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Aviation, the 'guilty secret', needs self-belief to ensure growth

Analysis

CAPA ANALYST PERSPECTIVE - a new series where CAPA - Centre for Aviation's analyst team provide their personal views on a hot topic facing aviation around the world.

Aviation is now close to pre-pandemic traffic levels. Pent-up demand from the COVID-19 pandemic years has been unleashed and passengers are enjoying air travel again.

They have an innate understanding that it connects friends, families and businesses, with significant benefits in cultural and social exchanges, in facilitating international understanding, and for the global economy. However, a return to reliable long term growth cannot be taken for granted.

Aviation is like a 'guilty secret'. Everyone likes to fly, but nobody likes to admit it, and there are many challenges to growth.

Jonathan Wober, Chief Financial Analyst at CAPA - Centre for Aviation shares his viewpoint. 

Aviation holds its future in its own hands

Growing environmental concerns are prompting government policies that manage growth. The Dutch government's reversal of a decision to limit Amsterdam capacity was a small win for airlines, but momentum is growing for increasing aviation taxes.

Challenges to aviation's growth also include physical infrastructure constraints, protectionism, and other government-imposed burdens.

To overcome these challenges aviation must help the public to shed its burden of guilt. Only if it becomes more confident at expressing its many benefits can the industry ensure its licence to grow.

Aviation holds its future in its own hands.

Global passenger demand is approaching pre-pandemic levels…

Demand for air travel has recovered robustly from the haemorrhaging of global passenger demand during the COVID-19 crisis.

Worldwide revenue passenger kilometres (RPKs) collapsed by 66% year-on-year in 2020; they were 58% below 2019 levels in 2021, and were 32% below 2019 in 2022.

Most recent monthly traffic figures for Sep-2023 from the International Air Transport Association (IATA) show that a return to 2019 traffic volumes is very close.

Global RPKs were only 2.7% below the data reported for Sep-2019.

In North America, Latin America and Middle East, passenger traffic volumes were actually around 5% above 2019 levels in Sep-2023.

Moreover, it has not been necessary to stimulate the traffic recovery with damaging price wars. Far from it, airlines have reported strong yields throughout 2023.

…but future long term growth can't be taken for granted

However, in spite of the near return to pre-pandemic levels of air passenger traffic, a return to the almost continual, apparently effortless, growth enjoyed over many decades cannot be taken for granted.

Public opinion has moved against air travel since the pandemic…

According to Gallup, US attitudes have moved against air travel since before the pandemic.

In 2019, 42% of respondents to a Gallup survey said that their overall view of the airline industry was 'very or somewhat positive', while 23% said that it was 'very or somewhat negative'.

In 2023 only 35% answered in the positive categories, and 38% put themselves in the negative.

…and environmental concerns are growing

The UK's Civil Aviation Authority conducts regular consumer surveys, including questions on aviation's environmental impact. It asks if prospective travellers think about the impact of flying on the environment when deciding to travel by air.

In Apr-2019, 31% of respondents agreed that they did. In Oct-2022, this proportion had risen to 37%.

Surveys in the UK by YouGov also show a rise in consumer concern over the environmental impact of air travel.

The proportion of YouGov respondents saying that they take fewer holidays to reduce the environmental impact of their travel plans increased from 22% in Jul-2019 to 25% in Jul-2023.

Those saying that they take holidays in the UK instead of abroad, for the same reason, increased from 19% to 21%.

Government action against aviation is increasing…

Surveys of consumer attitudes could, with some justification, be dismissed as irrelevant. Public opinion can be fickle and fashion-conscious.

Much more important than surveys, consumers are voting with their feet and boarding aircraft to fly somewhere in large numbers.

However, governments are also expressing reservations and – more disturbingly for aviation – acting on them.

Here are some recent examples from Europe.

…with proposed new taxes in Denmark

As part of new proposals on green aviation, Denmark's government recently (9-Nov-2023) announced a passenger tax, to be phased in from 2025 and implemented in full in 2030. Part of the proceeds will go into green initiatives in aviation, but part will finance pensions.

…and the Netherlands

The government of the Netherlands has proposed a new tax on transfer passengers at Amsterdam Schiphol, a move described by KLM as "incomprehensible and very worrying".

…and increased taxes in France

Earlier this year France announced an increase in taxes on flights in order to invest more in its railway system.

It aims to close the price gap between air fares and higher train fares and thereby to encourage travellers to switch away from airlines.

A Greenpeace report found that flights were on average half as expensive as trains for journeys in Europe.

Expect other governments to take note.

