Interesting breakdown by T&E of the hidden subsidies of airlines in Europe, that allow flights to be SO cheap
An interesting inquiry by Transport & Environment looks at how flights within Europe can be so cheap. It emerges that there are many hidden subsidies, which enable a flight to be so much cheaper than the same trip by train. In their example, they consider the trip from Amsterdam to Toulouse. The cost of the air ticket by Air France-KLM would be €80, and €81.65 with some extra charges. The total of the subsidies came to €86.24 in subsidies, and then another €43 in state debt. That consists of: airline tickets being VAT exempt, a difference of €7.35 per person. €45 per person is invested in the infrastructure to keep Schiphol Airport accessible. Border control costs €3.50 per person. The pipelines to get kerosene to Schiphol cost €0.05 per person, and the tax exemption for kerosene is €25 per person. The total amount of small extra subsidies was estimated at €0.25 per person. The EU contributes €1 per person to the flight, in particular to reorganise the airspace. And KLM gets free emission rights worth €4.14 per person. The €86.29 in subsidies does not include the Dutch public debt, which increases by €43 per person because of state investment in Air France-KLM.
A cheap airline ticket doesn’t fall from the sky
By Eoin Bannon (for Transport & Environment – T&E)
August 27, 2019
A round trip flight from Amsterdam to the south of France costs the same as a round trip ticket to the Dutch island of Terschelling. How is that possible?
Part of the answer can be found in the enormous subsidies that go to the aviation industry. Ties Joosten from the Dutch platform for investigative journalism Follow the Money mapped as many of these subsidies as possible. Aviation, the most carbon intensive mode of transport, is heavily subsidised and its emissions will continue to soar until these are addressed.
We discovered why flying within Europe is cheaper than taking a train. The aviation industry is connected via international, national and regional governments to an incomprehensible tangle of subsidies, tax exemptions and public investments. Our tax money contributes to making airline tickets so cheap.
How did we investigate this?
For many weeks we investigated public records from municipalities, provinces, ministries, NATO, the WTO and the EU, and we talked with different experts.
This investigation also has some limitations: it does not provide a full picture of all subsidy flows to the aviation industry; it is not a comparison between aviation and other forms of transportation; and this investigation does not take into account the added value of aviation (in terms of tourism or employment).
Why should I read this?
Due to immense subsidies to the aviation industry, low income people help pay for the flights of the rich. Moreover, travel by plane is a significant contributor to climate change, which has to be addressed by society as a whole.
In June, the Dutch secretary of state for Finance Menno Snel joined representatives of 29 countries to discuss, among other things, climate taxes for the aviation sector. Prior to the conference, he stated in the Dutch newspaper NRC that he wanted to levy excise duties on kerosene because “all forms of transportation have to contribute to fighting the pollution they cause. At the moment, this is not the case for aviation.”
It is improbable that this is the full story. It is quite possible that we have overlooked some kind of funding or cash flow from a government source to the aviation industry. Therefore we ask: Do you know of other kinds of cash flows from governments to the aviation industry that we missed? Please let us know by emailing the author at email@example.com.
Let’s take a trip together
Iren and Naomi work hard all year. He is an illustrator, she works as a medical doctor in a hospital and is looking to specialise. They live in Rotterdam. When Naomi works the night shift, they barely see each other. That’s why they have decided to take a trip together. They both take a week off and book a flight to Toulouse, in the south of France.
They take the plane on a Friday afternoon, and travel with the Dutch airline KLM, part of the Air France-KLM group. “This cost us €80, and it wasn’t even the cheapest flight we could find,” Naomi says. “But we wanted to fly there on a specific date and flight, which meant we had fewer options. Besides, Schiphol airport is really close. The evening of our flight we’ll already be sitting with a cold beer on a terrace in Toulouse!”
All extra fees included, Iren and Naomi pay €81.65 per person for a round trip flight with KLM from Schiphol to Toulouse. How is this possible? How can a round trip flight to Toulouse cost the same as a round trip ticket to Terschelling, one of the Wadden Islands in the north of the Netherlands?
To answer this question, Follow the Money will virtually join Iren and Naomi on their trip. During the journey we map as many subsidies – which make this dirt-cheap flight possible – as we can. Fasten your seatbelts!
VAT exemption: €7.35
The first tax exemption is already booked at Naomi and Iren’s kitchen table: in the Netherlands you do not have to pay VAT on airline tickets unlike train tickets, on which 9% VAT is levied. This means that when buying their airline ticket, Iren and Naomi have already saved €7.35 per person in VAT.
