Airlines play a fundamental role in connecting the UK to the world.
Businesses require passenger and freight services so they can operate and invest in the UK, as well as export goods to global markets. At the same time, millions of Brits each year depend on airlines to connect them with loved ones and enjoy well-earned holidays. UK carriers have excelled in delivering these services in what is a highly competitive market.
Complacency, though, is the enemy of success. Although passenger numbers are rising, competitors are making gains, establishing a greater presence in burgeoning new markets and attracting business and leisure visitors away from the UK.
According to industry body ACI Europe, Schiphol Airport in Amsterdam is now the number one airport in Europe in terms of direct connectivity, having replaced Heathrow in that position in 2016. But Frankfurt is the city offering the best hub connectivity in the world, while Schiphol and Paris Charles de Gaulle are also in the top five.
With Brexit on the horizon, improving our global connectivity will be of even greater importance as we look to build new trading relationships with countries around the world.
The government is getting on with the much-needed expansion of Heathrow Airport ,which will help to improve our global reach. Ministers have also begun the process of engaging with industry and community groups on the modernisation of UK airspace.
Progress on both these areas will do much to help the Prime Minister realise her ambition of creating a “truly global Britain” and “a country that goes out into the world to build relationships.” The problem, however, is that these gains will be more limited than they could be, so long as ministers continue to levy egregiously uncompetitive rates of tax on air passengers in the form of air passenger duty (APD).
APD is the highest tax of its kind in Europe and aside from some welcome amendments in recent years, rates are as high as they have ever been. Last year the Treasury brought in over £3bn from taxing people to leave the UK, and in the 23 years since APD was levied, its cost has shot up by 848 per cent. APD is as much as six times the rate in France and more than twice the rate in Germany – and we are similarly disadvantaged when it comes to our global position.
The United States and Australia, for example, both levy substantially lower rates of tax on their air passengers.
Why does this matter? Increasingly it will be harder for airlines to operate new routes – or increase frequency on existing ones – if the cost of doing so is prohibitive. Carriers already operate extremely tight margins. Across the globe, earnings are just $7.49 per passenger on average – and that is why airlines must remain vigilant against anything that could impact passenger demand. The truth is that the UK is not going to be able to achieve its trading potential unless ministers take action to incentivise air travel to these shores. This is especially the case when it comes to growth at regional airports (where spare capacity is plentiful), from which there are currently relatively few or no direct long-haul connections.
Fortunately, some parts of the UK are taking action to make themselves a more competitive destination. The Scottish government, to whom the tax has recently been devolved, has made clear its intention to reduce APD by 50 per cent from next April, with a view to abolishing it altogether in the future. In Northern Ireland, following pressure from the Democratic Unionist Party (DUP), the government has committed to undertaking a review of the impact of APD as part of the post-election deal between the Conservatives and the DUP. Taking action on APD would leave both countries in good company, as the vast majority of European nations either levy no tax on passengers or have taken steps in recent years to abolish it. The Dutch government scrapped its version of APD in 2009 after realising that the levy – which it hoped would contribute $395m to the coffers – was costing it $1.7bn as passengers drove across the border to avoid paying it.
Similarly, since ministers in Ireland scrapped its aviation levy in 2014 Dublin has experienced huge growth in demand for air travel. The consultancy PwC concluded that abolishing APD in the UK would not cost the Treasury a penny – in fact, it would boost GDP by 1.7 per cent and create 61,000 jobs over the longer term.
The Treasury is increasingly isolated in continuing to ignore the negative effects of this damaging tax on tourism and trade, whereby families and businesses – through no fault of their own – end up paying even more to take to the skies. If the Prime Minister is to realise her vision of a Britain reaching out to the world and building trading links that will deliver growth for the long term, then taking action on APD is a vital and necessary initial step.