Airports and airlines feel the effects of Air Passenger Duty charges, and things are not going to get any better, as Roy Allen explains.
Looking around for new ways of raising revenue, as governments regularly do, the UK government turned again to the air transport industry to provide a new tax on travel, and Air Passenger Duty, or APD, was introduced in 1994. Despite all-round condemnation the tax has been maintained and, indeed, regularly increased (see table), leading to Colin Matthews, Chief Executive of BAA to comment recently: “The UK has the highest aviation taxes in the world, and ultimately, increases in APD hurt consumers and businesses alike as it makes it much more expensive to fly from the UK. Bigger and more environmentally-efficient jets will not be able to fly from Heathrow if we do not have enough transfer passengers to make the flights viable.”
His words are echoed rather more stridently by Ulrich Schulte-Strathaus, Secretary-General of the Association of European Airlines (AEA) who says: “It seems the UK Treasury is addicted to APD revenue and has no plans to quit this habit, despite considerable pressure from the industry and lessons learned in other countries.”
Passengers bear the brunt of the APD charges, but the airlines have the burden of collecting them and passing the monies on to the Treasury. In this regard the voice of the AEA is a strong one, representing as it does 36 major European airlines, three of which are British. Notably, the UK is among the most important destinations for these airlines, with 70 million passengers being carried by them to, from and within the UK in 2010. The AEA’s view on taxation is two-fold: “Firstly, aviation is wrongly viewed by governments as an easy source of cash for national treasuries, for they tend to overlook the huge economic and trade benefits of their air links, instead favouring short-term gain. The withdrawal of aviation taxes in several countries is strong evidence of this being a flawed revenue-generation strategy.
“Secondly, with the advent of the EU Emissions Trading Scheme (which comes into effect from January 1, 2012), we do not want to see airlines charged multiple times over in the name of the environment. Airlines are more than willing to shoulder their environmental responsibilities, but multiple layers of taxation will only hinder the industry’s ability to invest in more efficient technologies.”
While strongly condemning any further increases in APD, John Hanlon, Secretary-General of the European Low Fare Airlines Association, accepts the introduction of the EU’s Emissions Trading Scheme, as he told Airports International: “We’re strongly in favour of that, for we think there’s a role for a market mechanism and the ETS creates this role, while it can serve as a positive way of reducing overall emissions.”
Where APD is concerned however: “We’re against any further increases, and the UK Government should be mindful of the experience of other European governments and their reactions, in that the Netherlands abandoned its passenger tax after 12 months; Ireland has reduced its tax to just three euros with a view to permanently withdrawing it; Germany is considering its position, as is Austria, and Belgium dropped the idea altogether,” he said. Perhaps once regarded by some as an inconsequential body, ELFAA is far from that today, in that its member airlines carried 172.6 million passengers in 2010, representing 42% of intra-European traffic.
When first introduced in 1994 the government case was that: “APD would make a useful but fair contribution to public finances while also contributing towards meeting the environmental costs of aviation.” Environmental matters and aviation emissions were less of a high-profile issue then than today and the general public saw the levy for what it was ‑ another tax. Airlines were required to collect APD and the duty was applied to any passenger travelling from a UK airport on board an aircraft of more than 20 seats. Even at 1994 prices, however, £5 (US$7.85) APD levied on an economy short-haul passenger and £20 (US$31.40) for an economy long-haul flight were not seen as excessive, and the duty became a way of life.
For the Treasury, 1994’s APD receipts yielded a ‘useful’ £84 million (US$132). For the next dozen years, covering the whole period of the Blair government, no further increase was made (overlooked, perhaps?), but with the advent of the Brown administration in 2007 APD rates were doubled in all bands and steady, substantive increases have been made ever since.
As figures show, the value of APD as a contributor to government coffers was well appreciated by 2007, as the Treasury’s ‘take’ for the year was £1.99 million (US$3.12m), or 105.4% more than 1994. Further increases would be made almost annually from here on; economy long-haul now cost a passenger £40 (US$62.80) APD and premium long-haul £80 (US$125.60). This last figure rose to £110 (US$173) in 2009 and a swingeing £170 (US$267) in 2010. With a fall-ff in passenger traffic of 7% over 2008-9 because of the recession, Treasury receipts were down by 6.3%, to yield £1.85 million (US$2.9m), but were up again in 2010, to £2.30 million (US$3.6m).
Air Passenger Duty, 1994-2010. Principal rates
1994 2007 2009 2010
Economy short-haul £5 £10 £11 £12
Economy long-haul £20 £40 £55 £85
Premium short-haul £10 £20 £22 £24
Premium long-haul £40 £80 £110 £170
Source: HM Treasury
BAA for one has taken issue with the government claim that APD was intended to largely cover the environmental costs of aviation, saying: “APD does nothing to protect the environment. The money raised from APD goes straight to the Treasury and is not ring-fenced for environmental purposes.”
Heathrow’s major operator, British Airways, has said with some irritation: “At existing rates of APD British Airways and other UK airlines meet their carbon costs more than twice over. We are particularly concerned about the disproportionate impact of APD on long-haul destinations. A family of four flying in economy class from the UK to Florida currently pays £240 in Air Passenger Duty. Travelling to the Caribbean they pay £300 – or £600 if they are in Premium Economy. We are calling for a fairer flight tax.”
Using stronger language, Andrew Herdman, Director-General of the Association of Asia Pacific Airlines, proclaimed: “The UK Government has frequently tried to justify APD, entirely spuriously, as an environmental measure, but later admitting that it was purely a revenue-raising fiscal measure, that extracts UK£2.3 billion a year from the travelling public. The APD is entirely ineffective as an environmental measure because none of the funds raised are directed towards achieving any environmental benefit. Furthermore, the UK Government appears to be blind to the hidden damage done to the broader economy.”
