The evaluation of “1008”: an opportunity to create global airline carriers? Probably not

While the European Commission is almost with one foot out of the door, there is a surprising raft of publications expected in the coming weeks in relation to the aviation agenda. These span a range of topics, from social labour conditions, airport charges and taxation. In a series of publications, we will take stock of what we can expect. Today: the ongoing evaluation of the principal regulation underpinning the EU’s internal aviation market, commonly referred to as “Regulation 1008”.

In force since 2008, Regulation 1008 defines the concept of an EU airline carrier and lays down specific rights and obligations on them to operate flights within the EU. The Regulation is credited for creating one of the most liberalised international aviation regimes in the world, as airlines, once in possession of a valid EU operating license, do not need to obtain authorisation to operate flights on any route within the EU. As part of the 2015 Aviation Strategy, the Commission is currently evaluating the Regulation, and Ricardo, the contracted partner undertaking the study, is expected to publish its findings in the coming weeks.

One of the key elements of Regulation 1008 are the so-called ownership and control requirements, which UK airlines now find to be particularly relevant as to whether they can continue to fly to the EU after Brexit (airlines need to be owned and effectively controlled by a majority of EU shareholders in order to qualify for an EU license). Relaxing those rules would enable further, and as some argue, much-needed consolidation across the EU’s borders. At least theoretically, this would benefit both airlines (by eliminating cost duplication and allowing for a more efficient allocation of capital and capacity) and consumers (though more competition).

This is particularly relevant in a time where the industry is facing a period of economic descent in the business cycle and overcapacity in the market, which could quite possibly see already ailing airlines join the ranks of the now defunct Air Berlin, Primera, FlyBMI and Monarch, as well as spur the need for further cost reductions in healthier airlines.

DG MOVE Director-General Henrik Hololei has already hinted that the EU’s existing O&C rules may indeed inhibit the creation of “truly global carriers”. Further liberalisation may be the panacea to the EU’s relatively fragmented airline market. However, on balance, while a looming economic downturn may provide a powerful argument in favour of airline consolidation, I consider it unlikely for now that the EU will take a unilateral decision to further liberalise O&C rules.

It already has the highest foreign ownership threshold (49%) of any major economy, while others have not followed suit: Japan caps it at 33%, while the U.S.’s 25% is even more restrictive. What is more, none of the third countries that the EU has negotiated with over the past years, including ASEAN, Qatar and Turkey, have shown an appetite in O&C liberalisation. Why would the EU go even further, if others keep their doors closed? Moreover, airlines have been creative enough to circumvent O&C rules, for example by setting up alliances, antitrust immunised arrangements or joint ventures.

On balance, while a looming economic downturn may provide a powerful argument in favour of airline consolidation, I consider it unlikely for now that the EU will take a unilateral decision to further liberalise ownership & control rules

Where the EU may be able to bring a fresh approach is by altering the principle of nationality to reflect the idea of principle place of business, i.e. the nationality of an airline would be determined by the regulatory regime it is subject to, rather than by the citizenship of its shareholders. The idea was floated in a World Economic Forum paper from 2016, and would better incentivise airlines to set up subsidiaries abroad.

However, given the downsides a unilateral approach would pose, interpretative guidelines are currently the most likely course of action. In relation to the application of 1008 overall, most complaints have focused on ownership and control rules, suggesting that clearer definitions could overall benefit the Regulation.

The most difficult aspect in the application and enforceability of 1008/2008 concerns not so much the ‘ownership’ part, but the ‘effective control’ part, as it is hard to quantify the amount of influence an investor has in the management of the airline. This is also one of the problems that the Commission is currently running into when assessing the compliance of IAG with O&C rules after Brexit. Ultimately, Brexit and the experience DG MOVE is currently gaining from having to scrutinise opaque ownership and control structures may ultimately do the evaluation of 1008 a favour.