The air transport industry is battling against an ever-rising tide of taxation that bears little relation to the issue of engine emissions – such as world poverty

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Clarita / MorgueFile

There can be few industries that have had to cope with as much trauma as the airline sector over the past four years. On top of the normal business cycles, to which the sector is heavily exposed, there has been 9/11, a dramatic rise in fuel costs and the SARS outbreak – to name but a few. And there is always the threat of new challenges – bird flu is just the latest concern.

In short, airline chiefs have had a lot on their plate – and can perhaps be forgiven their incredulity that some governments appear to see the industry as a cash cow. While the debate about user charges, the price for airports, air navigation and the like, is still very much alive, the issue of taxation – money going straight into government coffers – is rising up the agenda.

“There is an ingrained common perception, largely misplaced in the 21st century, that taxation of air transport constitutes a tax on a luxury good. This is simply not true,” says Kenneth Button, professor of public policy at George Mason University in the USA.

There is little uniformity when it comes to taxing airlines around the world, but if there is a common theme, it is that airlines are significant net contributors to the public purse. IATA estimates that in the USA, the world’s largest aviation market, taxes levied mounted up to $14 billion in 2004, corresponding to 25% of air fares.

However, it is Europe where the pressure is most acute. As David Henderson, manager for information at the Association of European Airlines (AEA), puts it: “We are convinced we, or our passengers, are seen as a soft target. There is still a notion that air travel is the preserve of the affluent few, our passengers will cough up without demur, and if a few of them are persuaded to travel less, that’s a plus for the environment – which is the way the tax is presented in the first place.”

There has been pressure on European airlines to pay some form of compensation for the environmental impact from aviation for quite some time. The European Commission (EC), European Parliament and some member states have been pushing for aviation to be included in the nascent European emissions trading scheme, having decided that a kerosene tax would be too difficult to implement due to the need to persuade trading partners to amend the Chicago Convention that exempts airlines from paying tax on kerosene for international flights.

The EC estimates that will mean that passengers will pay up to €9 ($10.70) a ticket, although it is still not clear how the system will work – or whether it will get off the ground at all. The target date for aviation to join in 2010 is widely seen as optimistic.

Some European airlines at least have put their weight behind emissions trading, believing an environmental charge is inevitable. This does not seem to have eased the pressure, however, with airlines being targeted for a poverty tax aimed at raising funds for the UN’s Millennium Development Goals initiative to halve extreme poverty by 2015.

France has taken the lead in promoting this idea, with president Jacques Chirac winning approval for his proposed “solidarity levy” that seeks to charge €1 for short-haul flights and €4 for long-haul flights, rising to €10 and €40 for business- and first-class fares. The tax is due to be applied in France from July this year, and is expected to raise €210 million.

At a conference in Paris in early March, 11 other countries also agreed to levy the tax; Brazil, Chile, Cyprus, the Democratic Republic of Congo, Ivory Coast, Jordan, Luxembourg, Madagascar, Mauritius, Nicaragua and Norway. The UK says it will funnel some of its ticket tax revenues into development programmes. In January 2006 Sweden proposed an environmental tax.

Airlines have made their feelings on the Chirac proposal quite clear. “The decision defies all reason,” warns Ulrich Schulte-Strathaus, general secretary of the AEA. “Our industry is struggling to recover from a period of sustained losses, to cope with a massive rise in the price of fuel, and to invest in new technologies which will deliver environmental benefits. Now our business is threatened by a heavy-handed move to make our product more expensive for our customers.”

IATA secretary general Giovanni Bisignani also hits out at the French move. “It ignores the policies of ICAO that seeks to eliminate taxes on the sale of air transport,” he complains.

The Airports Council International (ACI) warns that the tax will “dampen” strong traffic growth to Africa and other regions which the tax is supposed to help. In a rare public pronouncement the African Airlines Association agrees, warning the tax could “kill” the development of the region’s airline industry.

Defying convention

In 2000, ICAO’s council resolution on taxation of international air transport stated: “With respect to taxes on the sale and use of international air transport, each contracting state shall reduce to the fullest practicable extent and make plans to eliminate as soon as its economic conditions permit all forms of taxation on the sale or use of international transport by air.”

