline has the right to fly from the EU to a destination in the US under market conditions (i.e. fares and capacity are not regulated but are subject to competition rules). Equally importantly, EU-US Open Skies also allows airlines designated by EU Member States to carry out flights to the US, provided they (a) have a principal place of business in the EU and (b) are substantially owned and effectively controlled by EU entities (or EU Member States themselves).
“Substantial ownership and effective control”
Most ASAs provide that designated airlines must be under the (i) substantial ownership and (ii) effective control of the designating states or their nationals, otherwise, the other state has the right to challenge or revoke the designation. The provision in ASAs that establishes this right is referred to as the “nationality clause”.
This means that, for example, a standard nationality clause in a bilateral ASA between countries “A” and “C” would not typically permit an airline operating from country “A” (but which is substantially owned and effectively controlled by nationals of country “B”) to operate flights to country “C” from country “A”.
It is generally considered that an entity that owns more than 49% of the voting shares of an airline exercises “substantial ownership” over it. However some states have taken a narrower view under their ASAs, as influenced by the more restrictive limits set out in their local airline licensing laws.
“Effective control” is more difficult to determine because, while ownership is usually transparent and can often be determined by public records, effective control may be exercised in a variety of ways, many of which may not be readily apparent. For instance, effective control can be exercised within a company, by way of equity rights to appoint the management, or from outside the company via loans or up-stream partnerships which require lender approval for some corporate actions.
In practice, most states take a case-by-case approach to determine who exerts “effective control”, using both applicable national laws concerning corporate responsibility for decision making; or special laws, regulations and policies specifically related to determining who exercises control of airlines; or a combination of the two. Some states also take into account the number of nationals of the designating state that hold key management positions within the airline.
A key feature of the EU-US Open Skies is the concept of a “EU nationality” where an EU Member State can designate any EU airline to fly to destinations in the US provided that (i) substantial ownership and effective control of that airline are vested in an EU Member State or States and/or their nationals; and (ii) the airline is licensed as a Union airline; and (iii) has its principal place of business in the EU. The authorisation to operate flights of a designated airline can be revoked if these conditions are not satisfied by the airline at any given time.
Once the UK leaves the EU on 28 March 2019 (or at the end of any agreed transition period, assuming the UK can persuade the US to treat it as an EU Member State during such time), the EU-US Open Skies will cease to apply to the UK.
Some form of replacement bilateral arrangement between the two countries will need to come into force, whether by way of memorandum of understanding, short form international agreement, or even simply a diplomatic note exchange. Arguably the restrictive, and decades old, bilateral ASA between the UK and the US could even come back into force, although this is not considered likely.
Negotiations regarding new bilateral ASA
The US initial position does not consider the concept of “EU nationality” for UK airlines. Although consistent with the standard form of nationality clause in bilateral ASAs (which generally only permit airlines substantially owned and effectively controlled by nationals of the designating state to operate relevant routes), this is highly problematic for existing UK airlines given their ownership structures, which often involve high levels of ownership or control within the EU but outside of the UK.
The obvious option is for the UK to push back on the initial offering and negotiate a broader nationality clause that can maintain the status quo for UK airlines. This option would be in line with the government’s policy on Brexit and provide greater legal certainty to UK airlines with high levels of EU ownership. That would require US agreement, not obviously forthcoming.
Remain party to the EU-US Open Skies
The EU-US Open Skies is only one of over 1,100 bilateral and multilateral treaties that the EU has concluded with third parties, highlighting the legal implications Brexit has over whether the UK can automatically accede to these treaties. Under EU law, the EU can enter into “EU-only” agreements and it is clear that once the UK ceases to be a EU Member State, it will no longer be bound by those agreements.
The situation is different with respect to EU “mixed agreements” since the UK is a contracting state to these in its own right and it could be argued that it can continue to be bound to the non-EU elements of any such agreement. However, from a practical perspective, the delimitation of EU competences is seldom clear and may lead to protracted renegotiations of the treaties themselves. The EU-US Open Skies itself is a “mixed agreement” so the UK could make the case that it can remain bound to its non-EU elements. However, even during the historical negotiations, the lines of authority and competence of the EU and the Member States were never drawn.
If the UK were able to rely on this position, it would assist in other EU ASAs which were concluded as mixed agreements too. However, the fact that the UK and US governments have started bilateral negotiations suggests that the possibility of the UK remaining in its own right a party to the EU-US Open Skies is currently off the table.
European Common Aviation Area (ECAA) membership
Another option is for the UK to remain part of the ECAA, which would then mean that, as a member of the ECAA, it would be more likely that the UK could then accede to the EU-US Open Skies as a third country, as is the case with Iceland and Norway. However, the US would also need to agree to this. The UK becoming a member of the ECAA also has political considerations for the government since it would then remain bound by EU law for aviation matters and under the jurisdiction of the European Court of Justice - see blog post Brexit, the European Common Aviation Area (ECAA) and the Court of Justice of the European Union (CJEU).
Rely on case-by-case waiver under a new ASA
Even if the standard nationality clause is adopted in a future bilateral ASA between the UK and the US, the US has waived the substantial ownership and effective control requirements on a case by case basis in the past. However, this option is unlikely to be satisfactory given the lack of legal certainty it would provide to UK airlines.
Other helpful US precedents
Finally, there are other less obvious options such as the adoption of a nationality clause similar to that contained in the Multilateral Agreement on the Liberalization of Air Transport Services (MALIAT) concluded by the US and Asia-Pacific Economic Cooperation (APEC) countries where only the “effective control” test is included. This option provides greater flexibility with respect to the ownership composition of the airlines; however, this would mean that UK airlines would still need to evidence to the US authorities that the persons exerting control over the airline are UK citizens, which entails its own complexity.