The Potential Economic and Commercial Impacts of Varying Air Passenger Duty (APD): Potential Economic Effects of a Reduction in APD on the Welsh Economy and Cardiff Airport
Introduction
Background
First launched in 1994 as a flat charge per passenger, the Air Passenger Duty (APD) has been reformed and changed severally over the last 19 years to become a contentious issue of debate between the treasury, the legislature and the aviation sector in the United Kingdom. As it was introduced in 1994, APD was supposed to be a flat rate of £5 or £10 per any passenger lifted from any UK public airport. the £5 was charged for all passengers taking the ordinary class of seat, while the £10 was charged per special class passenger. However, the structure of the tax and the taxing system has increasing been reformed, with the rates increasing rapidly between 1995 and 2010. Currently, airlines have to part with £13 per passenger for ordinary class seat and £184 for the special class seat. As it stands, APD is actually a revenue-rising tax that is levied on all passengers flying from any airport in the United Kingdom and has to be paid by airline corporations. To calculate the rates, different Banding structures have been set based on mileage as well as the class travelled. For instance, Band A is assigned to all flights alighting from and landing to any destination in the United Kingdom and Europe, which must be a distance of up to 2000 miles. In this band, the corporations are required to part with £12/£13 reduced rate and a standard of £24[£26] depending on the passenger class travelled. In Band B (2001- 40000 miles), the companies have to pay £60[]£65] reduced rate or a standard rate of £120[£130] based on the class of seat, and is assigned for all the flights taking off from airports in the UK to destinations in areas such as the united states and Canada. Band C (4001-6000 miles) is assigned to all passenger flights taking off from UK airports going towards areas such as Thailand and East Asia in general. The companies have to pay a per passenger rate of £75 reduced rate or a standard rate of £150[£162] depending on the class. Finally, all passenger flights covering 6000 miles and beyond must pay some reduced rate of £85[£92] per passenger, which also depends on the class travelled or a standard rate of £170[£184]. These are the flights to such destinations as Australia and New Zealand (Air Transport Action Group, 2012).
As shown in this taxation structure, it is evident that the government has rapidly increased the rates within a short period. In addition, the rate is quite high, which may have an impact on UK’s aviation industry. As the rates have always been rising since they were first introduced in 1994, APD has become a contentious issue in the UK. Airline companies and operators have greatly opposed this form of taxation, arguing that APD has a negating impact on the business as it damages their competitiveness. For instance, they argue that APD has been limiting their ability to expand their passenger routes from and within the United Kingdom in addition to holding back growth in tourism sector. More generally, APD has an impact of destroying the UK economy as it limits the number of flights from and into British airports. According to pricewaterhouse Coopers (2012), APD is responsible for the closure of a number of cross-border routesfrom the United Kingdom in the last ten years. Apart from local airlines, foreign operators have complained of the rising rate of APD in UK airports, with most operators trying to limit the number of flights to and from the United Kingdom. In addition, some foreign government have cited APD as one primary cause of decline in tourism sector, especially in the developing worlds. This could hold true because the United Kingdom is one of the most commonly used tourist routes as well as a major source of tourists for the developing nations in Africa and Asia (Air Transport Action Group, 2012). Therefore, there is some possibility that increased APD rates could have had an effect on the tourist sector in various areas of the world and in turn, affect the number of flights to and from Britain. Critics have argued that APD is a form of unfair economic taxation that causes damage to the industry and the economy in general. In fact, it has become the highest in the world. The UK government has therefore been taxing the highest rates in the world, despite continued pressure to review the rates.
On the other hand, the UK government has reaffirmed that it is not willing to abolish or reduce the APD rates, arguing that it is a major source of revenue. Moreover, the government has argued that there is little evidence to support the hypothesis that APD affects the operator’s competitiveness or the rate of tourism growth locally and in foreign nations.
