What is the impact of Brexit on UK transport companies trading and operating within Europe and on EU (non-UK) transport companies operating in the UK?
The EU and the UK have reached an agreement on their future relationship following the UK’s departure from the European Union on January 31, 2020, as set out in the EU-UK Trade and Cooperation Agreement (the TCA). This has implications for the aviation, rail and shipping sectors as set out below.
Aviation: the ability of UK airlines to operate to and within the European Union
Air Traffic Rights
In general the TCA provides EU and UK carriers with unlimited rights to fly between the UK and the EU (1 – 4 freedoms of the air).
The TCA leaves it open for the UK to negotiate with individual EU member states for the provision of fifth freedom rights (being the right for UK carriers to operate to an EU member state and then to travel to a non-EU country and vice versa) for cargo services only. However, UK carriers will not be permitted to operate passenger or cargo services between EU destinations. Similarly, EU carriers will not be permitted to operate passenger or cargo services between UK destinations.
More flexibility may be agreed between EU member states and the UK with respect to non-scheduled services.
Code Sharing/Blocked Space Agreements
Code sharing arrangements between UK, EU and third country carriers are permitted provided that the relevant operating carrier has the necessary rights to perform the relevant service. A UK marketing carrier would be able to enter into a code sharing arrangement to offer a service from the UK to an EU destination and then onwards to a final destination in the EU or a third country, subject to certain approvals.
Dry leasing is generally permitted. The TCA also allows UK air carriers to wet lease (aircraft plus crew) from EU carriers. However, EU carriers can only wet lease from UK carriers if the leasing can be justified on the basis of exceptional need, seasonal capacity or operational difficulties of the lessee and is for a duration strictly necessary to fulfil that need or overcome the relevant difficulty. In other words the EU will start to apply “third country” restrictions to wet leasing by EU carriers from UK carriers whereas it appears from the TCA that the UK will not introduce equivalent restrictions for UK air carriers wishing to wet lease from EU carriers. The TCA acknowledges that leasing may also be subject to requirements imposed by the UK and EU member states providing for leasing arrangements to be approved by their relevant aviation authorities to verify compliance with the conditions of the TCA and safety and security requirements. The EU and the UK agree that where this is the case they will endeavour to expedite the approval process and reduce the administrative burden on air carriers.
Ownership and Control
Ownership and control restrictions are maintained. As such, for an air carrier to be considered as an “air carrier of the United Kingdom” for the purposes of the TCA, it must be both majority owned and controlled by UK nationals with its principal place of business in the UK, licensed in accordance with UK law and hold an air operator’s certificate issued by the CAA. However, an “air carrier of the United Kingdom” no longer enjoys the right to operate intra-EU flights. This right is reserved to “air carriers of the Union”, which must be both majority owned and controlled by nationals of EU member states, other EEA member states or Switzerland (or a combination of these), with its principal place of business in the EU, hold an operating licence issued in accordance with EU law and hold an air operator’s certificate issued by EASA or an aviation authority of an EU member state.
There is however a grandfathering provision which allows airlines to be deemed UK air carriers provided they had a valid operating licence granted in accordance with EU law as at December 31, 2020 and are owned and controlled by EU nationals (whether alone or in combination with UK nationals). This means that the EU non-UK shareholdings of incumbent UK carriers count towards majority UK ownership and control for the purposes of enjoying the rights of an “air carrier of the United Kingdom” under the TCA, although as they are no longer “air carriers of the Union”, they have lost their right to, amongst other things, operate intra-EU flights and freely wet lease into the EU).
There is no equivalent grandfathering provision for EU air carriers controlled by UK nationals (whether alone or in combination with EU nationals). This creates an issue for EU airlines in which UK citizens hold a substantial stake. Some airlines have taken remedial action: for example, Ryanair removed the voting rights of UK shareholders to retain its status as an EU carrier and thereby maintain its intra-EU flying rights. It is expected that the EU Commission will scrutinise these arrangements in detail.
In addition there is a commitment to discuss the liberalisation of ownership and control restrictions in future as part of the Specialised Committee on Air Transport (a committee formed to monitor the application of the TCA) initially within 12 months of the TCA coming into force.
Rail: the ability of UK rail operators to bid for franchises and operate in the EU and of EU operators to bid for and operate UK franchises
The TCA includes a number of specific “reservations”, which may be imposed on UK service suppliers when supplying services in the EU in some sectors, and vice versa. A number of these reservations relate to rail transport, including the possibility of future measures regarding rail passenger and freight services, and in regard to future agreements with third countries. The EU reservations include inter alia the following:
- Only nationals of an EU Member State may provide rail transport or supporting services for rail transport in Bulgaria.
