Impact of Brexit on the transport sector

Aviation: the ability of UK airlines to operate to and within the European Union
Arguably the UK’s access to the European Single Aviation Market has been a key factor in the rise of low-cost carriers (LCCs) over the last twenty years. They have benefitted from the freedom of establishment rules to set up business in countries with low labour costs and from the ability to operate anywhere in the EU without any limitations as to pricing, frequency or capacity.

Upon Brexit, UK-licensed airlines will cease to be “Community air carriers” for the purposes of Regulation (EC) No. 1008/2008 on common rules for the operation of air services in the Community and will cease to benefit from the terms of the Multilateral Agreement on the Establishment of a European Common Aviation Area (ECAA). Unless other arrangements are entered into between the UK and the EU, upon Brexit UK-licensed airlines will lose their right to fly to and from the EU and between the remaining EU Member States.

Access to the EU’s internal market for air transport could be retained by the UK joining the European Common Aviation Area (ECAA) in its own right – membership is not restricted to EU Member States. However ECAA membership would require the UK to accept EU aviation laws and may be incompatible with the stated desire of the UK Government to extricate itself from the jurisdiction of the Court of Justice of the European Union (CJEU). Membership would also depend on the agreement of existing members, who may be more reluctant to welcome the UK and its heavyweight LCCs and other airlines than the burgeoning airlines of existing non-EU ECAA countries.

If the UK does not become a member of the ECAA, for UK airlines will be able to fly to and from the EU post-Brexit, it will be necessary for the EU and the UK Government agree to an air services agreements as part of the Brexit negotiations. The continued right of UK airlines to operate intra-EU in the absence of the UK joining the ECAA is in doubt. As such, UK airlines which need to retain the right to operate intra-EU post-Brexit should consider taking measures to obtain access to an EU air operator certificate.

Rail: the ability of UK rail operators to bid for franchises and operate in the EU
Following Brexit, the ability of UK rail operators to participate in franchise tender processes in the EU may be determined by the nature of the relationship which will emerge between the UK and the EU. Given that international trade rules (including in relation to government procurement) tend to operate on the basis of reciprocal treatment, the rights of UK operators in the EU are likely to mirror those of EU operators in the UK.

In our view, it is probable that many EU governments would be keen to allow UK (and other non-EU) rail operators to tender for rail franchises – irrespective of the Brexit model adopted – in order to ensure ‘value for money’. Therefore, UK rail operators are likely to retain the ability to participate in tender procedures for rail franchise in the EU (particularly once all rail franchises are required to be competitively tendered in 2019/2022) so long as the rail operator in question continues to comply with the regulatory framework applicable to the EU rail sector such as meeting the relevant technical and safety rules. In any event, even if restrictions were to be introduced, there may be opportunities for UK operators to tender via local affiliates or in partnership with local operators.

Shipping: the ability of UK shipping companies to trade within the EU
Brexit will not impede the right of British shipping companies to carry goods to or from EU ports. Being part of the EU offers 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). Given the UK Government’s stated policy on the single market and the customs union, it is unlikely that the UK will receive the benefit of this harmonising legislation after the UK has left the EU. This would mean that, whilst British shipping companies could of course still trade within the EU, some aspects of this trade might not be as straightforward post-Brexit. For example, there are likely to be taxes and duties payable on goods moving between the EU and the UK, which may affect trade. It also seems highly unlikely that any form of maritime cabotage rights within the EU would be available to UK companies, which could have an impact on shipping companies which operate in these areas.

The likely consequences of any Brexit depend upon its form.

The most obvious impact is on VAT. VAT raises around a fifth of the UK’s tax revenue, so it is most unlikely that it would be abolished, but the UK and the EU’s systems may diverge over time. Exports of goods and services outside the EU are generally excluded from VAT, however EU Member States do generally charge VAT on the import of goods and services from outside the EU. We would expect that once the UK has left the EU, the EU Member States would apply that treatment to imports from the UK.

UK membership of the EU has impacted on other areas of taxation, for example, the introduction of cross-border loss relief and the substantial shareholding exemption. Whilst over time, changes to the tax rules may take place, it should be noted that the UK’s tax system will continue to be influenced by both Europe and the rest of the world. Particularly, where multi-nationals are concerned, there will be continued pressures for the UK to remain competitive. For example, the UK could introduce more flexible incentives to invest in shipping and aviation if concerns about State Aid were removed.

Aviation
As well as intra-EU air traffic rights, the UK benefits from the air traffic rights negotiated at the EU level with third party countries. The most significant of these is the EU-US Open Skies Agreement, which allows EU and US airlines to fly between points in the EU and the US (and, in the case of US airlines, to operate intra-EU flights, although EU airlines cannot operate intra-US flights).

If the UK wishes to retain the status quo, it will need to (i) sign up to the EU-US Open Skies Agreement in the same manner as, for example, Norway or negotiate a bilateral agreement with the US (although this would necessarily be more limited and could not cover, for example, flights from Paris to the US), (ii) negotiate new bilateral agreements with other non-EU countries to replicate those which it currently benefits from as an EU member, and (iii) decide whether to retain the EU nationality clauses which it has in its existing bilateral agreements with non-EU countries. Removal of any such EU nationality clauses would risk destabilising the UK’s relations with the EU and would represent a move away from market liberalisation.

Rail
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.

Shipping
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.

The UK has announced plans for a “Great Repeal Bill” pursuant to which all EU-derived legislation will be converted into UK law. This will come into effect only after the UK has left the EU. The Great Repeal Bill has three primary aims:

• To repeal the European Communities Act 1972, which currently establishes the supremacy of EU law in the UK;
• To preserve EU law where it stands at the moment before the UK leaves the EU. The UK Parliament will then be able to decide which elements of that law to keep, amend or repeal; and
• To enable changes to be made by secondary legislation to those laws that would otherwise not function sensibly after Brexit.