Despite these arguments, it is worth noting that the existing economic evidence to support the arguments by both the government and the operators is little and generally lacking. For instance, as a part of the 2011 consultation, the treasury and the government in general failed to undertake an economic impact assessment to determine how APD and APD rates affect the economy. In addition, details costing of the closure of the mentioned routes are yet to be published by the critics of APD.
Statement of the problem
However, some few studies have shown that there is need for the UK government to involve the airline operators in restructuring and reviewing APD and its rates. For instance, a study by Price WaterHouse Coopers (Pwc) was commissioned by a consortium of Irish and UK airline corporations to investigate the impact of APD on their business as well as the aviation industry in general. These companies – British Airways, Rynair Ltd, Virgin Atlantic Airways and the easyJet Company Ltd- were hoping that the Pwc research would produce evidence-based assessment of the role that APD plays in the UK economy as well as its contribution to the public finance. They intended to use the report by Pwc in pressuring the authorities to restructure APD and the rates involved in order to increase their competitiveness in the industry. In addition, the European and world economic crisis had caused massive damages on their business, which they hoped would be a major reason to pressurize the government in reducing the rates. The study reported a number of key findings. Among them was that the abolition of APD had the potential to provide a short-term boost to the level of GDP in the UK by around 0.45% in the initial 12 months, which would average at 0.3% per annum between year 2013 and year 2015. In addition, Oxford Economic for the world travel, and tourism council developed a research in which it was reported that an abolition of APD would significantly improve the number of available employment opportunities by at least 91,000 while adding some £4 billion to the national economy (Oxford Economics, 2011).
Significance of the study
The fact that solid evidence to support the existence of scrapping of APD due to its economic gains or damages is still wanting because the studies done have always focused on one side of the problem. In addition, previous studies are generally few, which means that additional studies are needed. Moreover, it is worth noting that studies have focused on the national level, while leaving out some regions in their studies. This study will aim at describing the problem in Wales and narrowing down the study to focus on Cardiff Airport. With the narrowing down of the focus, it is expected that the study will yield concise and adequate information that will pressurize the authorities to restructure APD or remove it all together. This study will fill-in the gap in knowledge regarding to the potential economic and commercial impact of varying APD by reducing the rates of charge per passenger who takes off at Cardiff Airport, Wales. Policy makers, airline operators, the legislature and the treasury will find this report useful as they attempt to debate on how to restructure the rating.
Aims of the study
- Todetermine the commercial and the financial impact of APD on commercial airline business
- To determine the potential impact of rising APD on the rate of airlines using the airport
- To determine the impact of APD on the rate of tourist business at the airport
- To determine what a reduction in APD rates would have on airline business and the economy at Cardiff Airport, Wales.
Objectives
The study will strive to yield adequate data that will pressurize the revenue collection authority to review the standards and rates of taxation at the airport. The objective is to ensure that apart from reducing the rates, the government also restructures the system used to impose taxes, especially in regards to the use of “per passenger” system.
Study hypothesis
A significant restructuring of the APD rating system and a reduction of the rates will improve the airline business, allowing the companies to expand their business, which will in turn make the UK an attractive airline destination and improve the economy in general.
Literature Review
When APD was first introduced in the UK in 1994, it was expected that it would increase revenue obtained at the UK airports, given the booming airline business of the time. In fact, the government wanted to gain from the booming international business that was being conducted in and via the country (Air Transport Action Group, 2012). Throughout the 1990s and early part of 2000s, the business was still doing very well, with little hitches (Airport watch, 2011). Consequently, the government saw the need to keep increasing the rate of charges at the airport, not considering the effect of this increase on businesses and the economy in case there was an economic crisis. However, with the increasing costs of managing their businesses and the reducing rate of travelling inthe past 5 years due to world economic crisis, airline operators in the United Kingdom and Europe have had to strive hard to make profits. Among other things, they accuse the government of increasing the rate of APD despite the economic crisis (Pricewaterhouse Coopers, 2012). On the other hand, the government has argued that the rates are justified by the need to control flights and the need to obtain funds to drive the economy. As such, the debate has largely been between the government and the airline operators.In this case, it is worth reviewing the findings of various research studies, observations and the other writers in view of the existing problem.
