The Brexit Conundrum

posted on 8th February 2019
The Brexit Conundrum

Air cargo players and the wider freight transport and logistics sector − and their customers − continue to face an unnerving level of uncertainty and planning challenges over the UK’s planned departure from the European Union (EU) on 29 March.

The uncertainty was further extended with the overwhelming rejection by the British parliament on 15 January of the government’s proposed agreement with the EU outlining the terms of the UK’s withdrawal from the bloc at the end of March. And further votes on 29 January have prompted Prime Minister Theresa May to go back to Brussels to press for further changes to the deal.

Meanwhile, the outcome remains highly unpredictable, with a number of options still possible, including an extension of the 29 March deadline or the outside chance of a second referendum. But with May apparently determined to push ahead with the 29 March deadline, the prospect of a no-deal Brexit has continued to build. UK freight forwarders say this is what they are now preparing for – noting that if there is a deal agreed, that will come with a transition period until at least the end of 2020, meaning that little of no change will be required initially.

The major short-term fear of the freight industry and its customers is that a ‘hard’ or ‘no-deal’, cliff-edge UK exit from the EU will trigger the re-introduction of border controls, leading to massive tailbacks of trucks at Channel ports and bringing chaos to supply chains, especially those that reply on just-in-time production cycles and perishable goods.
Within its contingency planning for Brexit, the UK government has taken a number of steps, including measures to obtain additional roll-on, roll-off (ro-ro) ferry capacity designed to offset the risk of bottlenecks on key trade lanes such as the Dover-Calais crossing and Eurotunnel, through which a significant volume of UK air freight and other freight is currently carried each day.

Doubts have also been cast over whether customs authorities have enough manpower to carry out potentially bigger workloads while there are also reports of an urgent need to hire and train a significant number of customs brokerage staff on both sides of the Channel.

Europe’s biggest cargo airline, Cargolux, underlines that from “a global logistics perspective”, its biggest concern with a hard Brexit is the possible disruption to trucked cargo to and from the UK, as a result of physical border checks being re-instated and the potential delays this would cause. “If waiting times (at the border) were extended due to the customs processes being implemented, this would have a negative impact on the service we were able to offer our customers. Our costs would increase as a result as well,” a spokesperson says.

“We are in close contact with all of our suppliers and business partners, as well as with the Luxembourg and EU authorities, in order to assess the situation and plan solutions. However, at the moment, uncertainty continues to prevail with the decision of the British Parliament rejecting the negotiated deal.”

Road feeder issues
The continental Europe-UK route is also an important part of Luxembourg-based Wallenborn’s European road feeder services (RFS) network for air cargo. “We deliver UK exports to freighter and airline passenger hubs in continental Europe and carry exports from continental Europe to fly from London airports. Cargo arriving at UK airports aboard long-haul flights is transferred to final destinations in continental Europe, while we also handle shipments arriving at EU airports, again on inter-continental flights, which is transferred by RFS to destinations in Ireland and the UK,” explains commercial director Jason Breakwell.

“Most of this cargo is both time and temperature sensitive and comprises diverse commodities vital to sectors of the UK economy, which including aerospace, automotive (components and finished goods), e-commerce, fashion, healthcare and hi-tech.”

Contingency Action Plan
Wallenborn Transports is not expecting a hard Brexit and anticipates that potential problems will be ironed out during a transition period. But Breakwell says Wallenborn, like many other companies, is preparing for ‘no deal’ − “not because we expect ‘no deal’, but because there will be minimal disruption in all other scenarios”.

In the event of a no-deal, Breakwell expects that the UK government will welcome the European Commission’s proposed ‘Contingency Action Plan’, a series of measures announced in December aimed at mitigating some of the most damaging effects that would arise from a no-deal Brexit scenario, including ensuring limited continuity of air transport and road haulage until at least the end of 2019. The road freight proposals would allow UK operators to temporarily continue to carry goods to and from the EU, provided the UK confers equivalent rights to EU road haulage operators, through continuing mutual recognition of Community Licences.

