18th January, 2013
There has been some recent public interest in a report published in October 2012 by HMRC (Her Majesty’s Revenue and Customs): ‘Modelling the Effects of Price Differentials at UK Airports’. Report
HMRC commissioned research from the Department for Transport (DfT) into how localised price changes at UK airports might affect total aviation demand, and how that demand would be re-distributed between airports.
The price changes that were modelled focused on four main scenarios of interest.
In order to understand the implications of possibly devolving Air Passenger Duty (APD) to the Scottish and Welsh administrations, the first two scenarios directly examine the impact that differential – in this case lower – price levels in these countries could have on passenger demand, and in particular how such price changes would affect demand at English airports.
The second two scenarios examine the implications of modelled price changes at the UK’s two busiest airports, Heathrow and Gatwick.
The key assumption is that no new runways will be built anywhere in the UK. This means that when an airport becomes full, passenger demand is diverted to other airports which have spare capacity.
The effects at particular airports, which is the main issue being explored by the study, are quite complicated, traffic reducing at some airports and increasing at others. Some of the effects are far from intuitive, but the report gives a good explanation of how they come about.
Of particular interest to AEF, and others concerned with the broader issue of aviation and the environment, is how price changes would affect overall UK demand. The results are:
1. Reduce APD in Scotland by 100% – UK demand raised (ie higher than it would have been without the APD change) by around 0.2%.
2. Reduce APD in Wales by 100% – UK demand raised but by well under 0.1% up to 2023 and then lowered by 0.1% by 2025.
3. Increase APD at Heathrow by 50% – UK demand raised by 0.15% in 2014 but the depression of demand progressively reduces until 2019, after which lowered by 0.1% by 2025.
4. Increase APD at Heathrow and Gatwick by 50%. UK demand lowered by 0.3% to 0.4% over the period 2014 to 2025.
There are some surprising results, particularly in scenario 3. However, the most significant feature is the very small changes in overall demand, even for large changes if APD at particular airports. In the case of prices increase at Heathrow or both Heathrow and Gatwick, the large majority of traffic lost to those airports transfers to other airports with spare capacity.
Evidence from other sources, especially DfT itself, indicates that if prices change (due for example to APD changes), the main effect is on leisure travel. Business travel is much less affected. Because the impact of changes to total UK demand is so small and because the changes in business travel would be even smaller, it is extremely unlikely there would be any significant economic impact if APD were raised as in scenarios 3 and 4.
Aviation is hugely under-taxed at present, enjoying tax benefits of about £10 billion pa. AEF would therefore not support that cuts to APD at any airport. While a differential increase in APD at Heathrow, or at Heathrow and Gatwick, might help to re-balance traffic in the short term, AEF believes that the correct policy – for social, economic and environmental reasons – is to raise APD across the board.