Bisignani adds: “The tax proposal is at cross-purposes with the UN’s Millennium Development Goals. Imposing further taxes on air transport limits the industry’s ability to drive development.” Again, in its 2000 resolution, ICAO notes: “International air transport plays a major role in the development and expansion of international trade and travel, the further development of which is an objective of ICAO and its contracting states.”

Defending the tax proposal, French finance minister Thierry Breton has described the idea as “one of the most promising solutions for the developing countries and for the international-aid architecture”. He says airline tickets were chosen because airlines benefited from globalisation and pay low tax rates, because passengers “are rarely among the poorest citizens”, and because the practical and legal feasibility of similar plans has been proven in the UK and elsewhere in the world.

The Green Party argues that there is a direct link between world poverty and the environmental damage caused by the airline industry. “The developing world suffers the worst consequences from climatic change, which is accelerated by the increasing air traffic,” argues Michael Cramer, member of the European Parliament for the Green Party.

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"Imposing further taxes limits the industry's ability to drive development"

Giovanni Bisignani
International Air Transport Association secretary general

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"It is important to have as few non-market burdens imposed upon the industry while carriers grapple with fuel prices that are indisputably high"

John Heimlich
Chief economist, Air Transport Association

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"The decision defies all reason"

Ulrich Schulte-Strathaus
General secretary, Association of European Airlines

Cramer says the tax is necessary for fair competition between different transport modes, given the fact that airlines have not had to pay tax on fuel for the past 50 years. “If governments decide that they want to use that money to fight poverty, that is OK,” he says.

The Green Party is adamant that airlines have had a good deal when it comes to taxation. “A tax on air tickets is a first step towards a just cost system,” argues Cramer. “In addition, a kerosene tax should be introduced and the airline industry should be admitted into the Kyoto Treaty. The airline industry enjoys high subsidies – harming the competitive ability of the more pollution-free alternatives.”

He adds: “While rail ­traffic makes its contribution to Kyoto and pays diesel and energy taxes, the fuel for air traffic is still free of charge, with airlines not included in the emission trading scheme.” Cramer calls for Germany, Spain and the UK, which have all expressed support for the poverty tax in the past, to “meet their obligations”.

Funding aid

The idea of an airline tax to fund aid is not new – it was certainly around in the mid-1990s. In 1997, the International Chamber of Commerce (ICC) called for the trend towards increased taxation to be reversed, and warned: “The benefits that all economies obtain from air travel will be seriously reduced if present trends continue.”

The trend has continued, and at the end of February, ICC secretary general Guy Sebban echoed his organisation‘s warnings from 1997, complaining: “New economic opportunities are needed, not a new tax. Removing barriers to trade, investment and entrepreneurship in an open market should remain the preferred means of achieving long-term development.”

Back in 1997, the ICC noted 1,087 instances of taxes and fees imposed on airline tickets, up from 650 in 1992. While there have been no similar studies since then, a report by international consultancy Mott MacDonald, commissioned by IATA, suggests there has been no let up since that time.

The report, published last year, examined the taxes, subsidies and charges paid by airlines, rail and urban transport networks and road users, based on EC figures. It suggests that in the three largest European nations, where data is most consistent, the tax burden has increased, and air transport makes a net contribution to public funds.

Increasing burden

The figures are based on 1998, although the report suggests that the burden has actually increased since then. In 1998, the UK saw a net contribution of €4.60 per passenger flown, Germany gave a figure of €7.50 and France, €8.40. Between 1998 and 2003, Mott MacDonald estimates that the tax burden has increased by 14% in France and Germany, and while the UK has seen a 5% decrease; user charges have gone up by 46% in that period. User charges in France and Germany are up by around a quarter in the same timeframe.

Looking at other modes of transport, the report suggests that road transport is a small net contributor at less than €1 per journey, while rail is subsidised to the tune of €7.40 per journey in France, €6.20 per journey in Germany and €2.40 per journey in the UK.