Observers say that would at least provide some limited continuity, although it will not deal with the concerns of many operators about delays caused by new Customs and other regulatory checks.
Breakwell notes that the main concerns of Wallenborn’s customers have focused on the uncertainty surrounding the Brexit process, with the prospect of changes taking effect as soon as 30 March, including restrictions being applied to trucks operating between the EU and the UK, although the ‘Contingency Action Plan’ suggests there would be no changes until 2020 at the earliest, he says. “Another concern has been that that new customs procedures are expected, if not this year, in 2020 or 2021 and we are involved in developing technological solutions that will ensure reporting is done in advance and any inspections will be done ‘inland’ to avoid congestion at borders.” Feedback from customers had also highlighted difficulties in separating reality from ‘fake news’ and speculation about Brexit, he adds.

Major concerns
However, Pauline Bastidon, head of European policy and Brexit at the UK’s Freight Transport Association (FTA) is less confident about the contingency measures and their effectiveness, noting: “The EU’s very limited no-deal contingency plans will not allow trade to flow freely between the UK and EU, confirming expectations of border delays, supply chain disruptions, significant additional red tape for traders and operators alike, and restrictions to transport.” She said the proposals for aviation and road haulage “fall short of what would be necessary to allow our industry to keep the supply chain intact and trade moving”, and could still be rejected by the European Council and the European Parliament.
She points out that the scope of the proposals is also “very limited”, noting: “Only UK-EU and EU-UK haulage routes will be covered, and UK-registered operators will only be able to perform intra-EU international deliveries if they are in possession of an ECMT permit – and the number of these to be allocated to UK hauliers would only cover a small fraction of the needs of the industry. Cabotage will be effectively prohibited, meaning that operators based in Northern Ireland would not be able to access the domestic Irish haulage market, and vice versa. Likewise, the air services proposals only apply to point-to point services and exclude services between EU countries.”

Another very interested observer of the Brexit process is Sebastiaan Scholte, CEO of Netherlands-based Jan de Rijk Logistics, whose European RFS network for air cargo is served by a fleet of more than 1,000 trucks – which make around 20,000 Channel Tunnel crossings annually between the UK and mainland Europe. He describes as “superfluous” the contingency plans of the UK government to secure additional ro-ro capacity.

Border bottlenecks
“Bottlenecks would not be a result of a lack of capacity but rather a consequence of extra controls at the border, which would be devastating for everybody in the supply chain and cause chaos,” he says.

If long lines of traffic do occur at the border, they would inevitably lead to longer transit times for trucked UK-EU air cargo traffic flows, which would become more complex and costly to manage. “Every hour of delay would add roughly €1.5 million to Jan de Rijk’s annual operating costs,” he notes. “We represent around 1% of all the Tunnel crossings, so the extra cost for hauliers using the fixed link as a whole would be €150 million minimum, but probably nearer €200 million. And of course, this estimation does not include hauliers using the ferries.”

Nevertheless, Scholte is relatively optimistic that bottlenecks will be avoided at the ports. “The message we are getting on the new customs procedures which would be implemented with a hard Brexit is that the principle of clearance being completed ahead of the truck reaching the border will be maintained, which is reassuring.

“On top of that, whatever Brexit deal is struck, I think a ‘transition’ period will be put in place, which could mean the status quo is maintained until the end of 2020 for example, giving us time to prepare for any permanent changes in the longer term. Nor do I fear a situation arising where there is no reciprocity with regard operating and traffic rights of UK and EU carriers as it simply would not be in the common interest.”

No-deal Brexit
In the event of a no-deal Brexit on 29 March, Breakwell points to assurances from Port of Calais president Jean-Marc Puissesseau that UK Customs would not be checking vehicles arriving in the UK and so France would not be carrying out any more vehicle checks after Brexit than is the case at present − which includes checks for hidden migrants in vehicles − apart from those for food and livestock, and on the inbound side to France they would be checking that the appropriate Customs declarations had been made.

