The United Kingdom imposes a significant excise duty, known as the air passenger duty (APD) for all passengers traveling to and from the country. Here, we examine the levy, the supposed benefits of the tax, and the arguments for altering the charge.
The APD in numbers
According to the UK government, the passenger excise is generally dependent on two variables, the destination, and the class of travel.
Concerning destinations, HM Revenue and Customs identifies two destination bands, dubbed A and B.
Band A destinations are those where the distance of the country’s capital city and London is between 0 and 2,000 miles.
These include all countries in the EU and EAA, non-EU countries such as Morocco, Libya, Algeria and Tunisia and, most non-EU states on the European content.
Band B charges, on the other hand, apply to all destinations where the distance from London to the country’s capital city is over 2,000 miles, and all destinations not listed under band-A.
As for the levy rates, they are broken down into three categories: the reduced rate, the standard rate and, the higher rate.
Specifically, the government excises a reduced rate for passengers traveling in a seat which has less than 40 inches of pitch (economy) and a standard rate for passengers with more than 40 inches of pitch. Lastly, there is a higher rate for passengers flying on a plane of 20 tonnes or more which has a capacity of fewer than 19 passengers.
From April 1st, 2019 the APD charges are as follows:
- Reduced rate: £13
- Standard rate: £26
- Higher rate: £78
- Reduced rate: £78
- Standard rate: £172
- Higher rate: £515
According to the Office of Budget Responsibility, the government raises approximately £3bn annually, equating to 0.16% of the UK’s GDP.
The arguments for the APD
Since the introduction of the tax in 1993, taking effect in 1994, proponents have argued for the presence of the APD under environmental, budgetary, and even protectionist grounds.
On one hand, defenders of the APD such as the Aviation Environment Federation (AEF) argue that the APD comprises less than 10% of average airfare and less than 1% of the cost of a typical foreign holiday.
Rather surprisingly, however, some advocates of the ADP argue that the levy serves a protectionist, if not insular, motive, by increasing the relative price of foreign holidays and pricing-out would-be travelers.
Indeed, in a publication dated the 21st of September 2016, AEF wrote that cutting the APD “overlooks the fact that alongside any increase in inbound tourism there would also be an increase in outbound tourism, encouraging more Brits to take foreign rather than domestic holidays.”
Generally though, most supporters of the ADP state that the tax allows for a simple and generally consistent revenue stream, while compensating for environmental externalities.
While the APD may be one method of internalizing aviation’s environmental impact, the practice has some externalities of its own. Namely, on the competitiveness of the UK economy, tourism sector and aviation industry.
While the UK ranks rather favorably in the global Travel and Tourism Competitiveness reports, placing 5th overall behind France, Germany and Japan, the country scores in the lowest percentiles when it comes to price competitiveness. Specifically, the UK ranks 135th for price competitiveness out of the 136 countries studied.
The country’s “ticket taxes and airport charges” score, for example, received an abysmal 14.4 points out of a possible 100. Placing the UK in the 135th rank, only beating the countries of Colombia and Bolivia.
In truth, the UK has the highest aviation taxes in Europe, according to a 2016 publication by the British Air Transport Association (BATA).
The Band A reduced rate taxes (£13), for example, is 43% higher than Greece’s comparable levy, and more than three times higher than France‘s taxes at the time. The same goes for reduced rates in Band B, with the UK levying more than twice as much as its closest competitor, Germany.
Impact on UK airlines
The imposition of comparatively high charges on airfare has invariably impacted the UK’s aviation industry.
One report by Airlines UK, for example, states that as the ADP effectively increases the price of tickets which, in turn, has dampened demand and route viability.
The group even identified 66 potential new routes which would become viable in the absence of the ADP.
“We want to offer more flights to key trading markets, like our European competitors, but APD stifles route development to new emerging markets,” – IAG Spokesperson, Financial Times
Indeed, UK airlines face extremely high costs and require higher then average revenues to make a route viable. Airlines UK, for one, estimates that airlines need to generate between £1,300 and £15,600, depending on route and aircraft, per flight, just to cover ADP charges.
Annually, UK airlines must generate a minimum of £500,000 per short-haul connection, £1m for every domestic connection as ADP is charged both, inbound and outbound, and nearly £6 million per annum for every single long-haul connection.
Economic impact: deadweight losses
On a more macroeconomic scale, the ADP, like any other tax, invariably results in what economists call “deadweight loss”. That is, an unrecoverable loss in welfare that results from the application of a tax on a good or service.
In the case of the ADP, the presence of the levy influences purchasing decisions by effectively distorting the price of goods, in this case, airfare.
Fundamentally, the impact of deadweight losses associated with the ADP should not be underestimated.
On the household level, the addition of a minimum of £312 in ADP charges to a family of four’s foreign holiday budget could force the family to, not only stay at home, but spend less overall during their vacation.
Likewise, businesses thinking of establishing operations in the UK would have to take ADP charges into account. Perhaps deciding to limit the number of highly-qualified staff, those who would be most predisposed to travel.
Taken together, one study suggests that the ADP cost businesses located in the UK around £500m between 2011 and 2012.
Holding Britain back?
With the UK’s upcoming departure from the European Union, airline executives have urged the Chancellor of the Exchequer, Sajid Javid, to cut the APD before Brexit warning that the tax “is holding back UK connectivity”, according to the Independent.
“Connectivity, both in terms of destinations and frequencies, matters – more so for an island nation – and will be essential to the success of the UK as we near Brexit, and look to maintain European trading links and strike out new and emerging markets across the world” – Letter to the Chancellor of the Exchequer by airline CEOs
Indeed, a study by IATA demonstrated that a 10% rise in connectivity, relative to a country’s GDP, will boost labor productivity levels by 0.07%.
The World Travel and Tourism Council on the other hand estimates that the elimination of the APD would result in a GDP increase of up to £4.2bn, and the creation of an additional 91,000 British jobs in the first twelve months.
So, do you think the UK should scrap the ADP? Does the levy have a negative impact on the UK’s aviation industry? Should the ADP be increased? Let us know in the comments.