Richard North, 29/07/2019  

While the Johnson administration is talking big about ramping up preparations for a no-deal Brexit, it seems that the aerospace industry has been quietly taking its own measures to reduce the impact of a disorderly exit.

The problem for the industry is set out graphically in the European Commission's Notice to Stakeholders originally published on 13 April 2018 and replaced on 18 January 2019, covering the EU rules in the field of civil aviation safety.

As the Boeing 737 MAX affair graphically illustrates, official safety certification is the lifeblood of the industry: without the necessary permissions, there simply is no industry. And, as has recently emerged from Boeing, its relationship with the regulators has been a dominant issue in the economics of developing and marketing of its products in a highly competitive environment.

How close that relationship was is set out in a recent article in the New York Times, which suggests that the relationship was actually too close, and too much work was delegated to the manufacturer in what looks suspiciously like regulatory capture.

Another aspect of the 737 Max affair is that, despite two fatal accidents, it was not the US regulator, the Federal Aviation Administration (FAA), which acted to ground the aircraft, but non-US agencies, including the EU's own regulator, the European Union Aviation Safety Agency (EASA).

On 12 March of this year, it acted unilaterally to suspend all flight operations of all Boeing Model 737-8 MAX and 737-9 MAX aeroplanes in Europe.

In so doing, EASA established its position as a regulatory superpower in the aviation sector. The previous day, the FAA had publicly affirmed the airplane's airworthiness but EASA forced its hand. Citing new evidence of similarities between the two accidents that had caused the crisis, on 13 March it grounded all 387 aircraft so far produced.

A side-effect of Brexit, though, will be to sever the direct link between UK aerospace manufacturers and the European regulator which, currently works independently and through the UK's Civil Aviation Agency to certify the safety of UK-manufactured products.

As the Notice to Stakeholders states, as of the date we leave the EU (the withdrawal date), EU rules in the field of civil aviation safety will no longer apply to the United Kingdom. That means that approval issued by the CAA, such as certificates of airworthiness, and approvals of manufacturing and maintenance organisations will no longer be valid.

This leaves UK enterprises with the options of transferring their certification to a civil aviation authority of one of the 27 Member States or applying directly to EASA for certification, to take effect once the UK has left the EU. And where, for legal reasons, certification cannot be transferred, the EU has approved a time-limited regulation which extends the validity of that certification.

If the UK leaves the EU with a deal the EASA applications will immediately lapse, as CAA approvals will continue to be valid across Europe during the transitional period.

However, after a slow start, the UK industry has taken on board the implications of a no-deal Brexit and is clearly of the view that the risk of a no-deal departure is sufficiently high for them to undertake the laborious processes of transferring certification.

Thus, as the Guardian reports, the industry has stepped up its plans to switch regulators. So far, six hundred UK-based firms have signed up to move from CAA to a European regulator.

This represents a significant increase in the rate of applications, which have tripled between December and July. In December 2018, only 200 UK aerospace manufacturers had applied to come under the jurisdiction of the European Aviation Safety Agency (EASA) as third-country enterprises, suggesting many firms would not have been prepared for a no-deal Brexit on 29 March.

Currently, the total applications submitted by UK firms to EASA runs to 636, while about ten more are in the process of completing their applications. It is estimated that about 800 companies will eventually need new regulatory arrangements under a no-deal Brexit.

British manufacturers Rolls-Royce, Cobham and Meggitt are among those businesses that have applied to EASA. Canada's Bombardier and the US company GE Aviation, which both have significant operations in the UK, have also applied.

Quite rightly, the Guardian notes that the regulatory changes do not involve major job moves out of the UK (for the moment), although it cites industry insiders saying that it could contribute towards making the UK less attractive for future inward investment.

That is something of an understatement and, as I pointed out in an earlier piece, there are substantial added complications. Not least, where direct supervision from a "competent authority" is required, for a UK firm to come under the aegis of a regulator based in mainland Europe, this can only add to costs and reduce flexibility.

This is on top of other difficulties which will arise from a no-deal scenario, which is expected to impose billions of pounds-worth of extra costs on the industry. The impact on some goods could equate to about 38 percent of their sale value, with the aviation lobby group ADS estimating that new customs checks alone will cost an extra £1.5 billion a year.

But even this under-estimates the potential impact. Because of the exceptionally close relationship between the industry and its regulators, the proximity of offices and cultural issues such as languages assume some importance. Generally – as we've seen with the medicines industry – manufacturers and especially their design and approval operations, tend to cluster close to the offices of their regulators.

Already, at the end of last year, we saw Rolls-Royce relocate design approval work for its large aero engines away from Derby to Dahlewitz, close to Berlin in Germany.

Over term, we can expect to see many more such transfers and, where core parts of a business are moved, other parts will sometimes follow. As more and more regulatory work is moved to mainland Europe, we can expect to see a gradual haemorrhage of jobs and capital away from the UK.

This puts a completely different spin on the government's rhetoric about preparing for a no-deal scenario. The way such preparations are framed, one is given the impression that these are mitigation measures which will reduce the impact of our withdrawal from the EU.

As the aerospace experience shows, however, preparation can simply be the process of managing job-losses and business capacity, taking on board additional costs with no compensating upside.

And what applies to aerospace also applies to the chemical industry, to car manufacturing, medicines and medical devices – to name but a few sectors. All of these have regulatory issues and are finding it necessary to transfer operations to EU Member States.

Initially, with the amount of investment already in the UK, we are unlikely to see any dramatic changes, but it is here that the Guardian's concern for future inward investment might come into play. The general regulatory environment and the ease of access to the regulators (as well as their proximity) are certainly factors which will be taken into account when locating plant, and in keeping existing facilities in place.

In the longer run, therefore, one might expect regulatory issues to have an adverse effect on highly regulated businesses currently located in the UK. Almost all of them serve global markets, with the regulatory system forming an important part of the export facilitation package.

Even if the UK somehow manages to create a low-regulation utopia, this will hardly compensate for taking us out of the EU's regulatory system, where overseas buyers demand highly regulated products, monitored by competent and experienced regulators.

There, the Boeing experience also speaks loudly. If, as is being argued, the 737 MAX crashes represent a regulatory as well as a design failure, one can expect global buyers to be looking hard at regulatory systems, and seeking greater reassurance. Tough, tightly enforced regulation, in these circumstances, becomes a marketing asset, one from which Airbus might be poised to benefit, especially after EASA's robust action on the MAX.

Nevertheless, we see elements of a regulatory crisis emerging, from which even EASA might not be immune, adding to an already uncertain situation. Thus, this might not be the best possible time to drop out of the European aviation safety regulatory system and start preaching the gospel of deregulation. No amount of no-deal preparation will make any difference to that.

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