In time for the UK’s exit date from the European Union on 29 March, Puissesseau says several areas dedicated to documentary declarations or controls will come into being, training of staff, and other measures that are “designed to be scalable and to adapt according to the through-traffic and the level of controls to be deployed in line with the final Brexit agreements, which are currently still unknown”. An ‘intelligent’ system would ensure declarations are made in the customs declaration system before passing through the port, linking the vehicle’s registration plate and the electronic customs documents, to “avoid any physical formalities and ensure optimal fluidity”.

But Road Haulage Association (RHA) chief executive Richard Burnett highlights a number of potential problems, at least for freight travelling outbound from the UK, where vehicles lacking pre-customs declarations or the necessary permit or transit document will be rejected. To complete that initial documentation check may take up to five minutes per vehicle, “still a significant delay”, he notes adding: “If the declaration is not fully completed, the shipping lines will reject the vehicle − it will have to turn away or park up to get the declaration completed.”

And even to access that process, businesses would have to complete the right documentation in the first place, with the UK currently having “nowhere enough clearing agents” with sufficient knowledge to give business the help and advice they need. “We also need to be aware that the customs process has still not been agreed from a French perspective,” Burnett notes
UK Customs technology expert Agency Sector Management (ASM) chairman Peter MacSwiney says HMRC’s expectation that all exports will have pre-lodged declarations in place when they arrive at ro-ro ports – as is currently the case for all ‘third country’ exports – and that these will be declared as ‘arrived’, is “completely unrealistic”. He likens the time-scales of the ro-ro market to those of air freight and points out that at Heathrow Airport “it is only a handful of consignments that are pre-entered”.

RFS clearances
Breakwell acknowledges that there will be different processes in place sooner or later. But even in the event of a no-deal Brexit, he says new processes “are not expected to affect the vast majority of shipments carried on existing air cargo RFS because almost all these shipments are coming from or going to a ‘third country’ (outside the EU), so are already subject to Customs control”. And if there is an exit deal, Breakwell says he has received assurances “that it will be business as usual” even after the end of the transition period.

Nevertheless, he is “concerned about the absence of inspection facilities at the UK entry points at Dover and Eurotunnel”, which in the event of ‘no deal’ could require the re-routing of food imports to inland sites.
Other freight industry observers doubt that shippers will be ready in the event of ‘no deal’, especially the more than 100,000 UK companies that currently trade internationally within the EU that have never dealt with customs and other import-export requirements, and presumably similar numbers in the EU that trade with the UK that have also never dealt with customs issues. Freight forwarding representatives on both side of the Channel say there are currently too few customs brokers to deal with the expected increase in customs declarations and insufficient time to put these in place by 29 March.

Queues of trucks
MacSwiney highlights a potential problem that even goods that are already properly customs cleared may well still get caught up in queues of trucks leading to and from the Channel ports or Eurotunnel, because there may not be any effective system of differentiating between vehicles that have got the necessary paperwork from those that have not.

Some expect that in order to avoid this, we may see some customers deciding that instead of flying UK cargo in and out via mainland European airports, as is currently done for significant volumes of UK air cargo, they would instead route shipments direct to and from the UK on intercontinental flights, so they would not have to deal with the cross-channel situation.

Scholte says: “In case of border disruptions, this will happen for sure.” But he says it is something that forwarders and shippers will make decisions on much closer to the time.

Breakwell agrees that this scenario is possible, and if it happens, we “would likely see greater use of direct flights from and to the UK and third countries – and some EU-UK air-charters for some critical consignments are likely. The large operators and users of express services have contingency plans to deploy additional aircraft on the EU-UK corridor in case of short-term disruption around period when the UK leaves, but I’m not aware that they are planning this as a permanent solution to by-pass more onerous Customs processes.”