On the back of this report, IATA argues: “The aviation industry is already highly taxed relative to other transport modes. It is often asserted that airlines are under-taxed since, in most cases, they do not pay fuel duties or taxes on their international services. However, this misses the point. A true assessment must also take into account the contribution made by each transport mode towards the cost of investing and maintaining its infrastructure. The inability of a transport mode to meet the cost of its infrastructure translates into a financial liability for the public sector.”

America’s ever-burgeoning tax bill

For airlines in the USA taxes have been a billboard issue for years as carriers frequently form alliances with hotels and car-rental firms over the issue, using the line, “We’re taxed more steeply than alcohol or tobacco but we’re no sin!”

But in recent months, the campaign has reached a crescendo as airlines face the prospect of more add-ons to their $11 billion annual federal tax bill. They have won allies, significantly in a federally imposed security tax also known as the 11 September fee.

The Bush administration had proposed doubling the $5 tax, but one leading legislator, Kentucky Republican Hal Rogers who controls the Appropriations panel on homeland security, has publicly called this a “gimmick”, predicting it will “be very difficult to adopt this proposal this year”.

And a few states, most notably Georgia and Illinois, have moved to lessen the burden of their own state taxes on aviation fuel.

While Europe may be in the centre of the maelstrom, other parts of the world are not immune. In the USA, the Air Transport Association (ATA) has been battling with the issue of security taxes, which carriers argue should be borne by central government. The ATA’s chief economist, John Heimlich, says that airlines contribute over $3 billion annually to fund the Department of Homeland Security (DHS) by way of special taxes and fees. He complains: “Every year since 2001 airlines have been pressured to pay more and more, effectively to subsidise the defence of the USA against terrorist attacks.”

Pointing to the crisis in the US airline industry, Heimlich says: “It is so critically important to have as few non-market burdens imposed upon the industry while carriers grapple with fuel prices that are indisputably high.” He adds: “In the mid-to long-term future, the government should be encouraging conservation across all elements of the economy and exploring alternative sources of energy, a luxury that aircraft do not have.”

The Asia-Pacific region also has its tax issues. Andrew Herdman, director general of the Association of Asia Pacific Airlines (AAPA), explains: “In general, aviation taxes in Asia Pacific tend to take the form of departure taxes, although sometimes are described as passenger service charges. The amounts vary but typically fall in the range of $10-20. That equates to approximately 10% of the cost of a regular ticket, or more for short-haul journeys on discounted fares.”

He adds: “In addition, the other service charges levied by airport operators and other service providers at Asian airports often reflect an implicit form of taxation through the licence terms which may include taxes and levies. The effects may be less visible to passengers but the burden falls on the industry and is reflected in ticket prices accordingly.”

Looking across the region, he says that in Australia, the taxes and charges are transparent but add up to a significant amount, even in relation to typical long-haul international ticket prices.

International taxes

Looking further afield, Herdman says: “AAPA members are also very concerned about the number and severity of the many other aviation taxes imposed in USA, Europe and elsewhere. At our recent Assembly of Presidents held in Hong Kong in November 2005 we passed a resolution calling on governments to reduce the burden of existing taxes and avoid imposing additional burdens on the industry.”

Elsewhere, Latin American carriers also have their gripes over taxation. Roberto Kriete, chief executive of El Salvador’s TACA, said last year that “excessive fees” were a key hindrance to the development of the region’s airline industry, pointing to the 40% of gross revenues that airport operator Alterra has to pay to the Costa Rican government at TACA’s mini-hub at Juan Santamaria International in San Jose.

It is clear that taxation is a global issue – every region has one gripe or another. The poverty tax in particular illustrates that airlines are clearly seen as relatively easy targets for raising revenue, despite the fact that there is no shortage of industries with higher operating margins. What is also noticeable is how the environmental argument is put forward for forms of taxation with little, if any, direct connection to the issue of engine emissions – such as world poverty. It seems that airline boardrooms, and airline trade bodies, are going to be spending a fair amount of their time dealing with this issue, which looks unlikely to go away any time soon.


Source: Airline Business