United States and United Kingdom Conclude Major New Bilateral Air Transport Agreement

By Mark W. Atwood & Robert F. Foster | Cozen O’Connor

On November 28, 2018, the United States and the United Kingdom (UK) agreed on the terms of a new bilateral “Open Skies” Air Transport Agreement (the Agreement) that will become effective upon the UK’s withdrawal from the EU. Currently, U.S.-UK air transport is governed by the European Union (EU)-U.S. Open Skies Agreement (EU-U.S. Agreement).

As Brexit negotiations continue, the Agreement provides a degree of certainty for the aviation industry about a post-Brexit environment that does not yet exist for most other industries. The Agreement provides for the smooth transition of post-Brexit air transport rights for the U.S.-UK trans-Atlantic market, which traditionally has been the busiest sector for air traffic between the United States and Europe as a whole.

Although the uncertainty that surrounds Brexit has become daily headline news, the U.S.-UK Air Transport Agreement provides a degree of clarity and certainty regarding post-Brexit U.S.-UK aviation relations.

The Agreement will not go into effect until the UK officially withdraws from the EU but the parties intend to finalize the Agreement via the exchange of diplomatic notes sometime before Brexit.

Background: EU-U.S. Open Skies Agreement
The EU-U.S. Agreement became effective on March 30, 2008, and replaced all other bilateral agreements that had previously controlled air transport rights between the United States and individual EU member states. The EU-U.S. Agreement, which currently applies to members of the EU and members of the European Common Aviation Area (ECAA) (which includes Iceland and Norway), is a liberal agreement that creates a single air transport market between the European Union and the United States, with free flows of investment and few restrictions on air services.

The liberal EU-U.S. Agreement has allowed for an unprecedented expansion of air traffic rights for U.S. and EU carriers. It replaced a web of individual bilateral agreements that contained inconsistent limitations on air traffic rights, airport access, and capacity limitations for operations between the United States and Europe. For example, the agreement that dictated air transport rights between the United States and UK (U.S.-UK Air Transport Agreement of July 23, 1977, aka Bermuda 2) limited the number of U.S. carriers that could access London Heathrow Airport (LHR). Today, the EU-U.S. Agreement grants all U.S. carriers the right to access LHR (and all other points in the EU). The same traffic rights are granted to EU carriers for access to U.S. points.

The UK’s pending exit from the EU, and, by default, its exit from the current EU-U.S. Agreement, put the post-Brexit future of U.S.-UK air services in doubt. With air transport between the two nations vital to the economies of both countries, it was imperative for a liberal air transport accord to be reached prior to Brexit.

The U.S.-UK Agreement: What It Says and What It Means
With some minor differences, the Agreement follows the model U.S. Open Skies agreement that the U.S. government has used to negotiate more than 100 air transport agreements. The U.S. and UK delegations met almost 20 times to discuss and negotiate the final agreement, which resulted in a more liberal regime than the parties originally expected.

The resulting Agreement is important for several reasons:

First, it is by far the most important aviation bilateral agreement the UK government has negotiated, to date, in anticipation of Brexit. Shortly thereafter, the UK government concluded negotiations with Canada, another major aviation partner. It has already negotiated agreements with Albania, Georgia, Iceland, Israel, Kosovo, Montenegro, Morocco, and Switzerland. Thus, the UK government has shown that it intends to preserve, to the greatest extent possible, the liberal air transportation rights that it has enjoyed as a member of the EU.

Second, the Agreement provides air transport rights that will allow for continued U.S.-UK operations even after the UK withdraws from the EU.

The parties also drafted a Memorandum of Consultations (MOC) that memorializes mutual understandings regarding implementation of the Agreement. These include:

1. MOC Paragraph 12 (Geographical Scope of the Agreement) states that Article 1 of the Agreement will include in its definition of “territory” all UK Overseas Territories (OTs) (including, for example, Bermuda, the Cayman Islands, and the Falkland Islands) and Crown Dependencies (CDs) (Jersey, Guernsey and the Isle of Man). Currently, OTs and CDs are not included in the EU-U.S. Agreement and are still subject to the more restrictive Bermuda 2 agreement. The inclusion of OTs and CDs in the Agreement means that U.S. carriers will be afforded the same traffic rights to serve all British sovereign territory around the globe.
2. MOC Paragraph 13 (Provision of Aircraft with Crew) addresses wet lease provisions, an ongoing point of contention between U.S. and EU authorities. Under U.S. Department of Transportation (DOT) regulations, a “wet lease” means a lease between air carriers by which the lessor provides all or part of the capacity of an aircraft and its crew to the lessee. EU regulations prohibit EU carriers from entering into wet lease agreements with non-EU lessors for periods greater than seven months (or 14 months if the lessee is granted an extension by the EU regulator). Such time limitations are counter to the liberal air transport rights available under the EU-U.S. Agreement. MOC paragraph 13, however, states that “[b]oth delegations confirmed their understanding that the Agreement foresees a regime without time limitations on lease arrangements ….” Thus, Article 8, Paragraph 7 of the Agreement, which pertains to commercial opportunities, does not impose time limitations on the duration for cooperative marketing arrangements such as aircraft leasing or code-sharing.
3. MOC Paragraph 15 (Airline Ownership and Control) addresses the UK’s concerns that the DOT might refuse licenses to UK airlines whose ownership and control do not comply with Article 3 (Authorization) of the Agreement. Under Article 3, each party agrees to “grant appropriate [economic] authorizations and permissions[,]” provided that “substantial ownership and effective control” of the airline is vested in the party, citizens of that party, or both. Several UK airlines that operate to the United States are currently owned, at least in part, by non-UK entities. For example, British Airways is a subsidiary of International Airlines Group (IAG), a Spanish corporate entity that also owns Spanish carrier Iberia. Virgin Atlantic is 49 percent owned by Delta Air Lines. Although “substantial ownership” is not defined in either the MOC or the Agreement, MOC Paragraph 15 contains reassuring language for the UK delegation insofar as it states that “DOT has broad authority to waive ownership and control standards, and … DOT has a long-established practice of waiving such standards for airlines when all countries involved are Open-Skies partners.” In order to address the concerns of the UK delegation as it relates to foreign ownership and control, the Agreement contains an Annex deeming UK airlines that hold DOT operating authority as of November 28, 2018, to satisfy the “substantial ownership and effective control” standard of the Agreement. Thus, the Annex essentially operates as a grandfather clause for UK airlines whose existing ownership and/or control might not meet the requirements of the Agreement’s Article 3.

Third, Article 2 (Grant of Rights) of the Agreement will preclude post-Brexit EU carriers from operating U.S.-UK passenger service unless it is part of “5th freedom” operations — meaning EU carriers can only operate passenger or combination service to the United States via the UK if the flight involves a stop in the carrier’s home country. Likewise, UK carriers will no longer be able to operate EU to U.S. or U.S. to EU passenger flights (as they do now) without a stop in the U.K. On the other hand, all-cargo operations are given much greater flexibility — the right to operate from the territory of the other party to third countries, without transiting their homeland (i.e. “7th freedom” all-cargo rights).

Compliments of Cozen O’Connor, a member of the EACCNY