He says that direct flown air cargo capacity into the UK “is already limited, which is why there is a healthy demand for RFS from mainland gateways to the UK”. He adds: “One reason for relatively few freighter flights to the UK is relatively low yields from the UK, and most tend to be tagged with a mainland airport. There will need to be a significant jump in rates to entice freighter operators in to ramping up UK calls.”

He says an interesting question post-Brexit is “will the UK experience a significant increase in trade with non-EU countries and will this encourage more direct freighter operations from and to the UK”? But that is a question “for the mid-term”.

In the meantime, Philip Stephenson, chairman of UK forwarder Davies Turner, says the company has been “actively engaging with and advising its customers to ensure they are accelerating their own planning, and are prepared to give us all of the necessary information about their shipments, including EORI numbers, tariff numbers, commodity codes and incoterms in a ‘no-deal’ scenario working under WTO terms”.

But MacSwiney says that the task for shippers of gathering all this extra data about their products, sources and suppliers that has never previously been required will take a major change in shippers’ processes and systems – something that would take more like 18 months to achieve and would be impossible in many cases in just a
few weeks.

European forwarders
CLECAT, the European association for Freight Forwarding, Logistics and Customs services, says logistics service providers and customs agents are continuing to prepare for a situation whereby the UK will leave the EU without a
transition period.

“Our members are already used to handling trade with third countries. In most cases they already have the competence, experience, permits (including for example AEO) and IT systems in place to deal with such circumstances. The challenges that remain are the amount of human resources needed and the preparedness of importers, exporters and other stakeholders in the logistics chain, which have limited experience in trading with third countries,” its senior manager, Dominique Willems, comments.
“Various stakeholders such as port operators, transporters and freight forwarders have started good cooperation initiatives to ensure that, for example, any delays at ferry terminals can be minimalised or at least managed in the best possible way. Despite the preparedness of the logistics service providers, CLECAT still considers that a no-deal Brexit on 29 March should be prevented at all cost.

He continues: “Regardless of any preparatory efforts, such a situation will almost certainly lead to disruption, delays and extra costs in trade, and it will thus surely damage the economies of both the UK and EU.”

According to Olivier Thouard, who heads the Brexit working group at France’s leading freight transport and logistics federation, TLF and is also Customs and Tax director at French operator, Gefco, the readiness of forwarders is a work
in progress.

“It’s only quite recently that forwarders have become aware of the changes to the customs procedures a hard Brexit will usher in and what will be required in terms of export, import and transit declaration documentation to cross the border,” he notes. “If everyone has been doing their jobs and are fully ‘genned up’ on the new requirements, there’s perhaps no reason why things shouldn’t run smoothly.
“But as with any new system of compliance, there is the risk that some firms will dispatch trucks without completing the necessary paperwork, resulting in drivers being refused permission to board ferries or the Eurotunnel freight shuttle. And the trouble is you can’t really anticipate to what degree this might happen.”

Long-term confidence
UK forwarder Priority Freight says its concerns over a hard Brexit are largely confined to the impact on its customers and their confidence about the UK being a suitable environment in which to develop and prosper long-term. “Our discussions with them revolve around their ability to maintain adequate stock levels and production capability, as well as labour force availability that could be affected by traffic congestion in south-east England, for example,” explains group marketing manager Emma Cooper.

“We have a range of contingency plans to employ but they are all dependent on how Brexit actually materialises and what subsequently transpires. Some of the contingencies will be determined by this emerging picture, and the uncertainty of timing and potential impact is not assisting in the planning of the various options. These options are proprietary to us and our clients and involve alternative routings and modes of transport.

“Priority Freight will be fully focused, as always, on creating bespoke solutions for our clients’ requirements in what will be a resource-constrained market,” she adds.
Air charter options
As the 29 March deadline draws closer, feedback from some air charter brokers suggests they are receiving an increasing number of enquiries from forwarders about securing air cargo capacity to offset the potential repercussions of a ‘no deal’ Brexit on the supply chains of their shipper customers.

