Aberdeen International Airport Consultative Committee

3 June 2016

Fiscal Responsibility Division Scottish Government Area 3D-North Victoria Quay Edinburgh EH6 6QQ

CONSULTATION ON A SCOTTISH REPLACEMENT TO AIR PASSENGER DUTY

SUBMISSION ON BEHALF OF THE ABERDEEN INTERNATIONAL AIRPORT CONSULTATIVE COMMITTEE

Introduction

The Aberdeen International Airport Consultative Committee is the committee established under UK civil aviation legislation to enable the operator of Aberdeen International Airport to consult with a range of stakeholders on issues relating to the operation and development of the airport. The Committee, which was established in 1953, has some twenty members, including four Aberdeen City and three Aberdeenshire Councillors, a representative of each of the two community councils whose areas are most affected by the operation of the airport, representatives of economic and trade bodies, including the Aberdeen and Grampian Chamber of Commerce, Scottish Council Development and Industry and Association of British Travel Agents/Scottish Passenger Agents’ Association, and those associated with aviation, including NATS Aberdeen, the Airport Operators’ Committee and the UK Helicopter Operators’ Association. The Committee is independent of the airport management and has no executive powers. It meets under the chairmanship of Dr Peter Smart, who is independent of all stakeholder interests. It is advised by the Managing Director of the airport.

The Committee meets quarterly and has a record of responding to government and similar consultations on issues within its competence. We are therefore pleased to make this submission in response to the present consultation on a Scottish replacement for APD. We

seek to agree submissions by consensus, since the members of the Committee represent such a diverse range of organisations, and we are apolitical in our responses. We ensure that we only respond to questions that we believe are within the remit and competence of the Committee; in the case of the current consultation we have therefore restricted our responses to chapters 1 to 5, leaving chapters 6 to 14 to the aviation industry.

Support in principle to the present review

As a Committee, we have consistently lobbied successive Chancellors of the Exchequer to reduce substantially or abolish APD, or at least to review the double whammy effect whereby return domestic flights within the UK attract APD in each direction of travel, whereas return travel to destinations outside of the UK only attract APD on the outbound sector. We therefore support in principle the current review and the opportunity for APD to be reduced on flights from Scotland.

Meeting the Scottish government’s objectives

We note from the opening paragraph of the consultation document the presumption that a reduction in APD in Scotland will help to achieve the Scottish Government’s objective of boosting Scotland’s international air connectivity. We believe that this is a means to an end, and not an end in itself. The aim of any reduction in APD must ultimately be to support and nurture the growth of the Scottish economy to the point where the additional revenue raised from a higher level of exports, in-bound tourism and developing Scotland further as a location of choice for international business will greatly exceed the revenue ‘lost’ through the reduction in APD. New routes and connectivity will be one factor that should lead to such economic development.

We are prepared to accept that a reduction by 50% in the level of APD payable in Scotland, compared with the rest of the UK, should offer a mild encouragement to passengers wishing to fly from and to Scottish airports. However,

 we are not entirely convinced that it would be the sole, or even a major, factor in attracting new long haul air services to Scottish airports, as a proportion of the overall fare, nor sufficient per se to entice a substantial increase in the number of flights taken by Scotland-based passengers;  we believe that there would need to be much more of a business case to attract airlines and passengers, as has clearly been made by all four main Scottish airports in their route development activities over recent years;  there is evidence from south of the border that Birmingham and Manchester airports have had to fight hard to attract additional long haul services to Asia, particularly China;  furthermore, they have had to rely on foreign airlines to provide those services, since the UK’s only global airline (British Airways) shows no evidence of wishing to fly

long haul other than from its bases at London Heathrow and London Gatwick airports, and the only other UK long haul airline (Virgin Atlantic) concentrates its services on Heathrow and Gatwick, with a limited range of routes from Glasgow and Manchester;  at least one of the recently announced services from Birmingham and Manchester appears to be relying on a small, relatively newly established airline with little track record of long haul, that is, the service about to start from Birmingham to Beijing and Shanghai.

