A Level Playing Field in the European Air Transport Sector? – a Belgian Case Study
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A LEVEL PLAYING FIELD IN THE EUROPEAN AIR TRANSPORT SECTOR? – A BELGIAN CASE STUDY Franziska Kupfer, Katrien De Langhe, Sérgio Domingues, Christa Sys, Eddy Van de Voorde, Thierry Vanelslander University of Antwerp 1. INTRODUCTION Air transport forms a crucial part of current passenger and cargo transport. It is often considered an industry that adds value to a country’s economy. That also shows in the fact that in the case of Belgium, the added value of the airports and the air transport sector amounted to about 1.8% of the GDP in 2009. To increase the competitiveness of the sector, a level playing field is necessary and desirable. However, in practise, a level playing field is not always given. Therefore, it is interesting and useful to investigate this problem more in-depth. Different topics that influence the level-playing field in air transport such as the European Emission Trading Scheme (see e.g., Scheelhaase, Grimme & Schaefer (2010) and Anger (2010)) and the rise of the Middle Eastern carriers (see e.g., Grimme (2011) and Lei & Parmar (2012)) have already been discussed in other academic papers. However, the specific problems concerning air transport in a country have not yet been analysed. Therefore, this paper focuses on the European and more particularly the Belgian air transport sector.1 This paper adopts the definition of a level playing field of Mendes de Leon (2012), where a level playing field is defined as “an environment in which all competitors in a given market must follow the same rules and are given an equal opportunity to compete in that market”. This definition corresponds to the specification of level playing field as a rule-based level playing field, where level is interpreted as the same rules for all firms in a market. Therefore, the playing field is un-level if different rules apply to different companies. A level playing field can also be looked at as outcome-based level playing field, where level is interpreted in the way that all companies in a market have the same expected profit. (Appelman, Gorter, Lijesen, Onderstal, & Venniker, 2003) As said, in this study the approach of a rule-based level playing field is followed. This means that a company in the air transport sector should be able to operate within the same rules as other companies in the sector. The paper gives an overview of the specific problems that Belgian air transport companies face and that can be traced back to an un-level playing field.2 First, the differences in labour cost for the flying personnel between © AET 2013 and contributors 1 European countries are address addressed. Second, problems in the training of pilots are brought forward. Furthermore, the application of VAT in the travel industry is discussed. Those topics are seen as specifically but not exclusively relevant to Belgium. Each of these problems is analysed in detail and solutions are presented to solve the un-level playing field. 2. LABOUR COSTS One of the problems in the Belgian air transport sector is the high labour cost, which makes the country less interesting for airlines as a home base. Airlines that are already based in Belgium might consider moving their home-base activities and possible new air transport activities might be threatened due to the elevated cost. To maintain a healthy air transport sector in Belgium, measures are necessary to improve the attractiveness of the country. In other sectors, specific international treaties are in place stating that employees have to pay taxes in the country of employment. However, in those treaties, an exception for the air transport sector is included. Because of the international character of air transport, taxes for cabin crew and pilots normally have to be paid in the country where the airline has its headquarter. This creates an un-level playing field as different airlines which operate in the same country have to follow different rules concerning taxes. Consequently this results in different labour costs for cabin crew and pilots. Part of the problem concerning the labour cost in Belgium, was the high social contribution for pilots and cabin crew, which could amount to 50% of the gross salary. The reason for the high social cost for flying personnel was amongst others a special social contribution which has to be paid for the special pension scheme of the flying personnel (cf. Koninklijk Besluit of 3.11.1969; Koninklijk Besluit number 50 of 24.10.1967). This pension scheme implies that a member of the flying personnel could already retire at the age of 55, or even earlier in case of a career of 30 years (pilot) or 34 years (member of cabin crew). Moreover, the amount of pension was higher than that of a