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Air Passenger Duty: Up in the air

Could FlyBe’s financial difficulties deliver the much sought after policy change in Air Passenger Duty (APD) the industry has been demanding for years?

FlyBe’s much publicised financial woes have brought APD back onto the agenda, with the UK Government pledging to ‘consider’ abolishing or reducing the tax on all internal/domestic UK flights. The aviation industry nationally has been calling for the abolition of the tax on all flights, domestic and international, for over a decade and there has been an ongoing campaign locally for the last five years for the tax to be devolved and reduced in Northern Ireland.

What are the benefits of a lower rate of APD?

Reducing the cost of air travel should increase connectivity for a region, meaning increased frequency of flights to a greater number of destinations. Greater connectivity delivers more trade and also makes a region more attractive to inward investors, global HQs favour locations which are easy to access.

A further benefit would be the support for in-bound tourism.  In a Northern Ireland context this is important as GB remains the largest source of visitors. Lower domestic APD would have the effect of making Northern Ireland a lower cost destination for GB travellers relative to other destinations in Europe, including the Republic of Ireland. The hospitality and tourism sectors have experienced strong growth in recent years and this measure could help ensure that recent momentum is maintained moving forward.

What has changed from previous calls for APD to be reduced?

The previous appeals made locally from the industry and many politicians was for APD to be devolved to the Northern Ireland Executive and either be reduced or abolished here. However, reducing a tax in one region of a country raises issues with an EU ruling (known as the Azores Ruling), which requires that region to pay for the lower tax rate through reduced spending.  Therefore, if Northern Ireland was to have a lower rate of APD, this would result in a deduction being made to the block grant. This was the major obstacle last time.

However, on this occasion, as the decision is being taken by Westminster to reduce the tax across all parts of the UK equally, the Azores Ruling does not apply and the block grant would not be impacted.

Should the taxpayer rescue companies in difficulty?

Although details of the rescue package have yet to be published, it is widely reported that the UK Government has agreed to defer payment of FlyBe’s APD tax bill. This has enraged other airlines, most notably Ryanair and British Airways. They have claimed that this support breaches state aid rules, which forbids a government from providing a subsidy that would distort competition. The preferred outcome of the other airlines would be the reduction or even the abolition of the tax entirely, thus levelling the playing field for all airlines.

It should be noted that the UK Government have claimed that they have not breached state aid rules and that ‘time to pay’ arrangements are commonplace to help businesses facing short term difficulties.

The scale of the financial problems facing FlyBe are not in the public domain, but if it is a viable business with short-term difficulties, as the Government claims, then support can be justified.  However, if the problems are more fundamental then public funding would be required on an on-going basis and therefore more difficult to justify both in the court of public opinion as well as to the EU Competition Commission.  As an aside, although the UK left the EU on 31 January 2020, it is still required to abide by its laws, at least until the end of the transition period.

If FlyBe’s problems are more long-term in nature, the priority for the UK Government should be to protect the routes to key regional economic hubs rather than protect the incumbent airline currently delivering that service. That may be a difficult message for staff at the airline but if demand exists for a service, other operators will come in and meet that demand.

Gareth Hetherington

Will APD be reduced or abolished?

The move would be a very significant policy shift to help save one relatively small company, not to mention a huge ideological shift for a Conservative government. 

There are a number of reasons why it may not happen. Firstly, it is an attractive tax for government, it raises a significant amount of revenue, it is easy to collect and it is not highly visible to the voting public.  Secondly, the urgency to reduce the tax has been removed given the rescue package reached between FlyBe and the Government. However, in the fast-moving aviation industry, the urgency could re-emerge very quickly.

All that said, there is of course a political dimension to consider. This Conservative Government seems less focused on achieving a balanced budget than its predecessor and Boris Johnson has stated his desire to see greater regional development across the UK.  That includes Northern Ireland, Scotland and Wales, but also linking the north of England to the more prosperous south. Reducing APD on domestic flights is one policy tool which may help achieve that outcome.

A lower APD rate is far from secured, but the probability is much higher today than six months ago.

What about the environmental impact?

The environmental lobby has become increasingly influential in recent years and the airline industry’s contribution to the growth in greenhouse gases is also the subject of significant reporting.  This could be the determining factor if the decision is made not to reduce APD, but the alternatives seem as elusive as ever. 

For decades, it has been suggested that improvements in communications technology will reduce the need for travel, but there have been huge developments in this field over the last 20 to 30 years and yet all forms of travel, including air travel, continue to increase year-on-year.

Ultimately, it may be a technological development of a different kind that provides the answer. It seems we are innately wired to want to interact with each other, both socially and in business, in the physical world and as result we need to ensure appropriate resources are devoted to finding environmentally sustainable ways to move people around rather than discouraging travel.

Gareth Hetherington, Director of the Ulster University Economic Policy Centre (UUEPC).  The UUEPC completed research on the economic impact of a potential devolution of Air Passenger Duty to Northern Ireland for the Department for the Economy and Department of Finance in 2015.

The views expressed in this article are his own and do not necessarily reflect the views of the UUEPC or its sponsors.

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