- In Lithuania, the exclusive rights for the provision of transit services are granted to railway undertakings which are owned, or whose stock is 100 per cent owned, by the state.
- The EU reserves the right to adopt or maintain any measure with respect to the cross-border supply of maintenance and repair services of rail transport equipment in the EU, with the exception of Germany, Estonia, and Hungary. Certain measures that are covered under this reservation already exist in Lithuania and Sweden.
- Reservations in relation to transport advisory and consulting services only: (i) economic needs test for contractual service suppliers in Austria, Bulgaria, Czech Republic, Cyprus, Hungary, Lithuania, Romania and the Slovak Republic; (ii) economic needs test in Denmark, except for contractual service suppliers that stay up to three months; (iii) economic needs test for independent professionals in Austria, Bulgaria, Czech Republic, Denmark, Hungary, Italy, Lithuania, Romania, Slovak Republic, and Spain; and (iv) economic needs test for independent professionals in Poland, except for air transport.
However, in general UK rail operators are expected to continue to be able to participate in franchise tender procedures in the EU, unless a reservation is included that would need to be considered in that case. In terms of procurement processes generally:
- The pre-Brexit position, including the principle of non-discrimination, applied during the Implementation Period and will continue for procurement procedures deemed ongoing at the end of the Implementation Period (including relevant framework agreements).
- In February 2019, parties to the WTO’s Government Procurement Agreement (GPA) gave final approval to the UK acceding to the GPA in its own right after Brexit (UK participation was tied to its EU membership), and in October 2020 invited the UK to complete the remaining steps to achieve this. The UK acceded in its own right on 1 January 2021 (having continued to be treated as an EU Member State under the GPA, as well as having “observer” status, during the Implementation Period while in the process of acceding). Accession means that most publicly-tendered contracts must be open to companies from other GPA economies (which includes the EU as one member, and other developed economies such as the US, Canada, Japan and Switzerland). UK companies will also retain the ability to tender for public contracts in other GPA countries – including EU Member States.
- The TCA itself provides for a transparent and non-discriminatory framework of rules for public procurement, with these rules based on and extending beyond the GPA. EU public procurement markets covered by the TCA are open to UK bidders on an equal footing, and vice versa, including for small contracts.
The position for EU companies operating in the UK is complicated by the considerable uncertainty about the future of UK rail franchises, although this is not directly-related to Brexit. In September 2020, the UK Government introduced Emergency Recovery Measures Agreements (ERMAs) to help keep rail services operating during the COVID-19 pandemic. The ERMAs run for up to 18 months and are designed to end the UK rail franchising system (they contain provisions which when these agreements expire will bring current franchises to an end). A White Paper on the future of Britain’s railway is expected in 2021 following the Williams Review, a root-and-branch review of Britain’s railway.
Shipping: the ability of UK shipping companies to trade within the EU
Brexit will not impede the rights of British shipping companies to carry goods to or from EU ports. EU membership offered UK companies access to a single European market, with no taxes or duties payable on goods moving across internal EU borders, and the benefit of legislation intended to promote the single market, such as the right of EU member states to offer maritime cabotage services (i.e. transport services) across the EU (pursuant to Council Regulation (EEC) No 3577/92).
The TCA sets out the arrangements for a large free trade area between the UK and the EU, allowing the UK and EU to trade goods with each other without tariffs or quotas. Whilst the TCA has provisions to make customs arrangements for some goods and traders less onerous than they may otherwise have been, there will still be customs formalities to comply with, which may result in delays in port for some vessels or types of cargo.
The TCA also covers International Maritime Services, guaranteeing the UK and the EU open and reciprocal access to maritime services, including the use of port infrastructure and services (such as pilots, berthing and loading/unloading facilities), access to and the use of maritime storage and warehousing and provisions which allow UK shipping companies to move empty containers and provide feeder services between ports in an EU Member State, subject to authorisation. However, there is no reciprocity on maritime cabotage, which is specifically excluded from the ambit of the TCA.