To travel by plane, Iren and Naomi first have to get to Schiphol Airport. That may seem obvious, but it is good to be mindful that there is no means of transportation as dependent on other means of transportation as flying. Since the airport itself is never the final destination, everyone has to make an extra trip by car or public transportation to get home or to the city centre.
On average 123,000 people travel to or from Schiphol Airport every day. These people usually do not live or work at Schiphol, but come and go by car or public transportation. The wish of Schiphol Airport to be more easily accessible has no limits. For example, Schiphol’s former CEO Jos Nijhuis said in 2016 that, as far as he is concerned, the municipality of Amsterdam could not just use the dividend Schiphol distributes every year (around €23 million) as they see fit. According to him, the dividend should go straight to improving the accessibility of the airport because “I know exactly how things go with government money: it goes into the treasury and is then used to pay for random expenses.” Schiphol has long wanted to connect to Amsterdam via a metro, for example.
The new ‘multimodal node Schiphol’ requires investments in the motorways between Schiphol and Amsterdam and the doubling of the railway capacity between Schiphol and Lelystad airports. To keep the national airport of the Netherlands accessible, the Dutch government spends billions of euros. In 2016 the Ministry of Infrastructure and Environment and the Ministry of Economic Affairs drafted an Action Agenda Schiphol to map how “the government wants to further strengthen the position of Schiphol”. The government has “the ambition to accommodate the growing demand”. To further this agenda, the ministries say “good, preferably direct and especially reliable connections through the main road network and the main rail network are of great importance for the accessibility of Schiphol and the scope of the market area. By the end of 2028, the government will invest almost €12 billion to further improve these connections.”
This means that, according to the ministries, in 12 years’ time €12 billion will be spent, on average one billion per year. Taking into account that every year 45 million passengers leave or arrive at Schiphol, this averages to €22.22 per journey. Hence, to get Iren and Naomi to Schiphol (and back home after their holiday) the government invests almost €44.44 per person in the accessibility of Schiphol.
A relatively low dividend
Once they arrive at Schiphol, Iren and Naomi walk into a world that is ruled by the Royal Schiphol Group, the group which owns Schiphol airport but also Rotterdam and Lelystad airports. The main source of revenue for the group are the airport charges: a collective term for different fees aviation companies pay to fly to or from Schiphol. In 2018, 59% of the total turnover of €1.5 billion consisted of these fees (€890 million).
This actually is relatively little. To keep Schiphol attractive internationally, the airport keeps the airport charges intentionally low, and has been doing so for years. Today, Schiphol has the lowest airport charges in the entire EU, as research by SEO shows. Heathrow in London collects over €2.5 billion in airport charges and government levies, almost three times as much as Schiphol. Competitors such as Frankfurt, Paris and Munich collect about twice the charges of Schiphol. This policy is supported by the government parties that are shareholders of the Schiphol Group; they apparently don’t mind the lower dividend.
Royal Netherlands Marechaussee: €3.38
In the meantime, Iren and Naomi have arrived at the passport control and have had their hand luggage checked. This goes reasonably smoothly. The stricter security requirements adopted since 9/11 at Schiphol include electronic body scans, computers that read chips in passports and clear information signs about what one is and isn’t allowed to take on a plane. The cost for all of this amounts to nearly €300 million and is part of the airport charges the aviation companies have to pay. A year and a half ago industry advocates called for the government to take on one-third of these expenses, but this lobby failed.
But these are not the only security expenses being made at Schiphol. The government also pays for the deployment of the Royal Netherlands Marechaussee, Dutch military police, at the airport who take on duties of passport control, surveillance and armed security. The cost of all this is not completely clear, but we can make a reasoned estimate. The budget of the Royal Netherlands Marechaussee last year was €360 million. Over 90% of this was spent on staff. With this money, the Marechaussee employed 513 civilians and 5,931 soldiers. At Schiphol about 2,000 marechaussees guard the borders and monitor safety. That means the airport demands approximately one-third of the capacity of the Royal Netherlands Marechaussee. Out of the total budget of 360 million, about €120 million will be connected to the surveillance and safety of Schiphol. That is almost €1.69 per passenger. Because Iren and Naomi will cross the border twice at Schiphol (on their way to Toulouse and a week later on the way back home), this will cost the Dutch government about €3.38 per person.