Commissioned by a consortium of airline operators (British airways, easyJet, Virgin Atlantic and Rynair Ltd), Pricewaterhouse coopers limited (Pwc) conducted an empirical study to determine the impact of APD on the economy, the impact on the airline business and the impact a reduction or removal of APD would have on the airline business and the economy in general. Pwc, one of the most recognised and respectable research corporations in the world, embarked on a methodology based on a two-step approach in which the researchers estimated the impact that APD has on the economy of theUK as well as the airline business. First, they embarked on setting a clear framework that would allowthem to make an in-depth assessment of the problem (Air Transport Action Group, 2012). Secondly, they chose a set of analytical tools most appropriate to use for each one of the six core principles of taxation policy as well as an additional one environmental principle. From this list of principles, Pwc categorized them into five procedural principles (stability, practicality, certainty, and coherency) and two economic principles (supportive and encouraging competition and basic fairness) according to the theory or taxation.
With this study, Pwc came up with a number of key findings that have been a major cause of the debate over the existence of APD in the United Kingdom. First, Pwc found that the abolition of APD has the potential to provide a short-term boost to the economy by raising UK’s GDP by around 0.45% in the first year. The abolition was found to have the potential to make the GDP average at around 0.3% per annum between year 2013 and 2015 (Air Transport Action Group, 2012). Such an increase in the country’s national GDP was expected to increase the level of economic output on a permanent basis. In addition, the report anticipates that such an economic rise would significantly raise the national economy beyond the expected mark by more then £16 billion. Secondly, Pwc reports that a reduction in APD would increase and expand the country’s investments and exports. For instance, it points out that the possible increase in investment would be at least 6% between 2013 and 2015. Similarly, the volume of exports would be expected to rise by 5% over the same period (Pricewaterhouse Coopers, 2012). Thirdly, it was found that abolition of APD would significantly benefit UK consumers as well as foreign tourists visiting the united kingdom. However, the biggest beneficiary of the system would be the business community because they will have an access to cheaper airlines, thus allowing them to make international travels more frequently to expand their businesses. Therefore, this could lead to a huge expansion of local business organizations locally and beyond the borders (Pricewaterhouse Coopers, 2012). Moreover, it would leads to a significant improvement of the local productivity.
As per the expectations of the Pwc, an abolition of APD would result into an increase in the number of employment opportunities created by the expanding businesses. Pwc study reports that there could be a creation of around 60,000 job vacancies by the end of 2020 if the rise in output linked with abolition of APD materializes.
A similar study by Oxford Economics for the Word Travel & Tourism argues that an abolition of APD would create some 91,000-employment opportunities in Britain and an addition of more than £4 billion within the first 12 months of abolition (Oxford Economics, 2011). These two studies, however, are quite different considering the period of time in which the results would be expected. For instance, while Pwc expects the abolition to materialize within a period of seven years to create 60,000 jobs, Oxford Economics expects this to happen within a very short time of one year (Northern Ireland Affairs Committee, Second Report, 2012).
A similar study was carried out Northern Ireland commissioned by the Northern Ireland Affairs committee and the continental Airline of Northern Ireland. The aim was to determine the impact that APD had on the airline business and the economy in general. In a report tabled in the country’s parliament, the study indicates that customers were switching from Belfast to Dublin to avoid the higher charges at Belfast, especially for those gong to New York and other areas of America. In fact, the rate of APD charged per passenger was actually less compared to the charges in the UK, yet the airlines were making significant losses. To give the airlines some relief, a transport commission in Northern Ireland parliament pointed that a short-term solution was needed to help the companies avoid heavy losses. Therefore, the committee went on to argue that a zero-rating of the APD charged in the country would work best in order to ensure that the business is not impacted, having noted that passengers had actually been avoiding Newark for Dublin. In addition, the committee is reported to have argued that there was need for the authorities to decide on how APD could be devolved if the government was not willing to abolish it altogether.
