austrian air transport levy - oxford study - final

The economic impact of changing the Air Transport Levy in Austria

October 2012

The economic impact of changing to the air transpor t levy October 2012

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Contents

Executive Summary.................................. ................................................ 4

1 Introduction ....................................... .............................................. 6

2 Methodology ........................................ ............................................ 7

2.1 Stage 1: Modelling air passenger numbers ............................................... 7 2.2 Stage 2: Modelling the impact on the Austrian economy......................... 10 2.3 Stage 3: Modelling the impact on tourism................................................ 10

3 The economic impact of air transport in Austria.... ..................... 12

3.1 The aviation sector................................................................................... 12 3.2 Tourism .................................................................................................... 12

4 Impact of alternative ATL structures............... ............................. 14

4.3 Direct economic impact............................................................................ 14 4.4 Total economic impact ............................................................................. 16 4.5 Tax impact................................................................................................ 17 4.6 Tax revenue forecasts.............................................................................. 18

5 Other impacts of changes in the ATL structure ...... .................... 19

5.1 Connectivity and the implications for economic development ................. 19 5.2 Consequences for the environment ......................................................... 21

6 Appendix – methodology............................. ................................. 23

6.1 Channels of economic impact.................................................................. 23 6.2 Input-output tables ................................................................................... 23 6.3 Tourism .................................................................................................... 24

The economic impact of changing the air transport l evy October 2012

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List of charts

Chart 2.1: Total air passengers by market segment, 2011 ...................................... 8

Chart 3.1: Austrian jobs and GDP supported by the aviation sector, 2011............ 13

Chart 4.1: Total passengers handled at Austrian airports, 2011............................ 14

Chart 4.2: Total passengers under different scenarios, 2011 ................................ 15

List of tables

Table 0.1: ATL structures under three scenarios ..................................................... 4

Table 0.2: Total impact of a proposed change in the air transport levy ................... 5

Table 2.1: ATL structures under three scenarios ..................................................... 7

Table 2.2: Average airfares for a return journey to/from or within Austria, 2011 ..... 9

Table 2.3: InterVISTAS’ estimates of price elasticities for air travel......................... 9

Table 4.1: ATL structures under three scenarios ................................................... 14

Table 4.2: Direct impact of a proposed change in the air transport levy................ 16

Table 4.3: Total impact of a proposed change in the air transport levy ................. 16

Table 4.4: Implications for government revenue .................................................... 17

Table 4.5: Estimated ATL revenue projections 2011-2015 .................................... 18

Table 5.1: Impact of the Icelandic volcanic eruption in Europe, 2010.................... 21


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Executive Summary

The aviation sector in Austria makes a significant contribution to the economy

In 2011, the aviation sector (airlines, airports and ground services and aerospace manufacturing) contributed over €5.3 billion (1.8%) to Austrian GDP, supporting 78,200 jobs. This total comprises:

� €2.1 billion directly contributed by the output of the aviation sector, supporting 33,100 jobs;

� €1.4 billion and 18,700 jobs indirectly supported though the aviation sector’s supply chain;

� €0.7 billion and 9,800 jobs supported through employee spending; and.

� A further €1.1 billion generated by the expenditure of foreign tourists arriving by air, supporting additional employment of around 16,600 people.

In addition, total tax revenues generated through the different channels amounted to an estimated €2.3 billion.

Reducing the Air Transport Levy could increase annu al passengers by up to 1.1 million…

� Falling airfares will increase the affordability of air transport services, therefore increasing the number of people flying to/from or within Austria. Three different alterations to the current structure of the Air Transport Levy (ATL) where analysed as part of this research.

Table 0.1: ATL structures under three scenarios

� Current Ministry of Finance proposals, planned for January 2013, would lead to an increase in passengers of around 141,000 per annum, while a uniform 25% reduction in the level of ATL would double this figure. Complete abolition of the ATL could induce as many as 1.1 million additional air passengers flying to/from and within Austria, an increase of 4.4% on current levels.

� One of the primary justifications of the Austrian ATL was to compensate for the environmental impact of air transport. However, with the inclusion of aviation within the scope of the EU Emissions Trading Scheme (‘ETS’) in 2012, this aim now becomes redundant.

… boosting the impact of the aviation sector by up to €184 million in GDP…

� An increase in passengers flying to/from and within Austria will increase the revenues of firms engaged in the aviation sector. Airlines will be able to offer more flights to a greater range of destinations, at higher levels of occupancy. Airports will see an increase in aviation related revenue such as landing fees, while an increase in the flow of passengers passing through airports will boost sales in shops and restaurants located on-site.

Air Transport Levy - Market Segment Current Rate (€)

Scenario 1 (€)MoF proposed change

Scenario 2 (€)25% reduction

Scenario 3 (€)Complete removal

Short-Haul 8.0 7.0 6.0 0.0

Medium-Haul 20.0 15.0 15.0 0.0Long-Haul 35.0 35.0 26.3 0.0Source: Statist ics Austria, Oxford Economics


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� The increase in total GVA under scenario 1, stimulated through the increase in passengers, would be around €23.0 million, with 340 additional jobs supported.

� Under scenario 2, these impacts would increase to €46.0 million and 680 jobs

� Scenario 3 would help stimulate additional GVA in the Aviation sector of €183.9 million and support 2,700 jobs.

