28 JUNE 2010

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Article from BTNews 28 JUNE 2010

COMMENT: The UK Budget and Air Travel

COMMENT:  The UK Budget and Travel

Last Wednesday the new British Chancellor of the Exchequer, George Osborne, revealed his first ever Budget.  AERBT will only endeavour to comment on it as it affects the air transport industry.  In fact what Mr Osborne did was to defer any decision regarding taxation and the airlines.  He is going to consult.  Hopefully common sense will prevail.  Still on the books is yet another massive increase of Air Passenger Duty (APD) due in November. 

According to figures released by the newly established Office for Budget Responsibility, APD is expected to rake in £3.8bn by 2015/16.  This is more than inheritance tax (£3.1bn) or the Bank Levy (£2.3bn).  The Germans expect to introduce a similar tax shortly and plan to raise €1bn.  But even Wolfgang Mayrhuber, CEO of Lufthansa, has not a clue on its actual workings.  The Dutch quickly dropped a similar plan when they realised the consequences for Amsterdam Airport.  Unfair taxes drive international passengers to other gateways and hubs.

Essentially what is on the table is either to tax per passenger or tax per aircraft.  A further increase (and we are talking about £360 tax for a family of four to a medium haul destination from November) will not help Heathrow’s ability to stay as the world’s most important international airport.  The competition is intense from the near Continent and elsewhere.  If London wants to hold its world position it needs to be competitive.

London does have one great advantage.  It is the centre of a huge commercial and leisure composite drawing peoples from all over the world.  Dubai, for all its innovations, is no different than Las Vegas, but without the fun.  A city sitting in the desert.  The new ultra long range aircraft will just overfly, much more environmentally friendly than landing in The Gulf.

Whether it be by per plane or by the seat the passenger will have to pay.  If you charge by the plane it would be just another direct operating cost and added to the fare.  One advantage would be that airlines could not disguise other costs under the word 'tax'. 

The argument put forward by the outgoing Chief Executive of easyJet, Andrew Harrison, that per plane encourages a high passenger load factor is a poor one.  All airlines try to gain the highest occupancy.  It is a major way to profit.

It could get terribly complicated.  Air France use an ATR (70 seats), A320 (172 seats) and A380 (538 seats), plus the occasional A319 (142 seats) and A321 (206 seats) between London and Paris.  Suppose they change the aircraft after the booking has been made and paid for, what then?

Some sort of sliding scale would have to be worked out regarding the size of the aircraft.  The rules would be even more complex than the current ones.  Do have a look at HM Customs and Revenue reference notice 550 “Air Passenger Duty”.  They are complex.  If you are being deported from the UK you don’t have to pay APD.

Presumably the per plane charge would be by stage length, but what would happen on BA flights which use a fifth freedom stopover?  It would not be fair to charge the UK airline for the entire journey, whilst clearly it cannot tax its competitor on what is a route from its home state. 

There are vast anomalies under the present system.  Passengers on connecting flights are not applied APD on the second leg.  Therefore if you fly Economy to Heathrow and change to Business Class for the next sector you only pay tax on the first part of the travel.  Take the train to London and just like everyone else who boards at Heathrow you will pay the full Business Class tax.

Transit passengers do not pay tax.  On the whole plane principle they will.

Does an airline add frequency or put on larger aircraft?  Per plane duty will be unfair to those flying non-stop rather than say via a Middle East point that requires a multi-sector journey.  Suppose one flies London – Singapore – Darwin – Alice Springs on a BA ticket but using QF for two legs.  Is that one flight or three?

London City Airport and other small regional airports would be particularly affected with aircraft limited on size.  The current idea of charging based on the capital of a country clearly did not work.  Passengers to Hawaii (Washington being the capital) pay the same tax as Barbados. 

Most industry experts and lobbying bodies take a balanced view.  The whole issue needs a thorough review. 

The AERBT observation is simple.  If an acceptable resolution cannot be achieved between the Chancellor and the industry by November the tax rises due at that time should be put on hold.  Clearly it was a panic measure by a government that knew it was in financial trouble and did not have a clue how to deal with the situation. 

If Britain is to retain its leadership in world air transport it is vital that we get the next step forward in terms of taxation right.  From 2012 aviation will enter the EU Emissions Trading Scheme, another complication with serious consequences for airlines that fail to comply.

The incoming Government in the lead up to the election lacked ideas regarding its attitude to the air transport industry.  A great opportunity is now to hand.  The Chancellor has an enormous amount on his plate.  Instead of rushing out with some ill-conceived plan, like the previous incumbent, he has decided to deliberate.  He must get it correct.  The Budget was good for the air transport industry in that no decision was made. 

Governments do not like admitting mistakes and changing tack.  If the new coalition does decide to drop the November hike there is no embarrassment.  It will just blame the Opposition.

Nobody likes paying tax but there are sensible ways of dealing with the problem.  Mr Osborne has a wonderful chance of getting (most) of civil aviation on his side.

Malcolm Ginsberg
Editor in Chief

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