Taxing times

Government efforts to find ways to claw back national debts puts the air travel sector even further at risk of more tariffs. But how much impact do the additional duties have in deciding which markets an airline serves?

It was a look pitched somewhere between bemusement and outrage. Airline executives were rounding off IATA's annual general meeting in Berlin last summer and the mood was, if not buoyant, at least bullish about improving traffic and yields. But instead of talking recovery, as IATA director general Giovanni Bisignani and the boss of host airline Lufthansa Wolfgang Mayrhuber faced the media at the close of meeting, they found themselves answering questions about Germany's newly announced aviation tax. The air of disbelief was palpable.

Taxes on aviation, and the industry's dismay at paying them, is nothing new. Taxes have loomed large on the aviation landscape in recent years, especially as the exemption of duty on aviation fuel came under pressure amid the growing appetite in many quarters of the world for the environment to be at the forefront of policy.

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Within Europe, it has been the environment that has driven much of the political argument for taxation on the sector. This has been greeted with much cynicism by the aviation community, as it sees little evidence of the raised funds being ploughed into green investment - although restricting the rate of air travel growth does, albeit extremely bluntly, reduce extra related emissions.

"It's always under the argument of environment, but it's just a way of collecting taxes, and this is wrong," says British Midland International chief executive Wolfgang Prock-Schauer. "There should be much more honesty in this whole debate."

But the recession and financial crisis brings a new dimension to the tax debate. With pressure to cut debt levels like never before, few dispute that revenue-raising measures are needed. The debate is where it comes from. For an industry that has felt like a first-resort tax option in the minds of many policy-makers over recent years, the fear is that aviation will be taxed more heavily. "Generally, we are worried that taxes have been increased too much and may be increased further," Prock-Schauer says, echoing the views of many.

That taxing aviation is never far from policy-makers' minds was further evident at the tail end of last year. Aviation, which continues to argue that its emissions be tackled globally through ICAO, faced proponents suggesting that an aviation tax be used as part of measures to help sweeten the pill to move emerging economies to a greener basis.

Meanwhile, in October's EU budget review, the technical annexes included a potential EU-wide aviation duty as one of six possible revenue-generating options - although it stressed the options be seen as purely indicative and were included as an illustration of some of the issues that need considering.

The air transport industry has long argued the case that taxing the air travel industry is short-sighted and counter-productive, given the impact it will have on the loss of tourism and business revenues.

"Airport costs and taxes are pricing countries out of competitive tourism," argues Ryanair deputy chief executive Michael Cawley. Talking about the UK for example, he says the potential is massive if the government would support it by eliminating taxes. "That will cause economic stimulation. Elasticity affects everyone and the potential is enormous. To get things moving again, taxes and airport charges have to drop, particularly when the competition [Italy and Spain] don't have it."

He says Spain has seen a €1,000 [$1,390] return [economic boost per passenger] by discounting airport tax down. "This is the single best investment they can make. Their [the UK and Germany's] regressive point of view may mean they get tax revenue up front, but are losing money from lost tourism."

Europe has imposed a spate of additional taxes in recent years. The most recent include the German aviation tax, to be dropped when aviation enters the emissions trading scheme next year, and taxes in Austria and Iceland.

But previous taxes in the Netherlands and Belgium were implemented and dropped - cases the aviation industry enthusiastically highlights. Airports group ACI Europe, which has just released a report on the impact of aviation taxes, points to research that estimates the Dutch Aviation Tax - which ran for a year from summer 2008 - led to losses of between €1.2 billion and €1.3 billion for the Dutch economy as a whole.

"Most importantly, the tax had a major negative impact on passenger traffic at Amsterdam Schiphol airport: approximately 1.4 million passengers were lost in the second half of 2008 because of the introduction of the tax, diverting passengers to airports in neighbouring countries such as Germany and Belgium, and leading to a lower-than-anticipated tax return for the government," it says.

It points to German aviation industry fears that the estimated burden of €1 billion from the new tax exceeds the combined financial net results of all German airports and airlines. In total, it estimates that German airports and airlines expect the loss of five million passengers because of the tax.

Interestingly the approach to the issue from two of the recession's harder-hit economies could not be more different. The UK moved ahead with a sharp rise in its air passenger duty levels in November.

By contrast Ireland's government, which found its economy in an even deeper hole, has taken the opposite course. It slashed its air travel tax from the start of March. The measure is designed to bolster the country's key tourism market, but contained an ultimatum if airlines themselves did not rise to the occasion: then finance minister Brian Lenihan said the position and the rate increase would be reviewed "unless there is evidence of an appropriate response from the airlines".