While Iren and Naomi are still having their cups of coffee, their plane is filling up on kerosene. This fuel comes from the Port of Rotterdam and is pumped to Schiphol through underground pipelines under high pressure. Part of these pipelines is in the hands of the Defense Pipelines Organisation (DPO). Functionally and financially, NATO directs this organisation, because the pipelines are part of the Central Europe Pipeline System (CEPS). The CEPS connects refineries, storage tanks and airports in five European countries with each other.
Some 90% of the kerosene transported through Central European pipeline systems is destined for civil aviation. Civil organisations (such as Aircraft Fuel Supply) pay for this service, but not enough: according to the most recent data, the CESP in 2017 suffered an operational deficit of €26 million, on a budget of €134.5 million. This deficit has been covered by the member states. It is not clear what portion of the deficit was paid for by the Netherlands. At the same time, we see that a spokesperson of the Ministry of Defense states that “the budget for the national part of the DPO activities” amounts to approximately €2 million per year. Schiphol is by far the largest destination for the DPO kerosene, but not the only one.
The financial organisation surrounding the DPO pipelines is quite a patchwork. Nonetheless it is clear that the Ministry of Defense co-finances the infrastructure transporting the kerosene to Schiphol. Based on the sources above, we estimate this contribution to be a couple of cents per passenger, a bit under 5 cents per round trip flight.
Tax exemption kerosene: €25
KLM does not pay taxes or excise duties for the kerosene it uses during Iren and Naomi’s flight. This is the international standard: almost everywhere in the world, aviation fuel for international aviation is exempt from taxes. The exact amount of kerosene a plane uses depends on a number of factors, including the weather conditions, the type of airplane, the distance flown, the number of passengers and the amount of kerosene on board. Moreover, the kerosene consumption of aviation companies is often kept secret because fuel costs are their biggest expense, meaning this is sensitive information they want to keep from their competitors. Open Airlines, a company developing software to improve kerosene consumption in planes, estimates it at 25 to 33 kilometers per litre per passenger. Hence for Iren and Naomi’s mid-haul flight, we take it to be 1 litre per 30 kilometers per person. The distance between Schiphol and Toulouse is exactly 1,000 kilometres, meaning that for their round trip flight, Iren and Naomi each use 66 litres of kerosene.
In 2018, a litre of kerosene cost on average €0.48, according to the International Air Transport Association. A litre of diesel fuel cost on average €1.39 in Europe in 2018, according to the European Commission. More than half of that diesel price consists of excise duties and VAT; the diesel fuel by itself costs only €0.65. If the price of kerosene, like diesel fuel, were to be more than doubled by excise duties and VAT, you’d get an amount of €1.03 per litre. Aviation companies could settle the VAT to be paid with the pre-taxed VAT, just like any other company does. With diesel fuel, the VAT amounts for 17% of the average European total price. If we deduct the VAT from the kerosene price, we’re left with an amount of over €0.85, 37 cents per litre more than kerosene costs now. This would make the airline ticket of Iren and Naomi almost €25 more expensive per person.
Countless smaller subsidies: minimum of €0.25
Iren and Naomi are at the gate, waiting to board the plane. This gives us an opportunity to mention a couple of the countless smaller subsidies that go to Schiphol. For example, there is the Knowledge & Development Centre, which wants to find “valuable and innovative solutions for the sustainable development of the mainport Schiphol.” The government of the Netherlands sponsors this centre to the tune of €750,000 per year. There is also the Mainport Innovation Fund II, an investment fund for start-ups focused on transportation, logistics and aviation. The Ministry of Economic Affairs has made €6 million available for this fund for the period between 2015 and 2021. Then there is a ‘Liveability Fund’, helping people and companies that are inconvenienced by the air traffic. The province of North Holland and the Ministry of Infrastructure and Water Management bear two-thirds of the €30 million that was put into this fund between 2016 and 2021. Last month the Aviation House was created as a “regional investment program to strengthen the compatibility between education and the labor market at Schiphol and Lelystad Airport.” Cost: €5.6 million for the period between 2019 and 2023, paid for by the Ministry of Education, the municipalities of Amsterdam and Lelystad and the provinces of North Holland and Flevoland.
There is also money going to the farmers around Schiphol. To prevent the collision of airplanes with birds, farmers have to plough their land as soon as possible after the harvest so that nothing edible will be left to attract birds that might end up in an airplane engine. For this, the central government pays the farmers €853 per hectare.
The exact number of these smaller subsidies is impossible to determine as there is no central institution or government body keeping such an overview. For this reason we only take into account the subsidies we identified above which amount to over €8 million per year. If we calculate the amount per passenger, we can say that these smaller subsidies make the round trip ticket for Iren and Naomi a bit over 25 cents cheaper.
