What will Brexit mean for the wet leasing of aircraft?

Posted in Transport

The publication by the UK Government of a series of technical notices concerning the potential consequences of a “no deal” Brexit for aviation have understandably led to increased interest regarding what Brexit means for the sector – particularly in the event of a “no deal”. However, while the notices deal with a number of important issues such as traffic rights and aircraft safety, the impact of Brexit on wet leasing (i.e. arrangements whereby one airline provides an aircraft, complete with crew, maintenance, and insurance (ACMI) to another airline) between the UK and the EU-27 countries was referred only briefly. This blog post examines this important area in more detail.

Current Position

By virtue of the UK’s current status as an EU member state and pursuant to Regulation 1008/2008, UK airlines have the right as “community carriers” to wet lease-in aircraft registered in other EU member states subject to reasonably limited criteria and a specified procedure – the wet leasing must not endanger safety and the UK Civil Aviation Authority (CAA)  must be satisfied under Regulation 965/2012 that the UK airline wet lessee complies with the relevant requirements of continuing airworthiness and air operations.

The UK airline lessee must also provide a signed statement by the parties to the wet lease agreement that they fully understand their responsibilities under the relevant regulations.

EU airlines and the remaining member states of the European Aviation Safety Agency (EASA) –Norway, Liechtenstein, Iceland and Switzerland - have the ability to wet lease in UK registered aircraft on the same basis.

UK as a Third Country

Given that both the UK Government and the official Opposition have ruled out UK membership of the European Free Trade Association or its remaining party to the EEA Agreement, this leaves the possibility that the UK, as a non-EEA member state, may have the status of a “third country” following Brexit. Indeed, Michel Barnier has previously stated that “The UK will become a third country on 30th March 2019”. The UK Government’s technical notice entitled “Aviation safety if there’s no Brexit deal” certainly assumes that the UK would be treated as such by the EU in a “no deal” scenario.

So what would third country status mean for wet leasing? The EU rules for wet leasing an aircraft from a third country are fundamentally different to those for wet leasing an aircraft from another EEA member state.

The wet leasing in of an aircraft registered in a third country requires prior approval from the aviation authority of the relevant member state. This may only be granted if the lessee demonstrates that all safety standards equivalent to those imposed by the EU or national law are met and that the wet leasing is:

  1. justified on the basis of exceptional need;
  2. necessary to satisfy seasonal capacity needs which cannot be satisfied through leasing aircraft registered within the EU; or
  3. necessary to overcome operational difficulties and it is not possible or reasonable to lease aircraft registered within the EU.

Furthermore there are additional approvals required under Regulation 965/2012. This provides that the relevant wet lessee also has to demonstrate that:

  1. the third country operator holds a valid air operator’s certificate (AOC) issued in accordance with ICAO Annex 6;
  2. the safety standards of the third country operator with regard to continuing airworthiness and air operation are equivalent to the applicable EU standards; and
  3. the aircraft has a standard certificate of airworthiness issued in accordance with ICAO Annex 8.

In addition the pilots of the third country wet lessor will need to hold valid third country pilot license validations in accordance with Annex III of Regulation 1178/2011 (the Aircrew Regulation) and the third country wet lessor should have a part TCO (third country operator) authorisation issued by EASA.

The rationale for the restrictions is two-fold: (i) firstly safety: to avoid non-airworthy aircraft operating in EU member states’ airspaces, but also (ii) commercial / policy: to prevent foreign carriers indirectly gaining access to the EU internal market by setting up dummy EU airlines and bypassing air service agreements, tax and labour regulations, thereby ‘dumping’ cheap third country capacity into the EU internal market when there is already EU capacity to meet demand.

As such, following Brexit and in the absence of any other agreement between the UK and the EU, UK operators could have significantly more difficulty wet leasing excess capacity into the EU market.

In addition, there is a further problem. What will be the status as a matter of EU law on 30th March 2019 of wet leases of UK-registered aircraft which were entered into prior to 29th March 2019? Such wet leasing would not have had to satisfy the criteria for wet leasing from a third country set out in Regulation 1008/2008 and in other EU legislation. Would an EU member state lessee now need to apply for permission from its aviation authority to be able to continue the wet leasing arrangement by reference to the third country criteria? Would a UK wet lessor then need to fulfil the additional requirements of a third country wet lessor to be able to continue to perform its obligations under the relevant wet lease?

EU member states as Third Countries?

And how about wet leasing aircraft into the UK? What formalities would a UK airline lessee have to comply with to wet lease in EU-registered aircraft post-Brexit?

The UK Government’s technical notice entitled “Aviation safety if there’s no Brexit deal” states that UK airlines wishing to wet lease aircraft registered outside of the EEA will still need to comply with the existing regime for “third countries” if no deal is reached. From the reference to non-EEA airlines, it can be implied that the UK would continue to apply the same regime to the wet leasing by UK carriers of EEA registered aircraft into the UK as presently exists… even if the EU does not afford UK the same treatment.

So what is the solution for wet leasing post Brexit?

The extent to which the status quo with respect to wet leasing continues to apply following Brexit may depend on the degree to which the UK and the EU remain aligned from a regulatory perspective and the status of the UK within EASA (in respect of which the UK Prime Minister has expressed the desire to gain the UK associate membership). We know that restrictions against wet leasing from third countries are intended to avoid undermining safety and employment, environmental and other regulatory protections. Indeed, the tension between liberalisation with respect to wet leasing and concerns that this could open the flood gates to arrangements which undermine that can already be seen in the debate regarding the EU Commission’s proposal to seek a more liberal wet leasing agreement with the US. This may not seem an issue on the face of it, as the UK is going to be transposing EU-derived law into UK law immediately following Brexit. However the issue then becomes how potential future regulatory divergence is managed and any future involvement of the Court of Justice of the European Union.

Unlike some other sectors, there is no fall back to trading on World Trade Organisation (WTO) terms for aviation if no trade deal is reached with the EU. The  WTO General Agreement on Trade in Services excludes air traffic rights and services directly related to air traffic rights. In practice it is generally thought that wet leasing would fall within that exclusion. WTO members have, as a consequence, made few commitments with respect to wet leasing of aircraft due to the danger that wet leasing could be used to circumvent nationality, safety and other regulatory restrictions which may otherwise apply to their own national airlines.

So, if the UK is not going to remain party to the EEA Agreement or indeed the European Common Aviation Area Agreement, a bespoke agreement will be needed with respect to aviation. It is important however that the UK government and the EU institutions understand that this agreement should not only deal with flying rights but should also clarify the regulatory framework for wet leasing. In addition it should also confirm the continued status of wet leasing arrangements entered into on the basis of existing laws at Brexit. The issue, for the UK, will be the extent to which this can be sold from a political perspective and, for the EU member states, whether this will be perceived as the UK “cherry picking”.

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