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'COP 15': Environment vs Airlines and Airports. Good cop or bad cop?

10-Sep-2009

Green taxes are the 'get out of jail card' for airlines and airports - but only if they sober up! Two UK-based authors, Andre Morrall and David Bentley, propose an alternative method of allocating tax revenues generated by the aviation business.

‘COP 15’ The United Nations Climate Change Conference set for Copenhagen later this year will spell good news for one airport at least...Copenhagen. With thousands of delegates, support staff and journalists set to converge on the Danish capital (the majority by air transport), the role conferences play in generating air travel and all the associated carbon output that goes with it reminds us all of the irony that exists within the climate change debate.

As if to set a yardstick, John Prescott, the new Council of Europe’s ‘Rapporteur’ on climate change, just jetted half way around the world and back to a conference in China to lecture delegates on the need to cut their carbon emissions.

So while COP15 offers some short-term relief for the beleaguered selection of airlines that serve Copenhagen, not to mention adding some commercial relief to the depleted CPH commercial till, the message for the airline and airport community is clear...consider short term spells of success as “Commercial Binge Drinking!”

Since the inception of low cost aviation across Europe, airlines and airports in general have been enjoying the good times. So 11 September 2001 bought some prohibition back, but we soon recovered and, but for minor hiccups such as SARS, avian and swine flu, generally the last ten years of positive economic growth has helped airlines, airports, the aviation value chain and consumers all to enjoy the benefits of what cheap mobility can deliver. Yes, the aviation industry has grown a beer belly and so have consumers.

“I Predict A Diet”

But a fast crash diet arrived in the shape of the global financial crisis and the fallout - recession - a word not normally associated with the low cost sector which, since its inception within Europe’s aviation scene, has for the first time began to taste the flavour of this bitter form of diet pill.

Low cost has found itself to be better placed to cope with recession than the cost burdened flag carrying legacy sector where premium paying passengers have been the first ones to disappear during the slump - and possibly may not come back.

Clouds are also gathering on the horizon though for low cost. Many airports over the last ten years have lowered their passenger charges, ie their premium income, in order to stimulate volume and grow their commercial revenue, ie their marginal income. Low cost airlines have been very good at driving airport costs down in order to help them drive their ticket prices down, which was necessary to maintain their biggest marketing draw: low price. This approach, backed up by the ancillary revenue drive, forms the core business model of the low cost airline industry.

But environmental taxes currently at work in a number of countries directly threaten the low cost model because as an airline reaches a point of maturity in generating ancillary revenue, and reaches a point where cost is under maximum control, the only economic area left exposed is the ticket price, the biggest consumer draw in the marketing mix. If taxes force the ticket price up, then this scenario seriously threatens the entire low cost business model.

Cool Green taxes

When governments run out of money - and many of them are - they look for cheap mass market tax collection devices to bail them out. A convenient rescue package for those governments has come in the form of cool new “Green Taxes”. But when they are directed towards airlines, airports and the sensitive economic relationship that exists between the two, the fall out is divorce.

In the last few weeks we have seen Ryanair and easyjet, two of Europe’s biggest low cost airlines, announce capacity cutbacks. In both cases Green Taxes or “Tourist Taxes” or, officially, “Air Passenger Duty” (APD) has been identified by Ryanair and easyjet as the single most important reason why capacity has been reduced.

APD Was Not conceived As A “Green Tax” But It Has been Transformed Into One

APD was introduced by the Conservative government in Nov-93 and instigated on 01-Nov-94. According to the then Chancellor, Kenneth Clarke, ”air travel is under-taxed compared to other sectors of the economy. It benefits not only from a zero rate of VAT (Value Added Tax); in addition, the fuel used in international air travel, and nearly all domestic flights, is entirely free of tax”. The rate was set at GBP5 for flights to most European countries and GBP10 for other flights.

In his Nov-96 Budget Statement, Clarke clambered back on to his bandwagon saying, ”air travel has also been under-taxed, because it has proved difficult - still proves difficult - to get international agreement to tax its fuel”. He then went on to double APD to GBP10 for flights to most European countries and to GBP20 for other flights from 01-Nov-97. The rot had set in.

