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U.S./U.K. Aviation Trade Relations After Brexit

Maul Law March 15, 2018

Ever since “Brexit” (the nickname for the United Kingdom’s (U.K.) withdrawal from the European Union (EU)), aviation analysts and lawyers have pondered what would become of U.S./U.K. aviation trade relations. Prior to the landmark 2007 U.S./EU Air Services Agreement, U.S./U.K. aviation trade was governed by a highly restrictive agreement signed in the 1970s known as “Bermuda II” (“Bermuda I” was the slightly less restrictive treaty signed between the two countries after the Second World War). Bermuda II imposed tight controls on transatlantic rates, routes, and services offered by both parties’ air carriers. London Heathrow Airport, a major gateway into Europe, locked out competition from all but two U.S. airlines, PanAm and TWA (these rights were later acquired by American Airlines and United). Despite U.S. attempts to liberalize its trade relations with Britain, the U.K. remained favored a policy of managed air services trade for decades.

Then, after years of negotiations, the U.S. finally got its wish with the aforementioned 2007 agreement with the EU, an agreement that secured an “Open Skies” relationship with most of Europe, including the U.K. Under the Open Skies program, which was first championed by the U.S. in the 1990s, most restrictions on commercial air flights were removed between partner states under the belief that competition from all partner airlines offering international service, regardless of their nationality, was the best policy. However, some critics, including a number of European airlines, remained dissatisfied that the 2007 U.S./EU Agreement failed to provide foreign investment rights to allow for transnational air carrier mergers or the right for, say, British Airways or Lufthansa to establish subsidiary airlines in the U.S.

With the U.K. set to no longer be part of the 2007 U.S./EU treaty, it appears that the U.S. is attempting to play hardball with their longstanding trade partner. Under the terms of the 2007 agreement, U.K. airlines are allowed to hold substantial shares of other EU-based carriers without risking the rights of those carriers to fly to and from the U.S. Similarly, U.K. airlines remain open to foreign investment from other EU nationals without, again, risking their market-access rights to the U.S. Now, however, the U.S. appears unprepared to keep that concession on the table, insisting—in line with pre-2007 aviation trade policy—that U.K. airlines remain “substantially owned and effectively controlled” by British nationals if they want to serve the transatlantic market.

There are other key issues in play as well. After Brexit, the U.K. will be free to restrict U.S. air carrier access to Heathrow, as it did from the 1970s up until the late 00s. At the same time, the U.K. may find itself left out in the cold from the airline alliance system that grew up in the Open Skies era. These alliances, which typically include airlines from all across the globe cooperating on rates, routes, customer perquisites, and so forth, are only made possible through grants of antitrust immunity from the U.S. Department of Transportation (DOT), and those grants—controversial though they are—are almost always predicated on the U.S. having an Open Skies relationship with the participating air carriers’ home countries. Should U.S./U.K. aviation trade relations falter, it stands to reason that the DOT will rethink its immunization grants to those alliances with U.K. airline members.

For more on the history of U.S./U.K. and U.S./EU air services trade, see Brian F. Havel & Gabriel S. Sanchez, The Principles and Practice of Aviation Law, chapters 2-4 (Cambridge University Press 2014). For more on Open Skies and antitrust immunity, see Gabriel S. Sanchez, “An Institutional Defense of Antitrust Immunity for International Airline Alliances,” 62 Catholic University Law Review 139 (2012).