Shares in Air France-KLM: €43 of public debt per person
Iren and Naomi have just passed the gate. They walk towards the plane, where a friendly flight attendant in the light blue uniform of KLM welcomes them on board. Behind him stands the pilot, calmly radiating the professionalism that they will keep the plane steady in the air later on. For a couple of months now, they have worked for a company that is partly owned by the Dutch state.
At the end of February the Dutch cabinet surprised everyone: suddenly they bought €750 million worth of shares in Air France-KLM. The government thus acquired a 14% stake in the company. This decision came about mostly for business and political reasons. According to several commentators, Air France and KLM do not get along particularly well, causing fear that the French will want to move a couple of lucrative destinations from Schiphol to Paris. To prevent this, and thus ensure that Iren and Naomi can take their flight with KLM to Toulouse from Schiphol, the Netherlands enlarged their stake in the aviation company.
Of course, shares are not the same as subsidies. It’s a kind of property that can bring in extra earnings, if Air France-KLM distributes dividends. Unfortunately the company hasn’t done that in over 10 years. In the future the Netherlands can resell their shares, in theory for a profit. But at the moment this is out of the question: since the Netherlands bought their stake, the value of the Air France-KLM shares has dropped by about 20%. Moreover, the minister made clear that buying the shares is a long-term investment. In subsequent years the public debt resulting from this investment will be €43 more per Dutchman, on a structural basis.
Other hidden charges…
A trade war
Iren and Naomi put their bags in the overhead lockers and take their seats. They look around. They’re sitting in a Boeing 737-800, a medium-sized plane costing about €95 million. According to the European Union, this price should be higher. Since the beginning of the century the EU has accused the US of giving Boeing illegal subsidies and thus an unfair competitive advantage. Similar allegations have been made in the opposite direction: according to the Americans, the European aircraft manufacturer Airbus could never have become such a success if it weren’t for the billions of euro in illegal state support and dirt-cheap loans it received from several European governments.
The fight between Boeing and Airbus started in 2005 when the United States and the European Union submitted complaints against each other to the World Trade Organisation (WTO). Fourteen years later, the WTO has come to a more or less final decision. The organisation states that an important part of the cheap loans to Airbus do not comply with international agreements. Moreover, it states that certain tax benefits for Boeing can be regarded as illegal subsidies.
Meanwhile the battle between the EU and the US is entering a new phase. Both powers are preparing to levy additional taxes on the products of the other. In April the US announced that it wants to introduce additional taxes amounting to over US$11 billion (€9.8bn) in total on European goods such as Gouda and Edam cheese, oysters and olive oil. In reaction, the EU published a list of goods from the US that it subsequently plans to levy an extra tax on, such as front forks, spokes and rims for bicycles. This trade war, which started with state support for aircraft manufacturers, can now also affect other parts of the economy.
Note that we do not take these subsidies into account when calculating the total subsidy for the ticket of Iren and Naomi, because they mostly originate from other European countries rather than the Netherlands. Additionally, the total scope of the benefits the European aircraft manufacturer Airbus receives is still subject to a complex WTO investigation as we speak.
Subsidies for airspace monitoring and other EU funds: €1
While the plane begins to taxi, the pilot wishes everyone a pleasant flight. He then reestablishes contact with the control tower. In the tower, the employees of Air Traffic Control Netherlands (Luchtverkeersleiding Nederland, LVNL) are in charge. LVNL is a so-called independent administrative body: the company performs government tasks, but is not part of the government itself. The air traffic controllers charge the aviation companies that use their services: all airplanes calling at a Dutch airport have to pay for this. Additionally there is a (lower) fee for planes passing through Dutch airspace. These fees, which are among the lowest in Europe according to the annual report, finance the LVNL.
But that isn’t the whole story. The European Union is working hard on the unification of European airspace. In this programme, called the Single European Sky Air Traffic Management (SESAR), billions of euros are involved. The first development phase ran from 2008 to 2016. In this phase, €2.1 billion was spent. One-third of this amount was paid by the European Union, one-third by EUROCONTROL, an international organisation funded by governments and responsible for the central coordination of air traffic control in Europe, and one-third by the aviation industry. This means that two-thirds of the project was paid for with public money. In 2016 the second development phase started, which will last until 2024 and during which €1.6 billion will be spent, following the same partition. Hence, from 2008 until 2024 €145 million euros in tax money per year will be spent on the development of SESAR.