APD – We Have Lift-Off

Twelve years on, from 01-Nov-09 the new APD starts at GBP11 on tickets to destinations within 2,000 miles of London (which, as ever, is used as the base point), then GBP45 on flights up to 4,000 miles, GBP50 on flights up to 6,000 miles and GBP55 on flights over 6,000 miles. From Nov-10, the charges are GBP12, GBP60, GBP75 and GBP85, respectively. All these sums are doubled on premium class tickets, even including ‘premium economy’ (typically a couple of extra inches of leg room and a hot meal instead of bread and water) where it is available.

The problem with “Green Taxes” such as APD is that they are ill-conceived and fail to fit with the new economic model at work within the airport-airline setting.

 “Air Passenger Duty”, a name that signifies it will be spent on something that benefits passengers who travel by air, when collected actually goes straight into the UK treasury central collection pot, where it is directly exposed to all the inefficiencies at work within the government machine and is allocated to tasks as divorced from aviation as shoring up the massive, Guinness Book of Records-standard national debt and paying civil service pensions.

There appears to be no direct accounting relationship between the tax contribution airlines and their passengers are delivering and the core reason why today such tax is charged, ie to mitigate CO2 and the measures required to do that such as the implementation of engineering solutions, renewable energy and the transition to a low carbon economy. If we are correct and APD is now seen by the Government as a “Green Tax” then the aviation industry has its work cut out in getting it removed or reduced.

APD is in reality a national macro tax that does not recognise the micro economic impact that it can have on different airport and airline combinations.

Proposal – A Local Low Cost Micro Green Tax

The idea of aviation contributing something towards helping the world move towards a low carbon economy is more than idealistic, it is pragmatic. The fact is that aviation should play its part. The big problem is that airlines and airports have made the classic mistake and have attacked government and the tax policy directly. The solution is not to attack the tax, but for airlines and airports to help create a local micro low cost green tax.

A tax that can live with the new economic model at work within the airline airport setting.

Such a tax could then be used efficiently to implement renewable energy schemes that visibly demonstrate that the aviation industry can play its part in flying the world towards a low carbon economy.

The formulation of a local lower cost locally-collected tax, which is managed locally by either the local council or municipal economic development unit and then delivered back into the local economy to help stimulate and implement real engineering solutions directed towards renewable energy schemes, would be a much better solution than what we have today.

Imagine a regional airport handling five million passengers annually, two million departing, all paying just GBP2 for a European flight and say just GBP4 for a long haul journey.  Pretty soon you would have a locally-created sustainable and efficient pot of money to implement a range of visible carbon reduction measures, all delivered directly by aviation.

They might come in the form of wind turbine and solar power schemes. In fact we believe that every new home in the country should be built with such devices installed. If Ryanair and easyJet are so desperate for publicity that they want their names inscribed on those devices, so be it – they would be the ones paying for them.

The passenger profile of the airport and the type of traffic it handles would directly impact on how big or small the pot of money it creates would be, so the bigger airport with the bigger environmental impact would contribute more locally to delivering a low carbon solution. At a stroke, airline and airport growth could no longer realistically be viewed as a ‘bad thing’. One further stage would be to create a tax that better reflects the type of airport it is applied to. Such a system would, if adopted properly, better fit with the current airport-airline economics now at work.

Ryanair and Easyjet cutting flights and openly saying APD is the reason why they chose to do have played right into the hands of Government. The Government is now thinking “This APD must be working. These airlines are cutting flights and by association lowering their CO2 output. Job done.”

Airlines and airports really do not get it when it comes to Government relations. Attacking tax imposition is not the answer and neither is openly saying that the tax is working either. Both are costly mistakes.

We have seen some countries such as Spain and The Netherlands scrap these “Tourist Taxes” so we may be wrong; the lobbying could be working. However, it remains to be seen what COP15 will bring.

Environmentalists no longer live in trees or tunnels at the end of airport runways, like the infamous 1980s and 1990s eco campaigner ‘Swampy’ in the UK. They have desks at the United Nations and hang out in the coffee bars of Brussels entertaining Commissioners. The game has moved on.

Airlines and airports need to think of a low cost green tax solution and be positive, not negative. Aviation could be one part of the solution to creating a mass market shift to a low carbon economy; the aviation industry needs to quickly work out a plan on how to do that.

Les’s all sober up, soon, and get out of jail.

Andre Morrall, Director, Brand Aviation, Liverpool UK
David Bentley, UK Associate, CAPA


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