Evaluating the Impacts of the Swedish Aviation Tax by Sofia Fors Beatrice Ljung May 2019 Master’s Programme in Economics Supervisor: Joakim Westerlund Abstract The 1st of April 2018 an aviation tax was implemented in Sweden. With an event study approach this paper aims to provide an understanding of the outcome of the new policy. This by investigating if the tax causes significant effects on the stock returns of concerned flight carriers and whether the policy causes a significant change in the number of air passengers travelling from Sweden. By calculating the expected normal performance using the mean model, the market model and the Holt-Winters model, the abnormal behaviour is established and tested for significance. Previous literature provide insights from aviation taxes implemented in other European countries. A negative impact on concerned flight carriers and a decline in the number of air passengers travelling are mainly concluded. The results of this paper indicate no market reaction related to the introduction of the aviation tax. Significant changes are observed when considering the air passenger data. The tax may be an explanation to the results. Yet, there may be other influencing aspects such as economic and environmental considerations. Keywords: The Swedish aviation tax, Event study, Market model, Mean model, Holt-Winters model, Price elasticity ii Acknowledgements First of all, it has been a true pleasure to write this paper together. With this eminent collaboration we have reached far beyond our own expectations. We would further like to show our deep gratitude to Professor Joakim Westerlund for his wise advice, guidance and sense of humour. The time he so generously has given is very much appreciated. We would also like to express our profound gratitude to Christopher Ljung for his constant encouragement and useful critiques of this paper. Finally, we must not forget to thank our fantastic classmates for the support during all the hours spent in the basement of Alpha. iii Table of Contents 1. Introduction 1 2. Previous literature 2 3. The Swedish aviation tax – from idea to realisation 4 3.1 The design of the aviation tax 6 4. Data 6 5. Method 8 5.1 Determining event dates and estimation periods 8 5.2 Normal and abnormal performance 12 5.3 Significance of results 14 6. Results 15 6.1 Results of the market reaction analysis 15 6.2 Results of the air passenger data 19 7. Discussion 22 8. Conclusion 26 References 27 Appendix 33 iv 1. Introduction Seeking to reduce environmental impacts of the aviation, the Swedish parliament decided to implement an aviation tax on the 1st of April 2018 (Finansdepartementet, 2017a). The policy was accepted on the 22nd of November 2017 and the period before and after was characterized by inquiries, discussions and publicity in the media. Often, a tax aims to change an existing behaviour apart from bringing in revenues. If there are visible changes related to the policy is therefore interesting to study. Hence, this paper aims to investigate the outcome of the aviation tax. More precisely, what is the market reaction to this policy decision? And further, what is the actual effect on the number of air passengers travelling after the tax being realized? This paper seeks to answer these questions by: i) Investigating if significant effects are visible on stock returns of concerned flight carriers at different events related to the aviation tax. This in order to find out whether the market is expecting the air operators to be affected by the policy or not. ii) Evaluating if the implementation of the policy causes a significant change in the number of air passengers travelling to domestic and international destinations. This together is believed to provide evidence of the effects related to the introduction of the aviation tax. To analyse both the market reaction in terms of stock return changes and possible changes in the air passenger data an event study approach is used. Event studies are frequently applied in many areas of research when examining the effect of a certain event (e.g. Schweitzer, 1989; Kothari & Warner, 2007; Kumar, Mahadevan & Gunasekar, 2012; Gilligan & Krehbiel, 1988). The event can be anything from a change within the firm’s control such as earning announcements or stock splits, to something beyond the firm’s control such as a policy change announced by the government (Seiler, 2004). The evaluation of the event is made by comparing the expected normal performance with the actual outcome within a pre-specified event window. For stock returns, the market model and the mean model are used when calculating the expected normal returns based on their common occurrence in the literature (MacKinley, 1997). In contrast to returns, air passenger data is often characterized with seasonal effects (Bermúdez, Segura & Vercher, 2007; Grubb & Mason, 2001). 