Shipping: eligibility for registration of non-UK owned ships in the UK
The Merchant Shipping (Registration of Ships) (Amendment) (EU Exit) Regulations 2019 No. 509 provide that, post-Brexit, a ship can still be registered on the British register if it is owned by a qualified owner, which includes corporate bodies in an EEA state. The Government has stated (in explanatory notes to Maritime Transport Access to Trade and Cabotage (Revocation) (EU Exit) Regulations 2018, that it does not intend to restrict cabotage, but that it will repeal the legislation guaranteeing these rights where the UK does not enjoy equivalent rights enshrined in EU legislation.
Does Brexit affect the UK’s relationship with non-EU countries in the transport sector?
As well as intra-EU air traffic rights, pre-Brexit the UK benefitted from the air traffic rights negotiated at the EU level with third party countries. The most significant of these was the EU-US Open Skies Agreement, which allows EU and US airlines to fly between points in the EU and the US.
Traffic rights between the UK and the 111 third countries, including China, India and Brazil, with whom the UK has existing bilateral air service agreements (to which the EU is not party) continue to be governed by these bilateral agreements.
However, replacement air service agreements were needed with the 17 non-EU countries with whom air services to the UK were previously provided for by virtue of the UK’s membership of the EU, including Canada and the United States . The UK Government’s full list of the status of these agreements can be found here.
Whether these bilateral air service agreements are as beneficial to the UK as the existing EU bilateral air service agreements varies. For example, the US-EU Open Skies Agreement which the UK benefitted from pre-exit allows for liberal transatlantic travel between the US and the EU, using 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, amongst other things, the airline is substantially owned and effectively controlled by one or more EU Member States and/or their nationals. However, the model US Open Skies Agreement on which the US-UK air services agreement is based, only permits airlines substantially owned and effectively controlled by nationals of the designating state to operate relevant routes. Given the importance of the US market to UK operators and their ownership structures, this would be problematic for the UK incumbent operators, who often have ownership structures involving high levels of ownership or control within the EU but outside of the UK.
The UK has succeeded in protecting these incumbents, who, under the new agreement will be deemed to satisfy the ownership and control standards, provided that they were authorised by the US Department of Transportation as of November 28, 2018, and were (and remain) substantially UK, EU and/or EEA-owned. However this will not assist future operators of these routes.
We do not envisage that Brexit will affect the UK’s relationship with non-EU countries in respect of the rail sector. The UK is currently a member of international rail organisations, such as the Intergovernmental Organisation for International Carriage by Rail (OTIF), and is likely to remain so.
Given the global nature of the shipping industry we do not expect that Brexit will have a significant effect on the UK’s relationship with non-EU countries in the shipping sector.
What effect does Brexit have on the regulation to which UK transport companies are subject generally?
Under The European Union (Withdrawal) Act 2018:
- with effect from the “exit day” of January 31, 2020 the European Communities Act 1972, which currently establishes the supremacy of EU law in the UK, is repealed but its effects were retained until December 31, 2020; and
- with effect from December 31, 2020, the EU “acquis”, the then-existing body of EU law, is transposed into UK law where it stands at that date: the UK Parliament will then over time decide which elements of that law to amend, retain or replace.
Post-December 31, 2020, there will be some divergence in certain areas.
In any event, the UK will remain subject to its obligations under any international treaties to which it is party, such as the Convention on International Civil Aviation 1944 (the Chicago Convention) and the International Convention for the Prevention of Pollution from Ships (MARPOL).
Since January 31, 2020 the UK no longer has representation and voting rights at the European Aviation Safety Agency (EASA), the entity which, amongst other things, issues type certificates for aircraft on behalf of EU Member States.
Recognition of Existing Authorisations
Certificates of airworthiness, licences and certificates of competency issued by the EU or UK and which are valid and still in force will continue to be recognised by the other party for the purposes of conducting air services provided that they also comply with the requirements of the Chicago Convention. There are in addition procedures established for consultation on safety issues and for ramp inspections.
With respect to aviation safety more generally the TCA does provide for cooperation on various aspects of aviation safety such as airworthiness, operation, air traffic management and personnel training and licencing. Annexes are to be developed by the Specialised Committee on Air Transport to outline the scope of the cooperation in each relevant area. The Annexes will also set out the terms on which each of the UK and the EU may recognise each other’s findings of compliance and certification in future.
There are also provisions which provide for future information exchange in matters of safety and proposals to revise laws in this area.
The Office of Rail and Road (ORR) is responsible for economic and safety regulation for rail in Great Britain. Much of this regulation derives from the EU and is therefore designed to be a ‘one size fits all’ for all EU rail networks. The ORR could in theory seek to modify the regulatory framework to better suit Great Britain’s rail network after theImplementation Period. There may also be changes following the Williams Review.