Balancing the interests of the central belt with the other regions of Scotland

We support in principle the Scottish government’s objective of attracting a greater range of long haul services to and from Scotland’s airports. However,

 in practice, though, only Edinburgh and Glasgow airports have a sufficient catchment area and runway facilities within Scotland to support long haul services;  we are concerned that the interests of Scotland’s other main airports, particularly Aberdeen, are not overlooked in the Scottish government’s overall aviation strategy;  whilst services to and through Turkey and Middle Eastern hubs are beneficial to residents and businesses located in the central belt, they are not a substitute for the current range of connecting services through the main UK and European hubs for passengers from Aberdeen;  we should not wish the Scottish government to lose sight of this when developing their strategy for enhanced connectivity to the world.

Furthermore,

 it is not just the catchment population and runway facilities at airports such as Aberdeen that affect their ability to attract long haul services;  it is also our relative geographical isolation. As the Competition Commission concluded, in its inquiry into former BAA airports several years ago, Aberdeen is in a monopoly position simply because there is no other major airport closer than 125 miles away;  in addition, because of our geographical location, both business and leisure passengers rely more heavily on air travel, even for domestic journeys, than is the case from Edinburgh and Glasgow;  there are no major cities south of the border that are less than four hours by rail and road from Aberdeen;  our fastest three times daily train service to London takes seven hours;  even with Virgin Trains East Coast proposals to cut another 20 minutes off the Kings Cross to Edinburgh run when they introduce the new Hitachi Azuma train sets from 2018, the journey time between Aberdeen and London is likely still to be over 6½ hours;

 in the time it takes to travel by train from Aberdeen to London, it is possible to fly there, do half a day’s business and be ready to come home.

In summary, we are heavily dependent on air travel.

Aberdeen is fortunate, as the only Scottish airport away from Edinburgh and Glasgow, to have services to all the main European hubs (Heathrow, Amsterdam, Copenhagen, Frankfurt, Paris and more recently Dublin and Reykjavik), of which Heathrow has long been the most popular choice of hub. In addition, there is now access to a limited number of connections from Birmingham and Manchester, using recently established code share arrangements between Flybe and foreign airlines such as Etihad and Finnair.

Put simply, we believe that any reduction in APD must be as beneficial to travellers from airports outside of the central belt as it may be to Edinburgh and Glasgow. In terms of international connectivity, there is no great body of evidence to show that large numbers of passengers from outside the central belt are travelling by road or rail to Edinburgh and Glasgow to make use of their increasing number of long haul services; rather, it appears that most travellers continue to prefer the convenience of hubbing within the UK and Europe from the airport local to their home or business.

Why ‘a Scottish replacement for APD’?

We are aware that the consultation is headed ‘a Scottish replacement for APD’. Since the consultation is about a reduction in APD compared with the rest of the UK, and there is no suggestion of introducing a substitute for APD in Scotland, we believe that for simplicity of reference the duty should continue to be called APD (or ‘Scottish APD’).

Attached documents

We attach a completed respondent information form (Annex A) and our detailed answers to the questions set out in chapters 2 to 5 (Annex B). We should be happy in due course to elaborate on our answers if requested.

Wherever possible we base our comments on an evidential basis. You will note that, in our responses to individual questions, we qualify our support as appropriate.

Dr Peter Smart, Chairman

On behalf of the Aberdeen International Airport Consultative Committee

Annex B LIST OF CONSULTATION QUESTIONS

Chapter 2: Improving Scotland’s Air Connectivity – Strategic and Policy Objectives

Q1:  (a) Do you agree with our strategic and policy objectives for improving Scotland‟s air connectivity? Please answer yes or no. Yes, in principle

 (b) Please explain your answer to Q1(a). We agree with the objective of enhancing Scotland’s connections to new point-to-point destinations and developing services to key global hubs. However, as we have observed in our covering letter, section headed ‘Balancing the interests of the central belt with the other regions of Scotland,’ we are concerned that the government’s strategy needs also to be tailored to the needs and interests of those parts of Scotland away from the central belt, including Aberdeen, where air connectivity is critical to support economic growth at a local level as well as ensuring connectivity within and beyond the UK for both business and leisure purposes.