normal employee due to higher wage limits (Rijksdienst voor Pensioenen, 2011a). The extra contribution was thus used to finance those extra advantages. For example, in 1986 when the special pension scheme was introduced, flying personnel had to pay 30% above normal social security contributions due to this special contribution. As this led to very high labour costs in the sector, the contribution was systematically lowered (Rijksdienst voor Pensioenen, 2011b). Also, in 1995 an exemption was introduced that suspended the special contributions. This exemption terminated on 1 July 2007 after which the special social security contributions where gradually reintroduced. (Baker & McKenzie, 2007) Figure 1 shows the special social retirement contributions between 1999 and 2010. The figure shows clearly the end of the exemption: after 2007, a very strong increase in special social security contributions can be observed, although the number of employees paying the contributions stayed more or © AET 2013 and contributors 2 less stable (see also Table 1). While in 2007, a member of the flying personnel paid on average 1,300 euro per person, this contribution increased to more than 4,600 euro in 2010. Figure 1 - Special retirement contributions of pilots and cabin crew in Belgium between 1999 en 2010 16.000.000 14.000.000 12.000.000 Exemption from special 10.000.000 contributions 8.000.000 6.000.000 4.000.000 Strong growth, Contributions in euro in Contributions although number of 2.000.000 flying personnel stayed about constant 0 2002 1999 2000 2001 2003 2004 2005 2006 2007 2008 2009 2010 Source: Own composition based on data from Rijksdienst voor Pensioenen (2011a) In Figure 1, also the impact of the bankruptcy of Sabena in 2001 becomes clear, as the special retirement contributions were cut by half between 2001 and 2002 and the number of pilots and cabin crew in Belgium also decreased by more than 50%. Table 1 - Share of cabin crew and pilots in special retirement contributions Year Number % cabin crew % pilots 1999 5,058 69.65% 30.35% 2000 5,467 68.98% 31.02% 2001 5,426 67.21% 32.79% 2002 2,657 58.56% 41.44% 2003 2,633 57.35% 42.65% 2004 2,701 57.72% 42.28% 2005 2,563 57.20% 42.80% 2006 2,718 55.30% 44.70% 2007 2,886 53.85% 46.15% 2008 3,039 57.88% 42.12% 2009 2,991 53.83% 46.17% 2010 2,951 55.17% 44.83% Source: Rijksdienst voor Pensioenen (2011a) © AET 2013 and contributors 3 In 2010, a total of 13.75 million euro of special social contribution was paid by 2,951 people, which indicates that on average every member of the flying personnel had to pay 4,658 euro as extra social security. The Belgian social security regulation of flying personnel did not only create an un-level playing field, but it also initiated pilots to work as pseudo self- employed or to apply to foreign carriers to bypass the high social security contributions. As a step in the right direction, the Belgian government decided to abolish the special pension scheme from 2012 and therefore also the special social security contribution. (sdworx, 2012) 2.1. International Comparison of Labour Costs Comparing the labour costs between different countries, it becomes clear that Belgium has in fact a competitive disadvantage. Table 2 shows the differences between the gross salary cost of an employer and the net earnings of the employee. For easy comparison, a hypothetical gross salary of 100,000 euro was assumed. The results show that the difference between the gross cost of the employer and the net earnings of the employee is almost twice as high as in countries such as Luxembourg, Ireland and the UK. Table 2 - Comparison of labour costs between Luxembourg, Ireland, the UK and Belgium (2007) Luxemburg Ireland UK Belgium Gross salary € 100,000.00 € 100,000.00 € 100,000.00 € 100.000,00 Social security € 11,509.00 € 10,750.00 € 10,626.86 € 38.375,00 contribution by the employer Social security € 10,788.00 € 3,820.00 € 5,254.10 € 18.717,00 contribution by the employee Income tax liability € 17,059.00 € 26,577.00 € 26,617.58 € 34.987,55 Net earnings of the € 72,153.00 € 69,603.00 € 68,128.32 € 46.295,45 pilot Gross cost for the € 111,509.00 € 110,750.00 € 110,626.86 € 138.375,00 employer Difference between € 39,356.00 € 41,147.00 € 42,498.54 € 92.079,55 gross cost employer and net earnings employee Source: Baker & McKenzie (2007) We expect that an updated calculation for Belgium would show two different developments visible. On the one hand, the social security cost increased in the years after 2007 due to the gradual reintroduction of the special social security contributions. On the other hand, the income tax is expected to show a decreasing trend because the airline employees increasingly work in shifts or temporary employment and therefore have to pay less social security on © AET 2013 and contributors 4 their wages.