The TCA does not include particular provisions on rail services (other than certain rail activities being included as reserved matters, as mentioned above). However, cross-border rail services are able to continue after the end of the Implementation Period, provided that railway undertakings from the EU and the UK hold licences valid under EU law and UK law for those sections of the service operated within respectively the EU and the UK, and comply with applicable EU and UK legal requirements (e.g. with regard to safety certificates, rolling stock authorisations and personnel licences).
Certificates and licences issued in the UK, other than those issued for the Channel Tunnel, are not valid in the EU from 1 January 2021. Operators of cross-border services through the Channel Tunnel can continue to operate for a limited period with UK-issued operator licences, safety certificates and safety authorisations but the continued validity of this documentation is subject to compliance with the requirements set out in Regulation (EU) 2020/2222.
The UK will continue to recognise EU-issued operator licences, safety certificates and train driving licences until 31 January 2022 for services in Great Britain. This two-year time limit from 31 January 2020 on recognition of these categories of EU-issued documents does not currently apply to Northern Ireland and this documentation will continue to be recognised in Northern Ireland after 31 January 2022.
Under the Protocol on Ireland/Northern Ireland, Directive (EU) 2016/797 on the interoperability of the rail system within the European Union will continue to apply in Northern Ireland, insofar as conditions and technical specifications for the placing on the market, putting into service and free movement of railway products are concerned.
The Political Declaration also states that the EU and UK agree on the need for appropriate bilateral arrangements for cross-border rail services, including to facilitate continued smooth functioning and operation of rail services, such as the Belfast-Dublin Enterprise Line and services through the Channel Tunnel.
Broad contingency arrangements have been put in place to support the continuation of services through the Channel Tunnel and on the Belfast-Dublin Enterprise line.
Any future arrangements with France are expected to deal with the Channel Tunnel itself but not with the routes into continental Europe (beyond Calais-Fréthun). UK operators and train drivers will need to obtain additional licences and safety certificates to operate or work in the EU.
Much of the regulation to which shipping companies are subject is regulated by supranational bodies such as the International Maritime Organisation, and Brexit will have little impact on this aspect of maritime regulation. However, the EU has provided additional legislation in some areas which goes beyond those suggested by international organisations. These are discussed below as they primarily relate to environmental legislation.
What impact (if any) does Brexit have on the regulation to which UK transport companies are subject in the field of environmental or health and safety?
UK operators which were participating in the EU Emissions and Trading Scheme (EU ETS) prior to the UK’s exit from the EU must comply with their obligations under the scheme for the 2020 compliance year and surrender applicable allowances by 30 April 2021 (and indeed will continue to participate to the extent they operate qualifying routes - The European Commission has advised that aircraft operators that are currently administered for the EU ETS by the UK should take note of their new administering Member State indicated in the attribution list of aircraft operators published by the Commission.
A UK Emissions Trading Scheme (UK ETS) replaces the UK’s participation in the EU ETS with effect from January 1, 2021 and includes aviation. It covers domestic UK flights and flights from the UK to Gibraltar and EEA States, as well as from Gibraltar to the UK.
While the UK ETS is formally in place from January 1, various operational details remain to be finalised by the Department for Business, Energy and Industrial Strategy, as UK regulator, such as free allocations and how many UK allowances will be auctioned. However it is clear from the legislation that the scheme is based on and closely mirrors the EU ETS.
Phase I runs from 2021- 2030 (concurrently with Phase IV of the EU ETS) as a standalone system, but with the possibility that the UK emissions trading system (UK ETS) is linked to EU ETS and the Swiss Emissions Trading Scheme (Swiss ETS) where this can be agreed.
In the CTA, the UK and EU agree to “give serious consideration to linking their respective carbon pricing systems in a way that preserves the integrity of these systems and provides for the possibility to increase their effectiveness”.
The UK ETS has a single cap that includes both stationary and aircraft operators, with all allowances in the scheme being interchangeable between participating sectors, as in Phase IV of the EU ETS (which also runs from 2021 to 2030).
An added complication is the fact that the United Kingdom will also participate in the UN International Civil Aviation Organisation’s global offsetting scheme, CORSIA, although CORSIA does not apply to domestic routes while the UK ETS does. With UK aircraft operators already reporting their emissions in relation to international flights to the Environment Agency for CORSIA, the only additional reporting requirement to comply with the UK ETS would be to submit emissions data on domestic flights. However, aircraft operators are at risk of having to submit both UK ETS allowances and offset credits on the same routes – effectively paying twice for the same tonne of CO2.