A new plan
With such criticisms ringing around the corridors of the Treasury, the government decided on a reshaping of the APD at the beginning of 2011, to retain the tax but levy it, perhaps, in a more equitable way. Arrangements had already been made in 2010 for substantial increases in 2011, but these were shelved until a new scheme could be devised. This originally constituted a per-plane charge, whereby an APD levy would be made on an aircraft leaving a UK airport with a complete load of passengers. The scheme was criticised by the industry as impractical for a variety of reasons, among them the fact that international agreements would not be forthcoming, and so it was dropped. Prior to this the Treasury’s stance was that “We will work with our international partners to build consensus for this approach in the future.”
British Airways welcomed the decision at the time, noting that apart from the practical difficulties, it would have caused serious damage to the UK’s connectivity and economic competitiveness. What the airline wanted, British Airways said, was a fairer tax, and BA called for a three-pronged approach to APD, to make it more consistent with the government’s objective of economic growth. “The four distance bands of APD should be reduced to two: flights of up to 2,000 miles (3,200km) and flights of more than 2,000 miles. In the last two years APD on long-haul flights has risen by up to 112%, while the rise for short-haul has been 20%.”
Manchester International Airport calls for a fairer tax, arguing that the levels of APD are too high, and are now having a distinct impact on passengers and airlines. Speaking for the Manchester Airport Group, which comprises MIA, East Midlands Airport, Bournemouth and Humberside, Sarah Brooks, Head of Government Affairs, told Airports International: “Manchester doesn’t have a ‘home’ airline and is reliant on foreign airlines who may consider starting a service from here but then think again about it because of the high levels of UK APD. In terms of our ability to attract passengers, and thereby services, APD is certainly having an effect.”
Demonstrating its readiness to be fair and listen, while at the same time changing nothing, the government launched at the time of the spring 2011 Budget a Consultation Paper on the reform of APD, and this remains the current position. Sent out to UK and other airlines, UK airports and interested parties, the consultation document invited views and responses, with June 17 as the deadline for submission. Pronouncement on the findings from the document and the government’s future intentions are scheduled to be made public this October.
As the Treasury has said, the purpose of the consultation is: “…..to create a simple tax system for air transport services in the UK, which does not hamper growth, ensures a fair contribution toward the public finances from the sector and which is consistent with the government’s determination to reduce emissions across all parts of the economy.” Further to the publication of the findings and the response in October, the government has said that any changes to the structure of APD will be done on a revenue-neutral basis, that is, APD will not be levied just for the sake of tax.
The 49-page Consultation Document said in essence: “The Government proposes two alternative models for simplifying APD. The first is based on two bands. The boundary between bands A and B could be delineated at a distance of 2,000 miles (3,200km). The second model is based on three bands, with a distance boundary delineated at 2,000 miles (3,200km) and 4,000 miles (6,400km). In both cases alternative boundary delineation based broadly on the EU/EEA/ECAA and the rest of the world will be considered. Stakeholders are invited to comment and provide relevant evidence on the impact of a move to either of these models of APD from April 2012.
“Further, the Government plans to extend aviation tax to include ‘business jets’, on a per-passenger basis for all qualifying flights with an authorised take-off weight of 5.7 tonnes. The proposal is to have a single rate of duty per passenger in 2012-13, irrespective of distance travelled, equivalent to the highest standard rate of APD. Stakeholders are invited to comment on whether this proposal offers a fair and effective way of extending the APD regime to include passengers aboard ‘business jets’, the range of exemptions and the expected market impact of the Government’s proposals.”
Additionally: “The Government invites comments and relevant evidence on how the current class distinction in APD affects the market. Stakeholders are invited to demonstrate how any change could be achieved without significant additional compliance and administration burdens. The Government also invites comments and relevant evidence on the impact of APD on the UK’s regional economies, and stakeholders are invited to demonstrate how any change would promote more balanced economic growth. Further, the Government invites comments and relevant evidence on the market impact of proposals to devolve APD in Scotland, Northern Ireland and Wales.”
Airports don’t like it
The answer to some of these questions and the views of airports and airlines alike have already been reported here, with the BAA and Manchester International making it clear that there is a positive hurt being felt from the effects of APD, and Stansted and the new owners of Gatwick Airport add their voice to the argument. Consultancy company Frontier Economics considered the consequences at Stansted, where low-fare carriers constitute 90% of the airport’s scheduled passenger services, and concluded that there will be fewer passenger trips to and from UK airports; lower spending by foreign visitors, and a loss of jobs, particularly in the travel and tourist sectors.
Nick Barton Managing Director at Stansted, says that the airport already has spare capacity, and any change to APD would further impact on the airport’s ability to fill that spare capacity. For Gatwick Airport, CEO Stewart Wingate says the airport currently contributes £2 billion ($3.28bn) to the economy and a fair tax on flying is certainly wanted.
With the general view that APD is a tax disliked by all and that the reforms as mooted are unlikely to ease the burden, the bad news is that more charges are already in place for 2012. APD is scheduled to rise next April, with the present rates increased at double the prevailing rate of inflation. Further to that, Britain’s inclusion in the European Emissions Trading Scheme will mean additional costs which will not be offset in any way; BAA for one believes that these costs should be offset against total aviation taxation income, but has been told that this is not going to happen. It seems that flying from UK airports is becoming increasingly expensive, for whatever purpose.