1 This motivates the choice of the Holt-Winters method when calculating the expected normal performance of the air passenger data. The abnormal behaviour is then calculated and tested for significance using a parametric t-test and a non-parametric Wilcoxon signed rank test. With the tax being a charge, a hypothesis of a negative market impact is formed. A decline in the number of air passengers is further expected. Yet, the results of this paper indicate no market reaction related to the introduction of the aviation tax. Significance is found at some dates, however most of them are likely to be confounding events. Based on this, the policy is not believed to have an impact on the concerned flight carriers. A weak market response may also indicate the design of the tax not being powerful enough. The findings further provide support for the tax being a mark- up on the price of the flight ticket since a decrease in number of air passengers travelling to Sweden and Europe is observed. The findings are yet ambiguous since an increase in the number of air passengers is found for international non-European destinations. The increase can be explained by economic aspects such as a weak Swedish currency. As a conclusion, the aviation tax may explain the decrease in the number of air passengers travelling to domestic and European destinations. Yet, determining to what extent is more difficult since the decline can be reinforced by other aspects such as environmental considerations. This paper is organised as follows; section 2 provides insights from previous literature. To understand the process leading to the aviation tax, a short background and the motives behind the policy are presented in section 3. In addition, section 3 gives a description of the tax and whom it concerns. Further, section 4 provides a presentation of the data along with selected delimitations and section 5 describes the method used in this paper. The main results are presented in section 6 and will be more thoroughly discussed in section 7. Finally, a conclusion is provided in section 8. 2. Previous literature Several countries within the EU have implemented aviation taxes with environmental motives, for instance the Netherlands and Ireland (CE Delft, 2018). Veldhuis and Zuidberg (2009) published a report regarding the implications of the Irish air travel tax introduced in 2008. With a scenario- based study, they conclude the policy to mainly affect the airports, airlines and the tourism industry 2 negatively. The authors claim the revenue loss of the air carriers to originate from two different scenarios. The first scenario is that the flight carriers are able to pass on the full amount of the air travel tax to the air passengers, but the price increase results in a decrease in demand for flight tickets. The second scenario relates to the firms being unable to mark-up the tax amount. In either case, they claim it to have negative economic consequences for the firms, taking the form of lower demand in the primer case and as increased costs in the latter case. The International Air Transport Association (2019) emphasizes the passengers to be affected negatively by an aviation tax. This in terms of changed travel patterns as a result of a price increase. Gordijn (2010) finds support for this when examining the effects of the Dutch aviation tax. The author claims the tax to result in a decrease in the number of air passengers departing from Amsterdam airport. After the implementation of the policy Gordijn (2010) also observes an increase in the number of Dutch air passengers travelling from airports abroad situated close to the national border. Moreover, Krenek and Schratzenstaller (2016) examine how an efficient aviation tax is optimally designed. To avoid competition in aviation taxation and to support the nature of the cross-border emissions of international flights, they reach the conclusion of implementing a carbon-based flight ticket tax on an EU-level. When considering changes in air passenger data related to the Swedish aviation tax Ekeström and Lokrantz (2019) published a report on behalf of the Swedish Transport Agency in January 2019. The authors analyse possible changes in the air travel market six months after the implementation and find the number of passengers travelling within European countries to be less than forecasted. Yet, the number of passengers travelling to international non-European countries is higher than forecasted (Ekeström & Lokrantz, 2019). However, no statistical determination of the change in the number of passengers is made. Further, Ekeström and Lokrantz (2019) claim the share of the tax paid by the passenger to be determined by the consumer’s price elasticity. An application of price elasticity on air passenger data is made by Brons, Pels, Nijkamp and Rietveld (2002) who examine factors influencing the 3 price elasticity of air travellers. The authors conclude the passenger’s price sensitivity to depend negatively on the flight distance and positively on the number of substitutes available.