In an effort to address this, the UK Government is considering how the UK ETS could interact with CORSIA to avoid the duplication of obligations between the schemes. This is already something being examined by the EU with respect to CORSIA and the EU ETS. The aviation part of Phase I of the UK ETS will be split into two sub-phases: 2021-2023 (Phase I(a)) and 2024-2030 (Phase I(b)), to mirror EU ETS aviation review periods and accommodate any amendments for CORSIA by the end of Phase I(a) at the latest.
UK issued certification for use on EU-registered aircraft or within the EU and EU issued certification for use on UK registered aircraft or within the UK
The UK is no longer a member of the European Aviation Safety Agency (EASA).
As such, from January 1, 2021 UK-licenced operators, manufacturers and crew no longer benefit from the mutual recognition of licences and rights to operate throughout the EU under EASA’s safety rules. Likewise, in the longer term operators, manufacturers and crew licenced in EU Member States may no longer benefit from the same automatic recognition and rights in the UK as previously.
Following EU advice, large volumes of UK businesses have obtained EASA "third country" approvals in order to be able to continue to operate/ supply products or services to EU customers with EASA approval.
However, under the CTA certificates of airworthiness, licences and certificates of competency issued by the EU or UK and which are valid and still in force will continue to be recognised by the other party for the purposes of conducting air services provided that they also comply with the requirements of the Chicago Convention. There are in addition procedures established for consultation on safety issues and for ramp inspections.
The TCA provides for cooperation on various aspects of aviation safety such as airworthiness, operation, air traffic management and personnel training and licencing. Annexes are to be developed by the Specialised Committee on Air Transport to outline the scope of the cooperation in each relevant area. The Annexes will also set out the terms on which each of the UK and the EU may recognise each other’s findings of compliance and certification in future. There are also provisions which provide for future information exchange in matters of safety and proposals to revise laws in this area.
The UK is likely to retain a role in developing and applying common technical specifications and common approaches to rail safety for the rail sector in Europe. This includes ensuring ongoing compliance with the European Rail Traffic Management System (ERTMS) which is the European Standard for the Automatic Train Protection (ATP) that allows an interoperable railway system in Europe.
Through its membership of the Channel Tunnel Intergovernmental Commission (IGC) and international rail organisations, such as the Intergovernmental Organisation for International Carriage by Rail (OTIF), the UK is likely to continue to form part of working parties set up by the European Union Agency for Railways (ERA) regarding rail interoperability and integration. However, the UK Government explicitly stated that it would not seek to retain membership of the ERA following its expiry on 31 January 2020. All electricity used by the UK rail industry had been subject to the EU ETS, but the UK no longer directly participates in this. The UK Government has put in place a new UK ETS, possibly to be linked to the EU ETS. In any event, the UK rail industry is likely to continue to improve its environmental performance in line with UK Government policy.
The primary regulations governing safety at sea and environmental issues are contained in international conventions: SOLAS1 (in relation to safety at sea) and MARPOL2 (in relation to environmental issues). UK shipping companies will still need to observe and operate within this international regulatory framework irrespective of Brexit. The TCA provides a commitment for the UK and the EU to co-operate on trade related aspects of climate change and work together with the IMO to reduce greenhouse gas emissions and to promote low carbon technologies and sustainable transport. Aside from this commitment to co-operation, UK shipping companies will still have to comply with at least some current, as well as future, EU maritime policy by virtue of trading to, and using ports within, the EU.
Shipping is not currently included in the EU ETS, but, following a vote of the EU Parliament in September 2020, the industry will join from 2022. At present, the main EU legislation around emissions for shipping is Regulation 2015/757, which creates an EU-wide legal framework for the monitoring, reporting and verification of CO2 emissions from maritime transport. This is part of a three step strategy:
- monitoring, reporting and verification of CO2 emissions from large ships using EU ports;
- greenhouse gas reduction targets for the maritime transport sector;
- further measures, including market-based measures, in the medium to long term.
UK shipping companies using EU ports will be subject to such measures whether or not such measures are adopted more generally by the International Maritime Organisation and under The Merchant Shipping (Monitoring, Reporting and Verification of Carbon Dioxide Emissions) (Amendment) (EU Exit) Regulations 2018, the UK appears to intend to retain the EU legislation with necessary post-Brexit adaptations.