At the moment the first results of SESAR are being implemented. The EU also partially bears these costs. According to SESAR, the total cost of the implementation will be €18 billion to €28 billion, to which the EU contributes 10%. Research by Follow the Money shows that this contribution is at the moment a whole lot higher: the necessary budget for implementing SESAR is currently about €3 billion, 46% of which is paid by the Connecting Europe Facility, an EU fund.
Thus, the enormous reorganisation of European airspace is being financed significantly with European tax money. However, countless smaller investments in air traffic safety also come from European subsidy funds. For example, between 2018 to 2021 LVNL has been replacing old radar systems at the airports of Schiphol and Groningen. Half of the cost, over €6 million, is borne by the EU. The same goes for a system allowing LVNL to regulate air traffic around Groningen and Maastricht remotely. This costs over €15 million, half of which is paid by Europe.
This means the EU sponsors air traffic to the tune of hundreds of millions of euros. Follow the Money listed all aviation projects financed by the two main EU funds. Within the Connecting Europe Facility, €1.7 billion is spent this way, while within the Horizon 2020 fund, it is €280 million. Next, we selected only the projects active at the time of Iren and Naomi’s trip, and calculated the annual contribution of the EU to those projects. In total, we come to an amount of €390 million per year that go from these European subsidy sources to the aviation industry. Add to this amount the €145 million per year put into the development of SESAR, and the European subsidization rises to €535 million. According to the most recent Eurostat data, about one billion passengers per year use European airspace. Hence, the EU contributes about one euro per person to the round trip flight of Iren and Naomi.
DATABASE: SEE ALL EU CONTRIBUTIONS
CO2 emission rights: €4.14
The plane now turns onto the runway and gets permission to depart from the control tower. The engines rise to full throttle and the speed increases. The wheels leave the ground. We’re in the air! Soon the airplane rises to its cruising altitude and heads towards southern France.
During take-off and landing the nuisance caused by the plane is the highest. This is when it burns a lot of kerosene and produces the most noise. These costs are externalised, as it’s called. The people living around Schiphol pay the price, by way of decreased home values, reduced sleep quality, stress, and other adverse health effects. These costs were calculated in 2018 by the consultants of Aviation Economics, commissioned by the environmental NGO Natuur & Milieu, to be €1.93 per passenger. In our investigation we do not take these costs into account, because they are borne by the local residents, and cannot be categorised as a government subsidy.
The externalised costs that come with the emission of greenhouse gases, on the other hand, we can (partially) include. Iren and Naomi’s airplane aggravates climate damage, and KLM has to pay a price for this because flights within Europe are obliged to take part in the European emissions trading system (ETS). An important part of these emission rights KLM gets for free. According to research by the Dutch emissions authority NEA from 2018, the airport industry does not have to pay for slightly over half of the emission rights. According to the calculator of Greenseat.nl, Iren and Naomi emit 360 kilos of CO2 per person on their round trip flight to Toulouse. For half of this, KLM received free emission rights. If KLM had had to pay for this, based on March 2019 ETS prices, it would have cost Iren and Naomi €4.14 euros per person more.
Total: €86.24 in subsidies, €43 in state debt and a trade war
While the plane of Iren and Naomi is leaving Dutch airspace, we take stock. Their airline tickets are VAT exempt, a difference of €7.35 per person. €45 per person is invested in the infrastructure to keep Schiphol Airport accessible. Border control costs €3.50 per person. The pipelines to get kerosene to Schiphol cost €0.05 per person, and the tax exemption for kerosene is €25 per person. The total amount of small extra subsidies we estimate at €0.25 per person. The European Union contributes one euro per person to the flight, in particular to reorganise the airspace. And, last but not least, Iren and Naomi’s aviation company receives free emission rights worth €4.14 per person. Altogether, that makes for a total of €86.29 in subsidies. This is still not counting the Dutch public debt, which increases by €43 per person because of the investment in Air France-KLM, the investments done by the central and regional French governments in and around Toulouse airport, and a trade war with the United States that threatens to affect other parts of the economy.
While Iren and Naomi listen to the Beluga, Airbus’ largest freight plane, departing from the nearby Airbus factory and flying over from their terrace in Toulouse, they consider these subsidies. “I didn’t expect that the government would invest so much money in the aviation industry,” Iren says. “I now wonder how on earth the train can possibly compete with that.” Naomi: “I wouldn’t mind at all if the government would support all of that a bit less. I’d still want to go to Toulouse, but I’d happily pay the fair price.”