Birgitta Van Itterbeek of Monard Law analyses the challenges faced by Belgium’s highly competitive aviation market: what will be the effect of “Brexit”; will Lufthansa acquire its majority stake in Brussels Airlines; and how will the government tackle pressing security issues?
1.Currently, what are the main issues (strategic and political) affecting those in the aviation sector in your jurisdiction?
Following the terrorist attack on Brussels Airport on 22 March 2016, safety measures and the prevention of further incidents without impacting the functioning of the airport are still a major issue. The events and the safety measures have affected the reputation of the airport and still scare many passengers, some of whom are preferring to depart from another nearby airport. Whilst Brussels Airport is regaining its previous passenger levels, at the end of the summer it is still lagging behind, with about 3,000,000 passengers; significantly fewer than would have been forecast for the season. A national committee for safety of civil aviation has recently been created.
A major issue for all European airlines is the European Single Sky project, which is essential for the efficient operation and use of the European airspace. The local traffic control organisations are fiercely opposed to it, which has led to many strikes; for example by Belgocontrol, but also by the French and Italian traffic control agencies.
Belgium is a very competitive country in terms of airline operations, with many low-cost carriers using it as a hub or with a strong operational presence here, such as Ryanair, Easyjet and Vueling (short- and medium-haul flights). As to long-haul flights, there is not only competition from nearby airports such as Schiphol, Frankfurt and Paris-Charles de Gaulle, but also from carriers from the Far East who can operate at much lower personnel costs and do not fall under the strict European regulations.
2. Where has your jurisdiction seen the most growth in the aviation sector over the past 12–18 months? And, if any, where do you anticipate growth coming from during the next 12 months?
If one ignores the drop in passengers as a result of the attack at Brussels Airport, as mentioned above, growth over this period relates first of all to new carriers flying from Brussels and opening new routes, such as Nippon Airways’ flights to Tokyo, as well as the expansion of the operations of Ryanair which now, in addition to Brussels South Airport, is also flying to Brussels Airport. Brussels Airlines has also grown and expanded, while Brussels Airport and the Airport of Liège are experiencing strong growth in cargo.
Due to the United Kingdom’s recent vote to leave the European Union, there is a lot of uncertainty on the market. There are many businesses in Brussels with links to the UK such as lobby organisations and law firms, and it is still unclear how this decision may impact the economy and/or the aviation industry. It is also not certain when and if Lufthansa will take over its majority share in Brussels Airlines, and what the future of the airline will be. There are suggestions that Brussels Airlines may join Eurowings, but this may not fit with the business model of Brussels Airlines.
3. Does the GDS distribution model continue unchallenged as the most popular model for flight distribution?
Brussels Airlines, but also tour operators such as the TUI Group, have made important investments in their own online booking system which they now of course promote. There has been a significant decrease in activity among travel agencies. However, IATA (International Air Transport Association) carriers continue to use the GDS system and continue to operate with travel agencies, although this is in parallel with their own online booking systems.
4. In your jurisdiction, does airport capacity require boosting and, if so (and even if not), what plans and/or processes are in place to address this (or increase or re-organise airport capacity, as the case may be)?
There are five airports in Belgium. The largest is Brussels Airport, followed by Brussels South, Liège, Oostende and Deurne (Antwerp). Brussels South Airport has recently invested in an extension of its runway, thereby adding additional capacity. Apart from the renovation of one of the major runways, there are no plans at Brussels Airport to create new runways. At the International Airport of Antwerp (Deurne) there is a real capacity issue due to the shortness of the current runway, as this limits the type of aircraft which can land and take off. There are, however, plans to extend the runway. There are no real other capacity issues. The allocation of slots is performed by BSC Slot Coordination for the whole of Belgium.
5. Does the national "flag" carrier carry the most passengers into and out of the national airports and: (a) if so, what competition exists and how significant is it?; and (b) if not, what are your thoughts on the reasons for this, and why do competing airlines have higher load factors?
The “flag” carrier in Belgium is Brussels Airlines, which was created in February 2002 as a new company by a large group of Belgian corporate investors, out of the regional carrier of Sabena (Delta Air Transport) in the aftermath of its bankruptcy . At present, Lufthansa has a stake of around 45% in the holding of the airline. Brussels Airlines uses its short- and medium-haul flight operations in part as a feeder for its long-haul operations. It has suffered very strong competition from low-cost carriers such as Easyjet and Ryanair. However, following heavy restructuring, it has now a business model which can compete with the low-cost carriers, which has led to a strong increase in passengers for the airline. On long-haul flights, especially to the African continent, it has developed a strong niche, taking advantage of the Sabena legacy; but also here there is strong competition, for example from Turkish Airlines which applies very low rates. Brussels Airlines has a major disadvantage towards airlines such as Turkish Airlines due to the higher personnel costs in Belgium. Brussels Airlines recently announced that it will start new operations to India.
