Controversy over airline passenger duty continues

Air passenger duty continues to be a contentious subject throughout the Caribbean with destinations in the region crying foul.

The UK is in a consultation phase over proposed changes to the much-criticised air passenger duty.

The tax is levied on flights out of UK airports and was ostensibly introduced as an environmental measure to mitigate the effects of the release of carbon dioxide associated with air travel.

Initially introduced in 1994 by the Conservatives, this was calculated on a relatively simple two-band system – one for European destinations and one for non-European destinations.

In April 2009 the Labour government of the time announced it would plan to revise the air passenger duty into a four-tier system, based on the distance between London and the destination country’s capital city. At that time, tax for a journey to a non-European destination was approximately US$53.

Following the introduction of the new system, Caribbean was placed in Band C. Tickets in the lowest (economy) class of travel attracted a levy of $67 from 1 November, 2009, increased to $99.50 from November 1, 2010. Standard rate – non-economy class – was increased to $132.50 per journey from 1 November, 2009, to 1 November, 2010, and from that date onwards hit $199 per journey.

The Caribbean Tourism Organisation has consistently railed against the new tax bands, citing that journeys to the east coast of America are significantly further from London than any Caribbean destination and yet the United States, by virtue of Washington, DC being closer to London, is placed in a lower tax band.

Negative impact

According to a November 2010 report by the Caribbean Tourism Organisation, representatives of the Caribbean met officials in the UK during September 2010 to express concerns that the Air Passenger Duty was negatively impacting tourism in ‘the most tourism dependent region of the world’.

“The region also believes that as the 1 November, 2010, increases begin to bite,;the full negative effect of APD will become apparent as hotels and airlines reach a point at which they cannot continue to absorb the cost. The region observes that this will only become apparent once the damage has been done and visitors are lost to other lower banded destinations,” read the report.

It went on to say that arrivals from the UK to the Caribbean were declining whilst those from other source markets were increasing, said the tax was discriminatory against Caribbean destinations as well as the Diaspora in the UK, and called for an alternative approach that would involve a design change of the tax.

A key Caribbean concern, said the report, was that the Florida Keys and South Florida were taxed in a lower band despite their proximity to Caribbean destinations. Indeed, a World Economic Forum study of Travel and Tourism Competitiveness from 2008 stated that all studies reviewed over 25 years found that there was a significant demand response to changes in airfares.

“The consistency of this result strongly indicates that any policy action that results in higher fares… will result in a decline of tourist numbers,” said the Economic Forum study.

Evidence of this had emerged from 2010 arrivals figures, said the tourism organisation, with fares over $663 putting UK passengers off travelling in 2009. As many as 71 per cent of economy class visitors said they would lose interest if air fares rose above $730.

The organisation also said that tour operators would offer packages through other European cities such as Frankfurt, Amsterdam or Paris rather than through the UK.

Potential changes and alternatives

It’s not just the Caribbean that has taken a stance against the duty. In March, 2011, a new campaign called Fair Tax in Flying launched, representing 25 airlines, airports, tour operators, destinations and trade associations in the UK.

It noted that revenues from the duty had increased by 2,600 per cent since its 1994 introduction and that travellers flying from the UK paid the highest levels of tax in Europe. A family of four flying to Florida, said the campaigners, paid $318 in tax, but were they flying from Ireland they would pay just $14.50.

An analysis by Frontier Economics, commissioned by short-haul budget carrier EasyJet, was published in May, 2011. It assessed proposed changes in air passenger duty. The consultation period is ongoing between the government, industry associations and lobby groups. Interested parties are considering the implications of proposed changes and have until 17 June to submit formal responses to the HM Treasury for it to consider when determining tax policy from April 2012 onwards.

The main purpose of changes would be to simplify the air passenger duty and there are four main options:

To reduce duty bands from 4 to 2

To reduce duty bands from 4 to 3

To reduce bands from 4 to 2, where only flights to European Union or European Economic Area countries would be charged at the lowest rate

To reduce bands from 4 to 3, where only flights to European Union or European Economic Area countries would be charged at the lowest rate

The report noted that the implication of this would be that short haul passengers in all cases would pay more.

The report also predicted detrimental effects for the United Kingdom market regardless of which option was taken. It said that around 3 million fewer trips would be taken to and from UK airports but that passenger kilometres flown would increase as changes ‘favoured long haul operations’.

Long haul business could increase by 30,000 passengers, leisure by 500,000 and visiting relatives and friends would go up by 130,000, said the report. All those categories would see downturn in short haul flights should proposed changes take place. The report slammed the environmental aspect of the tax, saying that whilst carbon dioxide emissions could go down by 500,000 tonnes per year because of fewer short haul flights, emissions of long-haul flights would rise to 700,000 tonnes.

Re-banding options

The Caribbean Tourism Organisation said that re-banding was the preferred option. The Caribbean Community felt that should the UK use Bermuda as the Cariforum capital, the Caribbean could be re-banded to the lower-tax band B. It noted that a proposed per plane duty, under which all flights departing the UK would be taxed including transfer traffic, would impact on the commercial viability of routes to the Caribbean with a possible loss of airlift. Both British Airways and Virgin Atlantic – central to the Caribbean’s UK connectivity – were against this option.

Finally, the organisation warned that the European Union’s Emissions Trading System brought aviation under its system from 2012, which could impact even further on ticket prices.

“Given that the Caribbean is already suffering declines in UK arrivals as a result of increases in APD, Caribbean Governments make clear that beyond rebanding of the region and the development of a more equitable relationship between the distance travelled and taxation of emissions, they remain concerned about other related factors.

“These include: the prospect of additional costs to passengers to the Caribbean arising through the EU Emissions Trading System; the uncertainty surrounding the manner in which airlines might pass this on to consumers; the absence of any information on a per plane tax; the possibility that APD increases will make the popular premium economy services unviable for carriers and operators of Caribbean routes; and uncertainty as to how projections attached to the UK budget suggesting that APD revenue will double over the next six years will affect the region.

“Caribbean governments make clear that the only viable and equitable solution for the region and its community in the UK is the redesign of APD to provide a better and revenue neutral re-balancing between long and short haul destinations,” said the report.