In a report tabled in UK house of commons in 2012, the All Party Parliamentary Group for Aviation provided a detailed analysis of the impact that APD had on the economy as well as business community in the united kingdom. The report was actually based on an inquiry by the same group to determine this phenomenon in four regions of the united kingdom- Northern Ireland, Scotland, England and Wales. The report seems to be in favour of APD, especially by justifying that it gives UK a competitive advantage over the other nations in the European Union. However, the report noted that UK airlines were the only disadvantaged group because they are base in the country, which means that they have to part with large sums of money because most of their flights take off from the country.
The All Party Parliamentary Group for Aviation report further indicates that only six nations in the EU apply APD, which means that the UK has a competitive advantage over the other nations when it comes to attraction of airlines and visitors. One of the main justifications given by business organizations that were interviewed in this report was that unlike other nations in the region, the UK does not have VAT charges on passengers; neither does it apply duty on fuel. The report indicated thatsome businesses were citing lack of fuel duty as one of the reasons that justifies APD in the UK, although it is well known that most other nations do not charge duty on fuel because they would be breaching the ICAO agreement. As such, the report argues that most businesses agree the need for APD in order to increase UK’s competitive advantage. However, in the final report, All Party Parliamentary Group for Aviation argued that these issues could not place the UK at a better position or give it a competitive advantage. This is because the country has not made any efforts to ensure that the charges on the passengers do not exceed the ability of the companies to raise from the flight charges on their companies. It was determined that lack of duty on fuel was a result of an agreement the country signed under ICAO, while the removal of VAT on passenger tickets was as a result of the EU directive of 1997 dictating that all the member states must not apply any VAT to international travel (WTO, 2012). Thus, the conclusion was that APD does not place the UK aviation industry or the airline businesses at a competitive advantage over their competitors in European region.
The study by Pwc, on its part, concluded that the abolition of APD could actually cater for all other costs and go beyond to increase UK’S GDP and employment opportunities. Thus, Pwc gave a final report that indicates the need for abolition of APD since it has the potential to pay for itself (Blancard & Leigh, 2013).
Methodology
Study design
This study will employ a multi step methodology in an attempt to access the significant of reducing APD in the economy, with a special focus on Cardiff Airport in Wales. In actual sense, the study will be a quantitative research that will aim at using a wide range of information, especially reports given by airline companies operating or based in the airport, the aviation authorities as well as a group of selected customers. A quantitative study was chosen for the planned study for a number of reasons. For instance, since the study will only focus on Cardiff airport as a representative of the phenomenon in the entire YK, there is need for the study to generalize the data. This is only possible with quantitative design. Quantitative researchers believe that the results of a small portion of the whole population can give the insight of the features of the whole (Krauss, 2005). Qualitative researchers believe that the distribution of the characteristics in the entire population is not necessarily even, and thus one must look deeply into each unit if the study is to lead to a qualitative conclusion of the whole. They believe that is possible to analyze the data effectively where the population is small, unlike the quantitative research, which assumes that a small population can be a representative of the whole (Vaske & Donnelly, 2009). In addition, in quantitative data, there is a great utilization of observations, structured interviews, record reviews for numeric information and surveys. In quantitative research, the researcher is mostly interested in calculation of statistical data in order to understand the entire phenomena (Dodd, 2008). The researcher collects data using tests and questionnaires that will dig deeply into the important statistics of the whole population. The researchers therefore benefit from taking advantage of the already existing databases, which they use for cross-examination and checking (Creswell, 2005). For quantitative researchers, statistical methods are greatly important because they lead to measurable relationships between the variables of the research. The research in this category is mechanical and perspective in nature, where the statistical methods is applicable to find some clearly visible trends in the data obtained (Creswell, 2005). The researcher must develop hypothesis, research questions and the design for use in the research before embarking on the data collection. This means that the data analysis occurs after its collection. In addition, it impliesthat the process will be easier and faster than in qualitative method (Glaser, 2009). Finally, quantitative research is justifiable in this study, as it requires that data manipulation occurs to reach some meaningful results. The presentation occurs in the form of mathematical modes (Healy, & Perry, 2007).
