HMRC modelling of potential impacts of changes in APD between airports – Heathrow APD higher

Analysis by the Department for Transport suggests that a 50% rise in air passenger duty at Heathrow and Gatwick would be high enough to persuade passengers to switch to airports like Luton and Stansted.

The report, Modelling the Effects of Price Differentials at UK Airports, (43 pages) is being studied by several MPs, including the prime minister’s former green adviser, Zac Goldsmith, who are keen for it to be submitted as evidence to the independent commission on aviation, chaired by Sir Howard Davies.

It suggests that applying different rates of tax at airports would create a better regional balance in passenger numbers and take pressure off Heathrow and Gatwick. As the analysis observes: “Despite significant growth in regional airports, the aviation market remains dominated by airports in London and the south-east.”

The DfT predicts that 100 million passengers paying the duty will fly out of a UK airport in 2014. However, more than half – 53 million – will depart from one of the five airports in the south-east and more than a fifth – 23 million – from Heathrow alone.

But any move to increase the duty is likely to be unpopular. APD can add as much as £92 to the price of an economy flight and typically costs the average family more than £115 a year, according to the Airport Operators Association.

The campaign group A Fair Tax on Flying [an aviation industry pressure group] says that “a family of four flying in economy class from the UK to the US pays £260 in APD tax, whereas in France the equivalent tax is only £38”.

[This, as usual, ignores the fact that there is no fuel duty on air travel, and no VAT is paid on any part of the airline industry. The Treasury therefore charges APD because air travel would otherwise be almost entirely un-taxed. Contrary to the endless aviation industry publicity machine, air travel is NOT over-taxed.  By contrast, road transport is very highly taxed indeed]. 

George Osborne, the chancellor, confirmed in his autumn statement that APD would rise in April – the fifth increase in as many years. Although the rate of tax paid by those flying to Europe will remain the same (£13 per person), long-haul fliers will be expected to contribute an extra £2-£3 per person. The rates [of APD] are double those paid by passengers in economy seats, for those flying in premium economy, business or first-class cabins.i.e. £67 for a return trip for one person to the USA in economy, and £134 in a premium class.

Sarah Clayton, of the campaign group AirportWatch, said increasing duty at certain airports could help ease congestion. “We have sufficient capacity at our airports if only we used it properly,” she said.

According to the Department for Transport’s economic modelling, increasing the duty by 50% on flights out of Heathrow would see the number of passengers flying from the airport fall by around 22%, with travellers switching to other airports in the south-east and the Midlands. The analysis suggests passenger numbers at Stansted, would increase by 20% and by 25% at Luton by 2020.

The vast majority of those switching would be those on long-haul flights which would be most affected by the price increase. By 2020 the number of long-haul passengers at Stansted would rise by more than 1 million, and at Birmingham by around 2 million, the analysis suggests. As more passengers switched to regional airports, the likes of Stansted and Birmingham would start to offer more services with greater frequency, “thereby attracting further passenger demand in future years”.

Alternatively, increasing duty by 50% at Gatwick would see the number of passengers fall by “around 30% by 2020”. The report explains: “The impact on Gatwick is much more severe due to the more price-sensitive nature of its customer base, and the lower frequencies offered on many routes relative to Heathrow.”

Lower prices at Scottish and Welsh airports would see demand switch away from neighbouring airports.

http://www.guardian.co.uk/world/2012/dec/29/tax-rise-heathrow-gatwick-airports

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Modelling the Effects of Price Differentials at UK Airports,

The report’s conclusions on Page 24  (28 out of 43) state:

5. Conclusions

67. The analysis presented in this paper helps to understand the dynamic effect that
price changes may have on air passenger demand across UK airports. Whilst it is not
possible for economic models to fully capture the wide range of information that
goes into airport and airline scheduling decisions, the simulations demonstrate the
sensitivity of demand to price changes and the reallocation patterns that arise across
different UK airports.

68. A key finding from the modelling is that even the larger price changes that have been
modelled in this work have a relatively small impact on total passenger demand. A
key reason for this is that whilst these price changes are large in terms of the size of
the tax, they are smaller in terms of the total cost of a flight (including fare, cost of
travelling to the airport etc.). It is therefore perhaps unsurprising to see that price
changes of this magnitude have a relatively small impact on total demand.

69. Secondly the results suggest that large price changes at airports (i.e. the largest of
those modelled in each scenario) can lead to passenger reallocation but marginal
changes only have more limited impacts. There are two key reasons for this; small
price changes are insufficient to either 1) overcome the additional travel costs, or 2)
override a passenger’s preference for greater service frequency. This second point is
particularly important when examining the impact of price changes at Heathrow. In
the model passengers are prepared to accept higher prices to a certain extent, in
order to travel from airports that offer them greater frequency and connectivity
benefits.

70. The results also show that lower prices at Scottish and Welsh airports could attract
demand away from neighbouring airports. However, other factors such as travel
cost and service frequency limit the potential shift of passengers and services that
would occur. Similarly the model predicts that price increases at Heathrow and
Gatwick may only result in a shift of passengers to other airports in close proximity.
As passengers would still prefer to travel from the same area to minimise any
additional travel cost, suppliers would look to satisfy this demand by switching
services to other airports nearby who are unaffected by the price increases and have
the necessary spare capacity.

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Modelling the Effects of Price Differentials at UK Airports: Frequently asked Questions 

HM Revenue and Customs Research Report 188

www.hmrc.gov.uk/research/report188-app.pdf

1. What are the key findings of this research?

 There are three key findings from the research:

i. Small localised price changes are unlikely to cause significant changes in total aviation demand.
ii. Any redistribution in demand is only likely to be large if the price changes are fairly large.
iii. Where there are large demand redistributions, it is likely to be predominantly between airports that are in close proximity to one another.

2. Why has HMRC undertaken this research?

 HMRC has undertaken this research in order to better understand how localised price changes may impact passenger demand patterns.
 This research will be helpful when considering the recommendations in the Calman Commission report and the recently published Silk Commission report.
 The research is intended to provide evidence and improve understanding; it does not make policy recommendations.
3. What is HMRC planning to do as a result of this research?

 The Government will use the findings when undertaking any future analysis that involves passengers responding to differential prices at UK airports.

….and there is more at

http://www.hmrc.gov.uk/research/report188-app.pdf

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2013 rises in APD

•   Figures in orange are the 2012 prices

  http://cdn.hm-treasury.gov.uk/as2012_tax_and_tax_credit_rates_and_thresholds_051212.pdf