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The Economic Impact of Arrivals Duty and Tax Free Shopping in the EU European Travel Retail Confederation September 2020 York Aviation Contents York Aviation Contacts Originated by: James Brass Partner Page T. +44 (0)7767 455614 E. [email protected] 1. Key Points 2 Matthew Jones Senior Consultant 1. Introduction 6 T. +44 (0)1625 614051 E. [email protected] 2. How would arrivals shops affect the market? 8 3. Estimating the economic impact of arrivals shops 10 4. Country Case Study: Spain 14 5. Country Case Study: Italy 20 6. Country Case Study: Germany 26 7. Potential Impact Across the EU 32 York Aviation is the trading name of York Aviation LLP, registered in Cardiff, No. 0C307526. Registered Office: Smithfield House, 92 North Street, Leeds, LS2 7PN Disclaimer of Liability Although every effort has been made to ensure the accuracy of the material and the integrity of the analysis presented herein, York Aviation LLP accepts no liability for any actions taken on the basis of its contents. York Aviation LLP is neither authorised nor regulated by the Financial Conduct Authority or the Prudential Regulation Authority. Anyone considering a specific investment should consult their own broker or other investment adviser. York Aviation LLP accepts no liability for any specific investment decision, which must be at the investor’s own risk. Copyright Copyright © 2020 York Aviation LLP. All rights reserved. Except for the quotation of short passages for the purposes of criticism or review, no part may be used or reproduced without permission. 1 York Aviation Key Points York Aviation Key Points The COVID-19 pandemic has had a devastating impact on the European air transport industry and its partner sectors. The Impact of COVID-19 on European Airport Seat Capacity There is, therefore, a need for cohesive action by Governments across Europe to both directly support the sector but also to put in place a regulatory framework 100 that allows the sector to help itself to recover. One area of potential regulatory 90 change that has been identified by the industry is to amend current EU legislation 80 to allow airports to operate duty and tax free arrivals shops. 70 This change would enable retailers and their airport partners to build a new 60 stream of non-aviation revenues, which are vital to the commercial sustainability 50 of airports. Non-aviation revenues for airports include those derived from 40 activities such as car parking, advertising, food and beverage sales, property 30 rental or, of course, the letting of retail concessions. These revenues are often a 20 significant proportion of overall airport revenues, typically they make up around Way(millions) Seats One 40% in Europe. 10 0 Ultimately, this would enable the sector to provide more jobs and support greater levels of Gross Value Added (GVA) in the economy and support recovery. This Jan Feb Mar Apr May Jun Jul Aug Sep research considers these potential economic impacts in three major EU markets, 2019 2020 Spain, Italy and Germany. Together these three countries accounted for around Source: OAG. 35% of seat capacity from EU airports to non-EU destinations. How would duty and tax free arrivals shops affect the market? Case Study Countries and Focus Airports The primary impact of the change would be to ‘level up’ competition in the travel retail market between EU and non-EU airports, benefitting consumers, EU based retailers and airports and EU public finances. There are a number of key points to note: it is unlikely that duty and tax free arrivals shops will result in a significant increase in overall travel retail sales globally. Instead they will shift sales from outside the EU to inside the EU; the system of allowances will remain and hence it is unlikely that domestic markets will be affected or that there will a cost to the public finances from lost excise duty or sales taxes; the change will actually have a positive impact on Government revenues as economic activity within the EU is boosted; Evidence from elsewhere suggests sales from arrivals shops could make up 20% to 30% of total travel retail sales, with the most likely figure to the bottom end of the range. 