Denmark's aviation industry response was predictably defensive

The response from the aviation industry in Denmark to the new passenger tax was typical of similar responses to environmentally led moves by governments the world over.

SAS said that the tax would hit demand, and the extent to which the airline would have the opportunity to strengthen its route network.

Copenhagen Airports said, "It makes no sense to talk about a green transformation of aviation when only a small part of the money from a tax goes to reducing the climate footprint".

Denmark's Flight Personnel Union (FPU) said the Danish Government was "...mixing two things that have nothing to do with each other... where aviation has to finance the pension scheme", labelling it "an unnecessary burden on an already vulnerable industry".

Such responses are understandable, if also predictably defensive.

However, they are too late and, therefore, almost entirely pointless.

The tide of government opinion in favour of additional taxation on aviation appears to be gathering momentum.

Transport & Environment: Europe's lost government revenue due to 'poor aviation tax'…

The campaign group Transport & Environment (T&E) published a Jul-2023 report entitled 'Aviation tax gap', looking into how much revenue governments are "losing out on due to poor aviation tax".

It argued that the growth in aviation's share of CO2 and other emissions is due to the sector being "under-taxed and under-regulated for decades".

The report concluded that European governments (EU27, UK, Norway, Switzerland and Iceland) lost out on EUR34.2 billion due to tax and emission pricing exemptions.

It predicted that this would increase to EUR47.1 billion in 2025 if governments failed to remove tax exemptions.

The report added that existing policies barely represent 16% of the possible revenue that could be generated by EU nations through "properly taxing" aviation.

…requires increased taxes on aviation

T&E recommended an end to jet fuel tax exemptions, ensuring carbon markets cover all airline emissions, and applying VAT on air tickets.

In the short term, before making the above changes, it argued for governments to impose ticket taxes to the level needed to close the tax gap. According to T&E, these would average EUR23 for domestic trips, EUR51 for intra-Europe, and EUR259 for trips beyond Europe.

It also recommended that part of the revenues raised be reinvested in renewable energy, e-fuels production and other clean technologies, or promoting cleaner alternative transport modes, such as rail travel.

Aviation also faces other challenges to growth…

The UK government's decision to lower its passenger tax on domestic flights earlier this year looks like the exception that proves the rule.

The Dutch government's change of heart on limiting the number of flights at Schiphol may not have any implications for its planned tax on transfer passengers.

Support for demand-limiting taxation is becoming increasingly mainstream, and governments are taking note.

However, this is not the only threat to the future growth of aviation.

It also faces significant challenges around infrastructure (in the broadest sense) and its capacity; protectionism; and other government/regulatory burdens.

The infrastructure challenges include physical infrastructure, air space, and human resources.

…including physical infrastructure…

Physical infrastructure constraints are mainly around airport capacity, but also around surface access.

Air space challenges relate to air traffic management, both the available capacity and constraints arising from labour strikes.

Limited human resources can also be included under infrastructure, since lack of sufficient staff numbers can be a considerable constraint on achieving growth.

Solutions to aviation's infrastructure challenges will require a strategic and collaborative view from governments, proper consideration of the consultation process necessary in democratic societies, and smoother and faster planning approval processes.

…protectionism…

The challenges to growth posed by protectionism include rules limiting foreign ownership and control of airlines and restricting their market access. In addition, any moves towards a less liberal global trade environment could threaten aviation's growth.

Individual aviation industry participants may have little influence in this area.

However, the solution lies in industry-wide lobbying for full liberalisation of rules on ownership and control, and on market access on a multilateral basis, and for a commitment to international institutions and free trade.

…and other government-imposed burdens

Additional government-imposed burdens include consumer rights regulation and travel barriers imposed by visa regimes.

Solutions in this area are simple – at least, on paper: the minimising of consumer rights regulation (and its equalising across different jurisdictions) and the lowering of visa hurdles.

Aviation needs to be more coordinated, self-confident and visible in promoting itself

The solutions, broadly outlined above, to the challenges facing the growth of aviation have a common theme – namely, government policy.

In turn, government policy is set by politicians, who are elected by the public (at least, in democracies).

However, as the surveys suggest, the public's attitude towards aviation – the ‘guilty secret’ – is increasingly hesitant.

The truth is that aviation has an image problem. Only by fixing this can the aviation industry expect the public to back policies favouring its growth.

The many links in the aviation value chain need to come together to take responsibility for aviation's own future. Blaming regulators or governments for constraining growth is, at best, a waste of breath and, at worst, counterproductive.

Aviation needs to be much more coordinated, self-confident and visible in promoting the economic and social benefits of growth to the public.

Done well, this should naturally reverberate with consumers' innate understanding of these benefits.

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