This approach is intended to avoid the significant gaps and consequent uncertainty if all EU-derived law was repealed without replacement. However it is not without limitations.

As such, in the short term it is likely that the UK will continue to conform to EU laws and regulations, but going forward there may be some regulatory divergence as the UK extricates itself from the jurisdiction of the CJEU. The need to maintain the evolution of the regulatory frameworks of the UK and the EU so as to facilitate continuing trade was one of the issues highlighted by the UK Prime Minister in her letter invoking Article 50. It can be expected to feature in the ongoing Article 50 negotiations and in discussions on a comprehensive free trade agreement between the EU and the UK.

In addition, the UK will of course still be subject to its obligations under any international treaties such as the Convention on International Civil Aviation 1944 (the Chicago Convention) and the International Convention for the Prevention of Pollution from Ships (MARPOL).

Aviation
Following Brexit, the UK will cease to be a member of European Aviation Safety Agency (EASA), the entity which, amongst other things, issues type certificates for aircraft on behalf of EU Member States.

However, the “Basic Regulation” as set out in Regulation (EC) No 216/2008, under which EASA operates, contemplates that EASA is open to participation by European third countries which are non-EU Member States (such as Iceland, Liechtenstein, Norway and Switzerland), provided that they are contracting parties to the Chicago Convention and have concluded agreements with the EU whereby they adopt and apply EU aviation safety rules. If the UK became an EASA member state under this arrangement, it would not have voting rights in the EASA decision-making process and would need to comply with all EU law in the aviation safety field, unless negotiated otherwise. This may prove incompatible with the stated desire of the UK Government to extricate the UK from the jurisdiction of the CJEU and for the UK to regain sole control of law making.

Rail
In the rail sector, the Office of Rail and Road (ORR) is responsible for both economic and safety regulation in Great Britain. Much of this regulation derives from the EU and is therefore designed to be a ‘one size fits all’ for all European rail networks. In the absence of this system, the ORR could in theory seek to modify the regulatory framework in a way that it considered better suited to the rail network in Great Britain. One potential area that ORR might seek to change concerns the regulatory framework for access charging. The EU access charging rules contain strict provisions on how infrastructure managers should set access charges for operators. A consequence of these rules is that it limits Network Rail’s ability to discriminate in the way it sets charges for different operators, even if there is an objective justification for such discrimination. If these rules no longer applied, there could be scope to increase open access in rail by setting the access charging framework in a way that promoted open access operators and increased on-rail competition. This might be attractive to the ORR given its policy to promote more on-rail competition.

Aviation
If the UK remained a member of the ECAA, as mentioned above it would be required to accept EU laws in these areas. However membership of the ECAA may be incompatible with the stated desire of the UK Government to extricate the UK from the jurisdiction of the CJEU and  for the UK to regain sole control of  law making. Nevertheless, as EU-derived legislation is likely to be preserved by The Great Repeal Bill, in the short term at least UK rules on environmental protection and health and safety are likely to remain consistent with EU standards.

Following Brexit, the EU Emissions and Trading Scheme (EU ETS), which has been controversial in the aviation sector, would still apply to the UK if it became a member of the EEA (which now seems unlikely). However even in the case of a different Brexit scenario, non-EU airlines may well be subject to this or a similar regime either (a) depending on the International Civil Aviation Organization’s (ICAO) progress in implementing its “global market-based measure” regarding aviation emissions or (b) if the EU’s “Stop-the-Clock” decision is reversed.

Rail
Following Brexit, the UK is likely to retain a role in developing common technical specifications and common approaches to rail safety for the rail sector in Europe, irrespective of the Brexit model adopted.

Through its membership of the Channel Tunnel Intergovernmental Commission (IGC) and international rail organisations, such as OTIF, the UK is likely to continue to form part of working parties set up by the European Railway Agency (ERA) although is unlikely to retain membership of the ERA in its own right. The ERA establishes working parties of experts to assist it in establishing an integrated European railway sector and supporting the European institutions on technical matters regarding the implementation of EU legislation in the field of rail interoperability.

All electricity used by the UK rail industry, whether for traction or other purposes, is subject to the EU ETS. The only rail operations not covered by the EU ETS are the operation of diesel trains and road vehicles used to support rail operations. Irrespective of whether or not the EU ETS continues to apply following Brexit, we consider that the UK rail industry will seek to continue to improve its environmental performance and reduce emissions in line with the UK Government’s policy.

Shipping
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. It is likely that, regardless of an exit from the EU, 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.

Whilst the EU ETS does not currently apply to the shipping industry, the EU has introduced 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 are likely to be subject to such measures whether or not such measures are adopted more generally by the International Maritime Organisation.

The likely consequences of any Brexit depend upon its form.

The most obvious impact is on VAT. VAT raises around a fifth of the UK’s tax revenue, so it is most unlikely that it would be abolished, but the UK and the EU’s systems may diverge over time. Exports of goods and services outside the EU are generally excluded from VAT, however EU Member States do generally charge VAT on the import of goods and services from outside the EU. We would expect that once the UK has left the EU, the EU Member States would apply that treatment to imports from the UK.

UK membership of the EU has impacted on other areas of taxation, for example, the introduction of cross-border loss relief and the substantial shareholding exemption. Whilst over time, changes to the tax rules may take place, it should be noted that the UK’s tax system will continue to be influenced by both Europe and the rest of the world. Particularly, where multi-nationals are concerned, there will be continued pressures for the UK to remain competitive. For example, the UK could introduce more flexible incentives to invest in shipping and aviation if concerns about State Aid were removed.