Cut then scrap: The case against

Research Paper

Executive summary:

 Air passenger duty (APD) should be abolished across the UK. In the meantime, a reduction of at least 50 per cent should be introduced. This should be the priority, rather than devolution to Wales.

 APD reduces tourism, trade and investment. This has been compounded by regular increases in the tax. The UK is at a competitive disadvantage to neighbouring states which have a lower aviation tax, or none at all.

 It is a Pigouvian tax, but has had a limited impact on journey numbers since its introduction in 1994. Load factors have been steadily rising for domestic and international flights.

 A UK-wide approach should be adopted. After a 50 per cent reduction, HM Treasury should model the effects that this has on growth, employment, tourism, trade and investment.

CONTEXT

All airlines agree that cost is a central factor when looking at airport location. Cardiff Airport needs to demonstrate competitive costs to attract airlines and retain them. This is why in the short term we should place an emphasis on ensuring that increasing costs for airlines would be tackled. Cardiff can compete with airports like Bristol. Its catchment area could grow, connectivity could be improved easily, and its capacity is non-restrictive. This cannot happen however, unless costs for airlines are reduced. Since Air Passenger Duty (APD) was doubled from £5 to £10 in 2007, and then increased to £13 in 2017, development at Cardiff and other UK regional airports has stalled. Airlines allocate aircraft capacity to airports which represent best value, to the detriment of the UK regions. APD has rendered the UK’s regional airports uncompetitive, despite their market- leading cost control, since it adds £13 per departing passenger to costs of flying. Cardiff airport cannot compete with airports which offer charges lower than APD, and it is worth noting that, despite recent growth, the airport’s traffic remains lower than in 2006, when APD was 38% of the current level, whilst London airports have gained more than 30m passengers per annum. At £13, APD is the highest aviation tax in Europe and represents a large part of the air fare, particularly since low cost airlines account for most capacity at Cardiff. As a consequence, the airport has failed to prosper and has lost out to other, cheaper airports in competition for new capacity. It is incorrect to assume that APD is simply added to the ticket price and paid by passengers. Low cost airlines such as Ryanair are yield passive and load factor active, so set ticket prices at the price passengers are prepared to pay, in order to generate sufficient demand to fill the aircraft. Countries such as Israel are willing to waive airport charges and pay airlines €60 per arriving passenger, since they recognise the value of air connections to their economy, particularly tourism. Such a large incentive not only proves the importance of aviation in generating tourists, particularly in peripheral regions, but illustrates the fierce competition for capacity. Like Israel, the UK is on the periphery of Europe and, to fly to some of the main tourism target markets, takes longer than other UK or EU airports. APD, combined with above- average sector lengths, results in a high and less competitive cost of flying. The UK’s airports recognise the impact of APD on their competitiveness. For example, Derry airport has resorted to a public service obligation on its London route, to overcome £26 APD per return passenger, which does not apply to passengers travelling to London from Irish airports.

Devolution of APD

Air passenger duty and devolved administrations

 The government has taken a bespoke approach to air passenger duty (APD) devolution across the UK, recognising that what is right for one nation is not necessarily right for others. In July 2012, the government devolved powers over rates of APD for direct long haul flights to the Northern Ireland Assembly. As the only part of the UK to share a land border with an EU member state, it is important that the Assembly has the ability to respond to rate changes in the Republic of Ireland.

 As agreed in the February 2015 St David’s Day Agreement on the future of devolution in Wales and the publication of the discussion paper, the Wales Office Minister confirmed to the House of Commons on 12 September 2016 that the government did not intend to devolve APD to the Welsh Assembly as doing so could have caused significant market distortions in what is effectively a single aviation market in South Wales and South West England. As English and Welsh customers use both airports interchangeably, this could have caused negative consequences for both sets of customers.

 In accordance with the cross-party Smith Commission Agreement, APD was devolved to the Scottish Parliament in April 2018. In February 2015, the government announced it would consider the case and options for devolving APD to the Welsh Assembly, informed by a review of options to support English regional airports from the potential impacts of APD devolution.

The Centre for Welsh Studies supports the ’s commitment to reduce Scottish APD – to be called Air (ADT) – by 50% and abolishing it entirely when public finances allow. However, the potential for regional difference in APD does raise significant concerns about market distortions and is at odds with commonly accepted principles of good taxation such as those identified by the Treasury Select Committee including stability, certainty, practicality and coherence. Moreover, there is an issue of basic fairness at stake when UK residents face paying different levels of tax to fly simply because they live in different parts of the country.

It should also be noted that abolition/a cut in APD through devolution is unlikely to deliver significant improvements in domestic connectivity. For example, if Wales reduces the Band A rate (including domestic services) but the rest of the UK retains the rate, then a return flight from Cardiff to the rest of the UK will still incur an UK APD rate on the return leg.

The tax revenue effects of abolition in Wales would be small. In cash terms, revenue from APD in Wales has ranged from £6 million to £11 million between 1999 and 2017. In 2016-17, the most recent year with data, APD raised £7 million. Across the UK, the receipts from the additional rate increased by 37 per cent in real terms after the rate was reduced from 50 per cent in 2010-11 to 45 per cent in 2013-14. This serves as a good example of how income tax’s devolution could be implemented by Cardiff Bay in 2019-20.

The main drawback of devolution would be the potential impacts on airports, passengers and airlines in England. Rather than promoting tax competition between different countries of the , it could adversely affect passenger numbers and revenue for airports and airlines in England.

Two studies show conflicting evidence on the impact on English and Welsh airports if APD were to be reduced or abolished on only the Welsh side of the border. York Aviation suggested that Bristol airport would be adversely impacted if long-haul APD was devolved to Wales. This is because of the relative proximity of Cardiff and Bristol airports. Conversely, a study commissioned by the Welsh government suggested that there would be only marginal impacts on services from Bristol if there was a cut in Wales. Since their modelling has reached different conclusions, it would be simpler to treat all passengers in the UK equally with a reduction in APD in 2019-20. The goal should then be full abolition after the UK’s departure from the EU.

In terms of the impact on passengers, APD is regressive. As a proportion of wages and salaries, APD is twice as high for the bottom quintile of earners compared to the top in 2016-17. Cutting APD would benefit all those who take scheduled flights, but more so for those who are on lower incomes.

Conclusions and recommendations:

 APD should not be devolved to Wales. Instead, in the 2019-20 financial year, the UK government should cut APD in half on the reduced rate, standard rate and higher rate. Airport expansion, and the reduced requirement for state aid to sustain existing and new domestic routes, would help to ameliorate some of the lower tax revenue.

 Since the implementation of (ADT) has been delayed in Scotland, and the UK government continues to set APD rates for Scottish departures and short-haul routes for Northern Ireland, now would be the most apt time to introduce an APD cut for the whole of the UK.

 HM Treasury should conduct a study and model the effects of a 50 per cent reduction of APD. This should assess, inter alia, the impact on GDP growth, employment at regional airports, and how lower APD could improve domestic and international connectivity.

 After the UK leaves the EU, the ambition should be outright abolition. For the next few years, however, a 50 per cent reduction provides the opportunity to assess the merits of an expanded route network, and its consequent positive effects on growth, employment, tourism, trade and investment.

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