3 York Aviation Key Points The Potential Economic Impact of Duty and Tax Free Arrivals Shops Total Economic Impacts in Spain as Aviation Recovers € 500 4.000 5.000 The potential economic impacts from duty and tax free arrivals 3.600 shops in the case study countries are significant. € 400 3.000 3.200 4.000 € 300 3.000 The damage to the air transport industry from COVID-19 means € 200 € 400 2.000 Jobs € 320 € 360 € million € 300 that traffic levels across Europe are not expected to recover € 100 1.000 until around 2024. This means that it will take time for the € 100 € 110 € 120 € 140 economic benefits from duty and tax free arrivals shops to € 0 0 reach their potential. However, as demand recovers they will 2021 2022 2023 2024 boost each country’s economy, providing jobs and prosperity: GVA Tax Revenues Jobs Source: York Aviation. in Spain, implementing arrivals shops in 2021 would support around €300 million in additional GVA, 3,000 jobs and around €100 million in tax revenues through direct, Total Economic Impacts in Italy as Aviation Recovers indirect, induced and wider effects. By 2024, this would € 300 2.500 3.000 increase to around €400 million in GVA, 4,000 jobs and 2.200 €140 million in tax revenues. These impacts are largest at 1.900 2.000 the country’s two main airports, Madrid and Barcelona; € 200 2.000 € 230 € 260 Jobs € 100 € 190 € 210 1.000 in Italy, implementing arrivals shops in 2021 would support € million around €190 million in additional GVA, 1,900 jobs and € 80 € 90 € 100 € 110 around €80 million in tax revenues through direct, indirect, € 0 0 induced and wider effects. By 2024, this would increase to 2021 2022 2023 2024 around €260 million in GVA, 2,500 jobs and €110 million in tax revenues. Again, these impacts are largest at the GVA Tax Revenues Jobs country’s two main airports, Rome Fiumicino and Milan Source: York Aviation. Malpensa; Total Economic Impacts in Germany as Aviation Recovers in Germany, implementing arrivals shops in 2021 would support around €620 million in additional GVA, 5,900 jobs € 1.000 7.800 10.000 7.100 and around €240 million in tax revenues through direct, € 800 5.900 6.300 8.000 indirect, induced and wider effects. By 2024, this would € 600 6.000 increase to around €830 million in GVA, 7,800 jobs and € 400 € 830 4.000 Jobs €320 million in tax revenues. While impacts are again € 660 € 750 € million € 620 driven by the Country’s two main airports, Frankfurt Main € 200 € 240 € 250 € 290 € 320 2.000 and Munich, the higher levels of non-EU traffic at other € 0 0 airports means that overall impacts in Germany are higher 2021 2022 2023 2024 and more spread. GVA Tax Revenues Jobs Source: York Aviation. 4 York Aviation Key Points Estimated Total Impact of Duty and Tax Free Arrivals Shops across the EU £4.000 40.000 33.700 £3.500 30.300 35.000 26.900 £3.000 25.300 30.000 £2.500 25.000 £2.000 20.000 € 3.500 £1.500 12.100 € 3.150 15.000 € 2.625 € 2.800 £1.000 10.000 € 1.275 € 1.325 £500 € 1.000 € 1.050 € 1.200 5.000 € 475 £0 0 2020 2021 2022 2023 2024 GVA Tax Revenue Jobs Source: York Aviation. Extrapolating from the results for the case study countries enables an initial, high level assessment to be made of the impact across the EU. In 2019, the analysis suggests that for every million one way seats to non-EU destinations, tax and duty free arrivals shops would have supported: €16 million in GVA; 155 jobs; €6 million in tax revenues. Adjusting for COVID effects and BREXIT, this assessment sees an initial impact of around €1.3 billion in GVA, 12,100 jobs and €475 million in tax revenues, rising to €3.5 billion in GVA, 33,700 jobs and €1.3 billion in tax revenues. 5 York Aviation Introduction York Aviation Introduction The COVID-19 pandemic has had a devastating impact on the European air transport industry and its partner sectors. The travel restrictions brought in The Impact of COVID-19 on European Airport Seat Capacity by Governments around the world brought air travel to a virtual standstill 100 during the second quarter of 2020 and, even now, as people start to fly again, the recovery is slow and uneven. Airports, airlines, travel retailers 90 and their supply chains are suffering unprecedented financial hardship and 80 there is a very real danger of long term damage to the sector, hampering its 70 ability to support economic recovery in the short to medium term and to provide jobs and prosperity in the longer term. 60 50 There is, therefore, a need for cohesive action by Governments across 40 Europe to both directly support the sector but also to put in place a regulatory framework that allows the sector to help itself to recover. One 30 area of potential regulatory change that has been identified by the industry 20 One Way Seats (millions) is to amend current EU legislation to allow airports to operate duty and tax 10 free arrivals shops. Such shops are commonplace in other parts of the world and, indeed, a number operate at major airports in non-EU countries 0 in Europe, such as Switzerland, Norway and Turkey.