6. What trends, in terms of regulatory intervention and involvement, has your jurisdiction observed over the past 12–18 months in relation to airline acquisitions and alliances? Do you anticipate a change in the regulatory environment of your jurisdiction during the coming 12 months, and if so, how?
Airline alliances and mergers are mainly regulated by EU law. The purchase option for Lufthansa of a majority stake in Brussels Airlines has been approved. The biggest question is whether or not Lufthansa will lift its purchase option to gain a majority participation in the coming 12 months. It has already postponed this decision several times. Another big change in the tour operator business is the “one brand, one airline” model of the TUI Group; Jetairfly will rebrand itself as TUI.
7. What trends are being observed in relation to new technologies – such as UAVs/drones – and what impact are these technologies having on the aviation regulatory environment?
Drones are no longer the preserve of hobbyists, the military and the technology sector. Following a new Royal Decree (“Drones Law”), Drones are now recognised as aircraft, allowing their commercial use. The Drones Law entered into force on 25 April 2016. The Drones Law regulates the commercial use of small (with a take-off weight not exceeding 150 kg) remotely piloted aircraft (“RPA” or “Drones”) on Belgian soil or airspace. Drones with a higher take-off weight fall within the competence of the European Union.
The Drones Law is not applicable to 1) the recreational use of Drones with a maximum take-off weight of less than 1 kg, 2) the indoor use of Drones, and 3) the use of Drones for public policy (such as use by the military, customs, police, salvage operators, the coastguard, or the fire service). The licence covering the airworthiness, pilot and operational functions of a Drone depends on its intended operation, weight and use.
There is strong manufacturing activity within the RPA industry in Belgium. The Drones Law is expected to give a boost to the manufacturing and operational activities of Drones.
8. Legal issues in the “lease-to-part out” market. A major market development is the interest of investors purchasing mid–end life aircraft on lease for the purposes of making returns on a leasetail and component margin model. What challenges are inherent in this segment of the aviation finance market, and what techniques and disciplines are required to manage the risks involved?
As an aircraft’s end-of-life value depends on its parts, the major issue relates to the value, utility and EASA (European Aviation Safety Agency) compliance of these parts. One has to look at an aircraft’s records over a 25-year time span. When an aircraft has been operated by one airline for its lifetime, one may be able to more easily reconstitute missing records, but if one aircraft has changed operator many times, this may in practice be very difficult. One has to look carefully at the lease terms; not only as to the redelivery conditions, but also the wording of the continuing indemnity. If records are not in an electronic format, this may constitute a major challenge. It is therefore advisable to have very robust detail redelivery conditions, replacement standards for parts, and an obligation that all records are in an electronic format. Leases should also contain an assistance clause post-redelivery with respect to the records, covering maintenance tasks performed during the lease term.
9. Manufacturer support in the new cycle of new OEM products, e.g. MRJ, E2, C-series, etc. In an increasingly sophisticated and competitive environment, in what way is the type of OEM financial and product support for this new era of aircraft more complex and far-reaching than in previous cycles?
This is not applicable, as there is no airline currently using such products/aircraft in Belgium.
10. The advent of cheaper oil and the knock-on effects. What are the consequences that arise as a result of the unexpected purchasing power of a number of third/fourth-tier airlines? What will challenge lessors and suppliers in particular as they are faced with speculative judgments on an airline's longer-term financial viability?
Due to the cheaper oil price, airlines which mainly lease aircraft have fewer incentives to lease newer aircraft with more efficient fuel consumption. Hence Brussels Airlines, for example, tends to lease older aircraft fresh from their “4 C Check”. If the oil prices rise, then hopefully these leases will provide sufficient fleet flexibility to move to more fuel-efficient aircraft. Indeed, airlines do benefit at present from the lower fuel price, but with respect to the main Belgian airlines, this is not their main driver for profitability.
11. Iran and the market return. What remain as barriers, including sanctions-related issues to navigate, where Iran and aerospace and aircraft transactions are concerned? What sort of jurisdiction is Iran from a risk perspective, and what techniques from a supply perspective are likely to be needed so that Iran's potential and promise for OEMs, lessors, suppliers and service providers is realised and does not become the latest example of a disappointing gold rush?
On 16 January 2016, phase 1 of United Nations Resolution 2231 was implemented. As a result, an international ban against Iran has been partly abolished, allowing it to trade with other countries with respect to transport goods such as aircraft (see also EU Regulation 2015/1861). Exports and imports may, however, be subject to the respective duties. Belgium does not manufacture any commercial or military aircraft apart from small aircraft, and does not have any aircraft leasing companies. The Belgian companies are mainly manufacturers of parts and, as such, depend on the production and sales of the large aircraft manufacturers such as Airbus and Boeing. Iran is, however, in general a very interesting new market for Belgian manufacturers, and some Belgian manufacturers have already established a branch, subsidiary or affiliate office in Iran. In addition, the maintenance providers established in Belgium may benefit from the growth of the aviation business in Iran.