Aer Lingus welcomes the move, noting it has revealed seven new routes from Ireland this summer since the initial cut was announced in December, and signs that the tax may be cut altogether. Ireland's newly formed coalition government has pledged to scrap the tax. But again this is conditional on a deal being reached with Aer Lingus and Ryanair on reopening closed routes and bringing more tourists into Ireland.

To some extent, this is the crux of the issue. Nobody wants to pay a tax - be it the airline or passenger - but how much does it affect airline network plans?

"Network selection is driven by what is a logical fit into your network - where do you see demand? Do you have the right aircraft for the route? - so that is the overall criteria," observes bmi's Prock-Schauer. "But taxes are too high."

Alex Cruz, chief executive at Spanish budget carrier Vueling, says much depends on the type of route served. "It is completely at the mercy of the type of traffic on the route. For example, between Ireland and southern Spain, if the price goes up it affects people's decision about whether to travel or not. If it is London to Frankfurt, so what? Bankers and business people still need to fly back and forth. Airlines who are heavily taxed will react differently depending on the type of route, vis a vis business or leisure."

On leisure routes in Ryanair's world, Cawley thinks it is central. "They influence it entirely and were behind our whole movement out of Britain - Stansted has lost three million Ryanair passengers in the past three years, Dublin has also lost three million," he says.

Ryanair is at one end of the spectrum, because the tax forms a relatively high portion compared with the fare and because many routes do not have any direct rivals. "On the majority of our routes, we have no competition and only a tiny proportion of the population absolutely has to fly there," says Cawley

While much focus is on Europe, where the debt crisis has been heaviest, the pressure for taxation remains global and IATA is already highlighting further cases across the globe, and cites taxes alongside rising oil costs as the key risks to industry profitability this year.

In February, India announced plans to raise its service tax on air travel from April. South Africa, meanwhile, in a move grouped under environmental taxation in its recent budget, is proposing to raise its international air passenger departures tax by 25% from October.

And so the battle against increased taxes, be it on tourism or air travel specifically, or for environmental or money-raising efforts, continues. "This is a price-sensitive business. Aviation has the power to stimulate economies," argues Bisignani. "But that ability is being compromised by adding taxes at a time when we are struggling to cope with high fuel prices just to maintain anaemic margins."

IATA's Giovanni Bisignani slams UK government's aviation policy:

*LATEST NEWS:  Plans to abolish the air passenger duty and replace it with a per-aircraft tax have been dropped by the UK Government, which also announced that it will freeze APD rates for the coming year. Read the story here..

Much attention has been heaped on the increase in the UK's air passenger duty. In November, the UK raised the tax, although the debate is open as to whether it was done for ideological or cash-generating reasons. Either way, the UK position has caused dismay, both among home and international carriers.

"Taxation is not an industry issue - it's hitting some airlines harder than others," says IAG chief executive Willie Walsh. "In the UK, I think the government has got it wrong: it's making the cost of doing business with and in the UK much higher than other parts of the world, and that is going to have a dampening effect on UK economic growth."

Singapore Airlines general manager UK and Ireland Joey Seow argues the higher duty affects travel. "Fundamentally it will not help the UK if the cost of travelling to the UK is increased. We see that with weaker sterling there is a real opportunity for passengers from Asia to come to the UK and spend. The concern is, if you make it more expensive to come to the UK, it creates a disincentive to come.

"Load factors on our UK flights have declined year on year since the November increase. There are clearly a multitude of reasons that can contribute to declines in load factors, from industry budget cuts to the economic downturn and higher VAT, but it is also possible the increased level of APD is a factor in the recent decline we are seeing.

The impact of taxes is also not just restricted to countries as a destination market. Some of the most vocal opposition to the UK increase has come from the Caribbean. It is urging a rethink of the duty because of the feared damage to its own tourism.

Figures published in the World Economic Forum's latest Tourism Competitiveness Report - ranking the UK 134th out of 138 countries in an index of relative cost in ticket taxes and airport charges to international air transport services - underline reasons for disenchantment among UK companies over APD policy. Many UK travel and tourism industry firms launched a high profile initiative in March, under the "a Fair Tax on Flying" banner calling for a halt to any further rises in the duty.

The future shape of air passenger duty in the UK remains unclear. Reports suggest the government will shelve plans to reform APD after concluding a switch to a per plane tax was unworkable.

Source: Airline Business