The government’s specific objective can only be achieved by Edinburgh and Glasgow airports. Other Scottish airports, such as Aberdeen, do not have the same critical mass of population or the runway facilities to sustain services much beyond Europe, but the services they do offer are vital to the continued economic development of the areas served, including the energy sector, inbound tourism, life sciences, financial services and high value food and drink production.

We should not wish the interests of the further regions of Scotland to be overlooked by the Scottish government. As noted in our covering letter there remains a key need for sustainable air services to London, Manchester and Birmingham, and to the main European hubs, from the airports away from the central belt.

We agree (consultation document, paragraph 2.9) that more needs to be done to give Scotland a competitive edge on the global stage. However, in terms of truly playing on the global stage, no Scottish airport has the advantage that, say, Helsinki airport has in Finland, as a hub for connecting services, based on their geographical location between Europe and Asia. Nor does Scotland have a national airline that is aggressive in establishing a wide network of routes which largely relies on interlining passengers to sustain its business, in the way that Finnair does. Scotland will almost certainly be reliant on non-UK airlines to provide the services foreseen, as it already is reliant on Emirates, Etihad, Qatar, Turkish and various American airlines.

Q2: How could a Scottish replacement to APD help achieve these objectives? We indicated, in our covering letter, that the consultation is not about a replacement for APD per se, but about the means of achieving a reduction in the current level of APD, compared with the remainder of the UK. A reduction of 50% or more could be a contributory unique selling point (USP) in promoting new air services to and from Scotland, as a saving by passengers leaving the UK via a Scottish airport. We would hope this would aid the Scottish Government’s in-bound tourism strategy.

Chapter 3: Scope and Structure of Duty Q3:  (a) Taking into account the scope of the powers proposed to be devolved to the Scottish Parliament, should the UK APD definitions of „chargeable passenger‟ and „chargeable aircraft‟ be retained under a Scottish replacement tax? Please answer yes or no. Yes. We can see no benefit in rewriting the definitions of UK APD, unless the Scottish replacement is far more radical than a downward adjustment in the levels of duty levied. Indeed, it appears to us that no change in the name of the duty is required beyond ‘Scottish APD’.

 (b) If you answered no to Q3(a), please explain your answer.

Q4:  (a) Do you think that the current UK APD per-passenger charging model should be retained under a Scottish replacement tax? Please answer yes or no. Yes. The principle is well-established (whether we like the tax or not!) and understood by airlines, travel professionals and passengers. Since the current proposal is to reduce levels of APD by 50%, then to show that this has been achieved presumes that the per-passenger charging model will be retained.

 (b) If you answered no to Q4(a), please explain your answer. Subject to compliance with State Aid rules and current aviation agreements, what alternative charging model(s) should be considered?

Q5:  (a) Do you think that the current UK APD destination based banding system should be retained under a Scottish replacement tax? Please answer yes or no. Yes.

 (b): o If you answered yes to Q5(a), should destination bands be defined by distance to capital cities or what alternative measures could be considered? What would be the optimum number and definition of bands to support the achievement of the Scottish Government’s strategic objectives for a Scottish replacement tax, as outlined in Chapter 2? The principle of destination banding is well-established and understood by all the parties involved in air travel. It is vital that any banding system meets Adam Smith’s four principles of taxation, as recited in the consultation document paragraph 1.12. We would suggest that the Scottish replacement should be based on two bands, as the UK APD now is. It was clear that the initial four bands of UK APD were reduced to two to make APD easier to understand and to collect.