Study population
All the participants will be drawn from the business community existing in or operating from Cardiff airport, Wales. In particular, the study will target at least 8 airlines operating in the airport at daily basis, specifically those with more then 3 flights landing and taking off at the airport every day. In addition, two airlines must be foreign but operating regularly at the airport, while the others could be UK-based corporations. From each of these airlines, two persons with administrative positions will be drawn into the study group, thus making the study population from airline companies to be 16 respondents. Secondly, the study will target 8 officials from the revenue authority at Cardiff, while 4 more will be obtained from at least three tourist corporations operating in, through or from Cardiff airport.
Inclusion/exclusion criteria
For a person to be included in the study as a respondent, he or she must belong to the group mentioned above. He must be based in the airport. Any airline that had less that 3 flights taking off at the airport will be excluded from the study. In addition, any organization
Data collection
Data gathering technique is the process through which the researcher is set to obtain the relevant information from the respondents (Bhattacharya 2008). In the proposed study, the researcher will make use of questionnaires as the primary data collection technique. Questionnaires allow the researcher to interact with the respondents and interview them systematically, which will therefore avoid biased data and reduce false answers given by the respondents. In addition, questionnaires will allow the researcher to yield quantitative data that will allow the use of SPSS and Ms Tools in data analysis, which will in turn provide a statistical description of the financial values and variables associated with the reduction of APD.
Data analysis
This study will make use of SPSS version 18.0 to provide in-depth analysis of data collected with questionnaires. In particular, regressions, deviations, charts, graphs and tables will be of an important use in the study.
Confidentiality
All the information given by the respondents for the study will remain undisclosed. They will not be asked to fill in their names and particulars or any other identification, but rather a random and unique code will be assigned to them. As soon as they return the survey question, their identifications will immediately be removed from the paper.
References
Air Transport Action Group. (2012). Facts and Figures. 2012. London
Airport watch. (2011). More complaints from the aviation industry about being charged APD. Retrieved from http://www.airportwatch.org.uk/?p=1706
Airport Watch. (2012). PwC report on APD met by dismissive comments from Treasury – Chancellor has no intention of lowering APD. Retrieved from http://www.airportwatch.org.uk/?p=607
Bhattacharya, D. (2006). Research Methodology. New Delhi: Excel Books.
Blancard, O., & Leigh, D. (2013). Growth forecast errors and fiscal multipliers. New York: IMF.
Creswell, J. W. (2005). Educational research: Planning, conducting, and evaluating quantitative and qualitative research. Upper Saddle River, N.J: Merrill Prentice-Hall.
Dodd, T. (2008). Quantitative and qualitative research data and their relevance to policy and practice. Nurse Researcher, 15(4), 7-14.
HM Treasury. (2012). Budget 2011 policy costing. London
http://www.niassembly.gov.uk/Documents/Finance/AirPassengerDuty/World_Travel_and_Tourism_Council%20.pdf
Northern Ireland Affairs Committee, Second Report. (2012). Air Passenger Duty: implications for Northern Ireland. Retrieved from http://www.publications.parliament.uk/pa/cm201012/cmselect/cmniaf/1227/122702.htm
Oxford Economics (2011). Economic Benefits from Air Transport in the UK. Oxford, OUP.
Scottish Torusim Alliance. (2012). More complaints from the aviation industry about being charged APD. Retrieved from http://walesairforum.wordpress.com/tag/air-passenger-duty/
WTO. (2012). World Travel and Tourism Council: The case for abolishing APD in the UK. Retrieved from
Glaser, B. G. (2009). The Novice GT Researcher. Grounded Theory Review, 8(2), 1-21.
Vaske, J. J., & Donnelly, M. P. (2009). A value-attitude-behavior model predicting wild land preservations voting intentions. Society & Natural Resources, 12, (6), 523.