Pierre van der Stichele, director of cargo operations at Chapman Freeborn, says that the day after the vote by the UK Parliament rejecting Theresa May’s Brexit withdrawal agreement with the EU, the company’s Germany office fixed up a wide-body aircraft to remain as a dedicated asset on standby five days a week, based in the UK, to operate a daily UK-France-UK routing.
“This is a B767 freighter on behalf of a top-tier freight forwarder, starting mid-March, and will transport pharmaceuticals. So now, we have three aircraft dedicated to three different forwarders,” he says.

Earlier this year, Chapman Freeborn signed agreements with two major forwarders, one of them for their clients in the automotive field, the other in phamaceuticals, to supply two narrow-body freighter aircraft, respectively − a 20-tonne capacity AN12 and an 8-tonne capacity ATR72 − for renewable 12-week periods from the end of March 2019 when the UK is scheduled to leave the EU.

“These aircraft would be based at specific airports in the Benelux region and have dedicated crews on call and basically fly on demand for the forwarders’ clients,” he says.

The shippers in question operate to ‘just in time’ production cycles and their normal logistics provision focuses on transporting freight by truck to and from the UK using cross-Channel ferries and Eurotunnel.

Uplift in enquiries
UK-registered cargo airline CargoLogicAir is also fielding a number of
Brexit enquiries.

“We are monitoring developments closely and talking to our customers about their potential requirements to maintain the resilience of their supply chains, particularly if they start to encounter border disruption or delays,” CEO David Kerr says. “There is clearly a recognition that air cargo can provide the predictability they need and, as the UK’s only maindeck cargo airline, CargoLogicAir expects to play an important role in supporting the growth of British businesses and our economy as well as ensuring international companies trading with the UK can do so with confidence. Based on the current situation, it is clear we will be able to fly to and from Europe and other key markets, but we must be able to do so as efficiently as possible.

Kerr emphasises that CargoLogicAir is hoping that the decision made regarding the air services agreement between the UK and EU will be in favour of the most liberal aviation policy, protecting market access and the best interests of all parties that rely on the speed and reliability of air cargo.

“Our commitment to supporting the import and export trade relationships the UK has with the rest of the world and our plans for further fleet and network growth are unchanged and remain our priority as we continue to provide fast and dependable all-cargo capacity connecting major markets in Europe, the Americas and Asia Pacific.”

Automotive shippers
Evolution Time Critical (ETC), a leading specialist in emergency logistics for the automotive industry, is another company mulling the likely impact of a no-deal Brexit on freight flows.

“We’re consulting closely with our manufacturing contacts and industry trade bodies and while they all recognise air cargo to be a flexible, speedy and established solution in emergency logistics situations, most consider the current balance of factors doesn’t suggest the mass adoption of air freight as an economically proportionate or necessary contingency,” a spokesperson explains.

“Instead, careful and proactive supply chain analysis and mitigation planning suggests the vast majority of production material will continue via road, with air facilitating smaller volumes of time-critical parts as it has done previously.”

But he says air cargo capacity is only part of the equation.

“Perhaps more important is the form post-Brexit customs regulations will take, as many of the smaller airports favoured for emergency logistics may not have implemented the required customs systems and infrastructure, meaning that flights must leave Europe via larger but more-congested hubs. Evolution is used to managing complex customs processes and it comes down to familiarity and preparedness. Again, it’s more about rigorous analysis and planning than throwing money at air cargo that may not even deliver the required solution.”

One senior freight forwarding source close to the UK government says all efforts are now being made within his organisation to prepare for a no-deal scenario, even if the efforts ultimately prove unnecessary. “Will we be ready?” he questions. “We will certainly be more ready than if we were not making these preparations.”