The bands must, we suggest, ensure that the whole of Europe (EU, EEA, etc) falls within one band. To ensure the simplicity of administration of Scottish APD by airlines, perhaps the current full list of Band A destinations for UK APD could continue to apply to Scottish APD. The second band could then be defined as ‘the rest of the world, outside Band A’.

o If you answered no to Q5(a), please explain your answer. What system do you think should be used instead?

Q6:  (a) Do you think that the reduced, standard and higher rates system used for UK APD should be retained under a Scottish replacement tax? Please answer yes or no. Yes, subject to the comments in (b) below.  (b): o If you answered yes to Q6(a), do the UK definitions remain appropriate for practices in the aviation industry in Scotland? We cannot see why the rates system of UK APD should not remain appropriate for practice in the aviation industry in Scotland, although we would suggest a new set of descriptors for the three bands. We find the use of the UK APD terms ‘reduced’, ‘standard’ and ‘higher’ to be somewhat misleading. For example, on all domestic flights in the UK, all passengers are charged the ‘reduced’ band, because there is no business class seating. Equally, the number of aircraft (and therefore the number of passengers) that falls within the ‘higher’ band must be negligible, as a proportion of all aircraft movements out of UK airports (see answer to Q7).

We do not see any reason in principle why those travelling in premium cabins should not pay a higher rate of APD than those travelling in the lowest class cabin. o If you answered no to Q6(a), please explain your answer. What system do you think should be used instead?

Q7: Can you provide any evidence on the impact of the introduction of the higher rate which came into effect from 1 April 2013?

We are unable to provide any evidence. The incidence of flights meeting the criteria in terms of aircraft weight and passenger numbers is minimal, according to the MD of Aberdeen International Airport.

Q8: Do you have any views on how and when the planned 50% reduction in the burden of APD should be implemented? Ultimately, this must be a decision for the Scottish government, based on its manifesto commitments and the opportunity for a reduced rate of APD to contribute to enhanced economic activity in Scotland.

We do believe that the reduction, when made, should be achieved in one go, for simplicity of implementation by airlines.

Chapter 4: Exemptions Q9:  (a) Do you think that the current UK APD passenger exemptions should be retained under a Scottish replacement tax? Please answer yes or no. Yes, subject to our comments in response to questions (b, 10, 11 and 12 below.

 (b): o If you answered yes to Q9(a), to what extent are the existing definitions appropriate for the Scottish industry? We see no practical reason why the exemptions listed in the consultation document, paragraph 4.2, as enlarged upon in paragraphs 4.3 – 4.11, should be changed. We cannot see why ‘the Scottish industry’, as part of a global industry, should be any different. o If you answered no to Q9(a), please explain your answer. Is there any evidence to support the introduction of any additional or alternative exemptions?

Q10:  (a) Do you think that the current UK APD flight exemptions should be retained under a Scottish replacement tax? Please answer yes or no. No, not entirely.

 (b): o If you answered yes to Q10(a), to what extent are the existing definitions appropriate for the Scottish industry?

o If you answered no to Q10(a), please explain your answer. Is there any evidence to support the introduction of any additional or alternative exemptions? We believe that emergency and public service flights, short pleasure flights, planes with 19 or fewer seats operating scheduled services, circumstances beyond the control of the airline and NATO flights should be retained as flight exemptions.

We would also seek an assurance that a Scottish APD scheme will cover fixed wing aircraft only, having successfully lobbied the UK government for helicopters to be exempt from APD when it seemed, a few years ago, that larger rotary aircraft might be included in the UK APD scheme.

However, we believe a case could be made for amending the exemption for flights departing from airports in the Highlands and Islands. We respond to this point in our answers to questions 11 and 12.

Q11: What are the benefits to the local economy and residents of the Scottish Highlands and Islands region from the current UK APD exemption for passengers departing from airports in the region?

We are not in a position to comment upon the specific benefits to the local economy and residents of the Scottish Highlands and Island region from the current UK APD exemption for passengers departing from airports in the region.

