UK-US Open Skies talks hit Brexit turbulence

The US is offering Britain a worse "Open Skies" deal after Brexit than it had as an EU member, in a negotiating stance that would badly hit the transatlantic operating rights of British Airways and Virgin Atlantic.

British and American negotiators secretly met in January for the first formal talks on a new air services deal, aiming to fill the gap created when Britain falls out of the EU-US open skies treaty after Brexit, according to people familiar with talks.

In a sign of the battle Britain faces to replicate its existing rights, the talks were cut short after US negotiators offered standard bilateral conditions that would reduce access and in effect exclude all main UK-based carriers because they would not meet the criteria for ownership and control.

One person attending the London meetings to “put Humpty Dumpty back together” said: “You can’t just scratch out ‘EU’ and put in ‘UK’.”

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A British official said it showed “the squeeze” London will face as it tries to reconstruct its international agreements after Brexit, even with close allies such as Washington.

Negotiators are confident of an eventual agreement to keep open the busy UK-US routes, which account for more than a third of current transatlantic flight traffic, but there are legal and political obstacles that could impede the two sides from reaching a deal in time to give legal certainty to airlines booking flights a year in advance.

“We have every confidence that the US and UK will sign a deal that is in everyone’s interests and that IAG will comply with the EU and UK ownership and control regulations post Brexit,” said International Airlines Group, which owns British Airways.

Virgin Atlantic said it remained “assured that a new liberal agreement will be reached, allowing us to keep flying to all of our destinations in North America”.

Chris Grayling, UK transport secretary, declared in October that he was making "rapid progress" in reaching ambitious new airline agreements with the US and other international partners. According to FT estimates, the UK must renegotiate and replace about 65 international transport agreements after Brexit.

In its opening stance, the US side rolled back valuable elements of the US-EU agreement, the most liberal open skies deal ever agreed by Washington. Its post-Brexit offer to the UK did not include membership of a joint committee on regulatory co-operation or special access to the Fly America programme, which allocates tickets for US government employees.

Washington also asked for improved flying rights for US courier services such as FedEx.

The UK has also yet to formally offer the US access to overseas territories such as the British Virgin Islands and Cayman Islands, which were not included as part of the original US-EU deal, according to people familiar with the talks.

There are also potential issues over the continuation of antitrust exemptions, permitted by the US-EU open skies agreement, which allow airline alliances to set fares and share revenue, according to people familiar with talks.

The biggest sticking-point is a standard ownership clause in Washington’s bilateral aviation agreements that would exclude airlines from the deal if “substantial ownership and effective control” does not rest with US or UK nationals respectively. In effect it requires majority ownership by one of the two sides if an airline is to benefit.

London asked the US to adjust its long-held policy since it would exclude the three main British-based transatlantic carriers, which all fall short of the eligibility criteria. These are IAG, the owner of British Airways and Iberia; Virgin Atlantic; and Norwegian UK.

Sir Richard Branson owns 51 per cent of Virgin, making it majority UK-owned. But he is in the process of selling 31 per cent to Air France-KLM, which could complicate Virgin's access rights to the US. US airline Delta owns the remaining stake.

The challenge is most acute for Willie Walsh, IAG chief executive, whose group must also clear the EU's 50 per cent ownership threshold to avoid losing his European operating rights after Brexit, when UK nationals are no longer counted.

One senior EU official said the airline operator was heading for “a crunch”. “From the US point of view, there is not a single big airline that is UK-owned and controlled,” he said. “The Americans will play it hard. The mood has changed [against liberalisation], it’s the worst time to be negotiating.”

Andrew Charlton, an aviation consultant, said the negotiations with the US were likely to be “fraught with difficulties”.

“The EU has been arguing for a change to the ownership and control rule for decades but the US has never said yes. It’s been a sticking point forever. If the US has never bent before then why would they do it just for the UK?” he said, adding that such a change could set a big precedent.

British negotiators are hopeful the ownership issues can be addressed through a side agreement or memorandum of understanding giving airlines solid legal rights. But so far the US side has not gone beyond offering temporary “waivers”, on a case-by-case basis to airlines.

The UK’s EU membership also prevents the country from signing trade or aviation services agreements before the end of March 2019 when Britain is due to leave the bloc. The EU’s Brexit negotiators are insisting it seek permission for deals during any transition period.

British negotiators are hoping to convince partners such as the US to treat them as EU members during the transition period, so they do not automatically fall out of agreements during that period.

A senior UK government source said it was “nonsense to suggest that planes won’t fly between UK and US post-Brexit. Both sides have a strong interest in reaching an agreement and are very close to one”.

The US also played down fears of a looming crisis.

“Our shared aim with the United Kingdom is to ensure the smoothest possible transition in the transatlantic market,” said the state department. “Commercial aviation is key to the dynamic economic relationship between the United States and the United Kingdom. Discussions are going well and, while specific dates are not set, we plan to meet again soon.” – Copyright The Financial Times Limited 2018