Our AAD legal experts take a look at how the industry has been affected in the last 15 months or so, and take a look at what the future holds if the British pound continues its instability.

Stable and encouraging factors

The UK's defence budget may be under pressure, in the same way that all government budgets are, but there continues to be some stable and encouraging factors for the defence sector. These include:

  • the ongoing commitment to replace Trident;
  • the launch of the Queen Elizabeth aircraft carrier (a project on which Gowling WLG advised MOD), and its subsequent media profile (with The Prince of Wales not long to follow);
  • the need for aircraft on the aircraft carriers;
  • the coming into service of the A400M (another project Gowling WLG worked on);
  • the retention of Michael Fallon as Defence Minister through Brexit and then this year's election; and
  • the UK's continuing commitment to NATO - driven also by the stinging comments and threats of President Donald Trump as to the possibility of a waivering US commitment without more from the European partners.

The commitment to defence spending under a Conservative-led government seems unlikely to change, at least in the short term. This commitment may have been echoed under a Jeremy Corbyn Labour government, albeit possibly with some of the spending focussed in different areas.

Threat to employment levels

As the main employer within the three armed service limbs, one might think from the list above that the army might be getting nervous. However, this doesn't appear to be the case as we have seen numerous capital projects begin.

However, personnel - both as to numbers of troops, and the skills of them - is an area that Brexit continues to threaten.

This is particularly felt in the aviation and aerospace sectors, where the hard graft on the R&D is needed and on which aircraft and military capabilities depend. More significantly, as we still don't have enough certainty, we have a longer running risk that skilled labour will not be seeing the UK as a secure, long term environment for future and family life. Rules and regulations, tariffs and costs can be sorted (if the political will is there), but a brain drain is a long term threat.

Impact on rules and regulations

As we mentioned last year, the UK's continued access to the Common Aviation Area is important to businesses and consumers (we are all holidaymakers come July and August). But surprisingly there is still a lack of clarity in this area.

UK aviation regulation is primarily derived from EU law and is therefore unlikely to change, but if the UK wishes to retain access to the EU aviation market, it will need the EU to agree. That seems obvious, and must happen; but it hasn't yet in other seemingly equally as obvious areas (eg, existing EU nationals living in the UK). So while it seems an obvious objective, sadly we do not think that we can just rely on this coming to successful fruition until it actually does.

This issue has been heightened with America's leading airlines providing a clear warning that flights could be grounded if the UK leaves the EU's Open Skies agreement without negotiating a new deal.

So, UK owned/ UK based airlines may yet need to contingency plan for a relocation into mainland Europe in order to retain access to the EU market and be able to operate anywhere within the EU (as is happening with our banks also).

What next? Legal themes arising from Brexit

The Department for Transport (DfT) has opened a consultation process on the future of aviation in a post Brexit world as the UK hopes to continue its "global success story". In the report, the DfT has set out its Aviation Strategy which has six key objectives:

  • help the aviation industry work for its customers;
  • ensure a safe and secure way to travel;
  • build a global and connected Britain;
  • encourage competitive markets;
  • support growth while tackling environmental impacts; and
  • develop innovation, technology and skills

The strategy will be published by the end of 2018 and is expected to focus on an overhaul of EU rules on the allocation of "slots" - a system designed to make efficient use of airport capacity and to prevent discrimination among airlines.

And there do of course remain some legal themes that could arise for the sector for when the UK does eventually leave the EU, particularly focusing on the impact of that on contracts - not yet in play, but by way of example:

  • we are not yet generally seeing contracts being varied or terminated, but …
  • tariffs cannot yet be priced for, but …
  • there seems as much cross-border contracting on current/ new projects as before, but …
  • there is not yet much demand for specific "Brexit" clauses (be that by a reinforced material adverse change clause, or a more simple 2019/ 2020 break clause), but …
  • English governing law and jurisdiction clauses are no less popular, but …

One of the interesting issues however that we have already seen, and that is having an impact already, is from foreign exchange rates. While this isn't directly an outcome from Brexit, it is still related and worth discussing. In the global market that is the AAD sector, the weakness of the British pound, especially against the US Dollar, is starting to create friction. The British pound might be stable at the moment, but another downward jolt would be a most unwelcome threat to 'business as usual'.