We believe a case could be made to continue the exemption for the so-called ‘life line’ air services, as a public service commitment to keeping down the costs of travel from the islands and highlands, for business development, for those having to fly to mainland centres for health and other treatments, and to ensure that life in these more remote parts of Scotland is sustained.

However, we do not believe a case can be made for the continuation of the corresponding exemption for flights departing Inverness to destinations outside the Highlands and Islands region. Inverness is a vibrant city with a developing economy and tourism base. It has an increasing number of air services to destinations outside of the highlands and islands, including the recent reinstatement of the British Airways’ service to London Heathrow and a new service to Amsterdam by KLM. Since there is little difference in distance by air and flying time to such destinations from Aberdeen and Inverness, we cannot see any justification for the exemption to continue to apply from Inverness to such destinations. We believe there should be a level playing field.

Q12:  (a) Do you think the current exemption for outbound flights from the Highlands and Islands region should be retained or modified under a Scottish replacement tax? Please answer „retained‟ or „modified‟. Modified, as argued in response to Q11.

 (b) If you answered „modified‟ to Q12(a), please explain your answer. In what way should it be modified? Please see our response to Q11.

Chapter 5: Connected Flights Q13:  (a) Do you think that the current UK APD rules relating to connected flights should form a baseline position for a Scottish replacement tax? Please answer yes or no. Yes. Connected flights are regularly sought by business and leisure travellers, for the benefits they offer of a single end-to-end itinerary, seat allocations at first check-in, through-checked baggage and guaranteed support from the operating airline(s) if one flight in the rotation is delayed for any reason.

However, the opportunities for ‘connected flights’ from Scotland to other UK destinations and beyond are probably more limited now than they were when UK APD was first introduced. Many of these opportunities disappeared when British Airways withdrew from all UK domestic services, other than to and from seven major UK cities, including Aberdeen, Edinburgh and Glasgow (and, very recently, Inverness). From that time, the availability for connected services from the northern and western isles, which were served by BA to Aberdeen, Edinburgh and Glasgow, disappeared, as the first leg of the journey must now be undertaken by Flybe/Loganair on a point-to-point basis.

The advent of the low cost carriers, particularly easyJet from Aberdeen and Inverness to London Gatwick and Luton, with their emphasis on point-to-point ticketing, has also reduced the opportunity for connected flights. The only glimmer of light on this situation seems to be the availability of through ticketing on Flybe services, where the airline has a small number of code share services on partners such as Etihad and Finnair.

BA still offers connected flights from Aberdeen, Edinburgh, Inverness and Glasgow through Heathrow to their European and global destinations.

Where connected flights do still exist we generally support the continuation of the current UK APD rules, subject to agreement between the UK and Scottish governments that the payment of the lower level of duty in Scotland will be recognised as full payment of APD for connected flights departing from airports in other parts of the UK.

 (b) If you answered no to Q13(a), please explain your answer. What rules do you think should be considered instead?

Q14: What situations do you think could result in double taxation after a Scottish replacement to APD is introduced, and how might double taxation in such situations be avoided? We have already mentioned the ‘double taxation’ that inevitably occurs when airlines, such as the low cost carriers, rely on point-to-point bookings and do not offer connected flights. For example, a flight from Aberdeen to Gatwick with easyJet, followed within a few hours by a flight from Gatwick to Malaga, would count as two flights for APD purposes, because they are sold on a point-to-point basis. We cannot see any way of overcoming this phenomenon. If travellers choose to use such services, presumably because of the attraction of the headline fares, then they need to accept the imposition of APD on each leg of their journey – presumably, in the case of passengers

originating in Scotland, one leg at the new Scottish level and one at the UK APD level.

The only potential situation we can think of where double taxation could occur would be if at some time in future the UK government decides to charge connecting passengers originating from Scotland (and paying Scottish APD) UK APD on their onward flight from a UK, non-Scottish, airport. Thus we have already suggested that the UK and Scottish governments need to enter into a permanent concordat to prevent such a situation arising.

We have chosen not to answer questions 15 et seq, as they are outside the competence and terms of reference of the Committee.