Air Departure Tax in Scotland: An Economic Assessment December 2017 Contents Contents ................................................................................................................ 2 Executive Summary ................................................................................................ 6 1. Introduction .................................................................................................... 11 Overview of Approach ......................................................................................... 12 Scope of Study .................................................................................................... 12 2. Current Aviation Market ................................................................................ 14 Current taxation levels / Background to APD ...................................................... 14 Demand Side Baseline ........................................................................................ 15 Scottish Airports – Passenger Numbers .......................................................... 15 Current Air Passenger Duty ............................................................................. 16 Development of Demand Side Counterfactual ................................................ 18 Supply Side Baseline ........................................................................................... 20 Scheduled Passenger Operations ................................................................... 20 Scheduled Destinations ................................................................................... 22 Scotland Based Aircraft ................................................................................... 25 Benchmarking Against Comparable Airports ................................................... 26 Development of Supply Side Counterfactual ................................................... 28 Supply Side Summary ..................................................................................... 28 3. Logic Modelling Framework & Method ........................................................ 29 Supply Side Outcomes ........................................................................................ 31 Rates & Bandings ............................................................................................ 31 Extent of Pass-Through & Impact on Services ................................................ 31 Demand Side Outcomes ..................................................................................... 34 Estimating the ‘Do Something’ (tax reductions from APD levels) Demand ..... 34 Reduced Fares & Elasticities ........................................................................... 34 New Connections ............................................................................................. 35 Uplift in Passenger Numbers ........................................................................... 36 Determining Economic Impacts ........................................................................... 36 4. ADT Scenarios ............................................................................................... 37 5. Outcomes – Demand Side & Supply Side ................................................... 38 Demand Side Approach ...................................................................................... 38 Supply Side Approach ......................................................................................... 38 Market Composition ............................................................................................. 41 Headline Results .................................................................................................. 42 2 Scenario Based Sensitivity Tests .................................................................... 46 Other Issues to Consider ................................................................................. 48 6. Economic Impacts ......................................................................................... 50 Economic Impact Assessment ............................................................................ 50 Operational Impacts............................................................................................. 52 Additional Passengers ..................................................................................... 52 Based Aircraft .................................................................................................. 56 Tourism Impact .................................................................................................... 59 Wider Business Impacts ...................................................................................... 64 Combined Impacts ............................................................................................... 66 Wider Issues ........................................................................................................ 69 Rail Competition .............................................................................................. 69 Short-Haul versus Long-Haul .......................................................................... 70 Long Haul Hub Potential .................................................................................. 71 7. Monitoring and Evaluation Framework ....................................................... 72 Monitoring ............................................................................................................ 72 Monitoring of Demand ..................................................................................... 72 Monitoring of Supply ........................................................................................ 73 Evaluation ............................................................................................................ 74 Process Evaluation .......................................................................................... 74 Outcome Evaluation ........................................................................................ 74 Monitoring and Evaluation Framework ................................................................ 75 8. Conclusions ................................................................................................... 76 Appendix A – APEX Modelling ............................................................................. 79 Introduction .......................................................................................................... 79 Choice of Routes ................................................................................................. 79 Methodology ........................................................................................................ 80 APEX Modelling ................................................................................................... 81 Results ................................................................................................................. 82 Generic Conclusions............................................................................................ 86 Appendix B – Sensitivity Tests ............................................................................ 89 Scenario 1a: 100% reduction in Band A: Full Pass-Through ......................... 90 Scenario 1b: 100% reduction in Band A: Partial Pass-Through ..................... 91 Scenario 1c: 100% reduction in Band A: No Pass-Through ............................ 92 Scenario 2a: 100% reduction in Band B: Full Pass-Through ......................... 93 3 Scenario 2b: 100% reduction in Band B: Partial Pass-Through ..................... 94 Scenario 2c: 100% reduction in Band B: Zero Pass-through ......................... 95 Scenario 3a: 50% reduction in Band A & Band B: Full Pass-Through ............ 96 Scenario 3b: 50% reduction in Band A & Band B: Partial Pass-Through ........ 97 Scenario 3c: 50% reduction in Band A & Band B: Zero Pass-Through ........... 98 Appendix C - Monitoring and Evaluation Framework ........................................ 99 Table 2.1: Current Air Passenger Duty Rates and Bands ....................................... 14 Table 2.2: 2016 APD Summary, 2016 ..................................................................... 18 Table 2.3: Scheduled Passenger Operators with Services to / from Scotland ........ 20 Table 2.4: Scheduled Destinations from Scottish Airports (Year-Round) ............... 21 Table 2.5: Scheduled Destinations from Scottish Airports (Seasonal) .................... 21 Table 2.6: Summer 2017 Weekly Frequencies to Key Hubs from Scottish Airports23 Table 2.7: Winter 2017 Weekly Frequencies to Key Hubs from Scottish Airports .. 24 Table 2.8: Overnighting Aircraft by Airline (Sample taken on Friday 14th July 2017) ................................................................................................................................. 26 Table 2.9: Benchmarking with EU Peripheral Secondary Airports (2015) ............... 27 Table 5.1: Supply side uplift by scenario and airline type (2019-2021), Zero Pass- through ..................................................................................................................... 40 Table 5.2: ADT Scenarios Modelled ........................................................................ 43 Table 5.3: Summary of ADT Scenarios Modelled ................................................... 47 Table 6.1: Economic Impact of Additional Airport Passengers, 2018-2022 ............ 54 Table 6.2: Economic