… encouraging more foreign visitors…

Austria is a net benefactor from international tourism. The impact depends on the level of reduction in ATL;

� Under scenario 1 the contribution of the tourism sector will increase by approximately €5.4 million as a consequence of an increase in inbound foreign visitors, supporting 80 jobs in the process.

� Under scenario 2, these impacts increase to €11.3 million and 160 jobs; while

� Complete abolition under scenario 3 will boost GDP by €45.2 million and support 660 jobs.

Table 0.2: Total impact of a proposed change in the air transport levy

… and stimulating positive tax revenues for the gov ernment of up to €6.5 million.

� Under each scenario, direct tax revenues will fall as a result of altering the structure of the ATL, even when accounting for additional revenue generated through other streams such as increased corporation and employee-related taxes in the aviation sector.

� Direct tax revenues of the aviation sector will fall by €5.0 million under scenario 1, while under scenario 2 the fall in revenue will be around €11.7 million. Full abolition of the tax will decrease direct tax revenues by €49.9 million.

� However, when considering the extra activity generated through the indirect and induced channels, and the knock-on tax revenue generated as a result of this, the total contribution to public finances may actually even see an increase – ranging from €2.0 million under scenario 1, to €2.4 million under scenario 2 and €6.5 million under scenario 3.

Scenario 1 Scenario 2 Scenario 3

Change in average fare (%) -0.5% -1.1% -4.2%Change in total passengers (%) 0.5% 1.1% 4.4%

Aviation Sector Change in GVA (€m) 23.0 46.0 183.9Change in GVA (%) 0.5% 1.1% 4.4%Change in Employment 340 680 2,700Change in Employment (%) 0.5% 1.1% 4.4%

Tourism Sector Change in GVA (€m) 5.4 11.3 45.2Change in GVA (%) 0.5% 1.0% 4.0%Change in Employment 80 160 660Change in Employment (%) 0.5% 1.0% 4.0%

Total impacts Change in GVA (€m) 28.4 57.3 229.1Change in GVA (%) 0.5% 1.1% 4.3%Change in Employment 420 840 3,360Change in Employment (%) 0.5% 1.1% 4.3%

Source: Stat ist ics Austria, Euros tat, Austrian Airlines, Oxford Economics

Total Economic Impact

Operating Statistics


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1 Introduction

In April 2011, the Federal Ministry of Finance in Austria (‘MoF’) introduced an Air Transport Levy (‘ATL’) on the departure of any passenger from a domestic airport. The rate of tax varies depending on the destination. For short-haul destinations, passengers are subject to an €8 levy on top of their air fare, for medium-haul, the figure is €20, while for long-haul destinations the figure rises to €35 per passenger. Taxing passengers increases the cost of air travel, impacting domestic businesses reliant on aviation and reducing the attractiveness of Austria as a tourism destination for international visitors.

Oxford Economics were commissioned by a consortium of stakeholders including the Austrian Chamber of Commerce (WKO), the Federation of Austrian Industries (IV), Austrian Airlines, Vienna International Airport and the Working Group of Austrian Commercial Airports (AOEV), to investigate the impact of changes to the structure of the ATL on the Austrian economy. One such change the MoF are currently considering is a small reduction of the levy in both the short and medium-haul segments – to €7 and €15 respectively – scheduled to come into effect in January 2013.

This document presents the findings of the research, analysing the potential economic impact of three distinct changes to the structure of the ATL, including both the current proposal and a complete abolition of the ATL, as well as a flat 25% reduction across all market segments. The report is arranged as follows:

� Chapter 2 details the methodology behind the analysis;

� Chapter 3 provides an assessment of the economic impact of the aviation sector in Austria;

� Chapter 4 presents the results of the analysis for the three different scenarios;

� Chapter 5 discusses a number of other channels of impact through which the aviation sector contributes.


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2 Methodology

In April 2011, the Austrian MoF introduced a Levy to be included in the price of a ticket for the departure of any passenger from a domestic airport. The levy is structured into three bands such that the fee depends on the distance to the final destination. For short-haul destinations, passengers are subject to an €8 levy on top of their air fare. For medium-haul, the figure is €20, while for long-haul destinations the figure rises to €35 per passenger1. It is argued that the imposition of a levy on passengers flying to/from and within Austria is eroding the competitiveness of the Austrian aviation sector, and affecting its ability as an important facilitator of economic growth in the economy.

In order to evaluate the impact of changes in the structure of the ATL on the Austrian economy, it is necessary to undertake a three stage process of analysis. For the first stage, a model of demand for air travel in Austria is required to estimate the impact of a change in air fares on passenger behaviour, and hence the number of people travelling by air. The second stage involves translating the change in passenger numbers, estimated in stage one, into an economic impact for the aviation sector in Austria. Finally, the third stage involves assessing the impact of reduced airfares on international tourism in Austria. This is repeated for three distinct changes to the structure of the ATL:

� Scenario 1 provides an assessment of the impact of current proposed changes to the ATL, scheduled to come into effect in January 2013;

� Scenario 2 presents an assessment of the impact of a 25% reduction in each market segment of travel from the current rate;

� Scenario 3 provides an assessment of the impact of a complete removal of the ATL across all market segments of travel.


The remainder of this section presents the approach used to analyse the economic impact of alternative ATL structures.

2.1 Stage 1: Modelling air passenger numbers

Based on official passenger statistics published by Statistics Austria, over 25.7 million air passengers were handled at Austrian airports in 2011 (excluding transit passengers). The vast majority of these passengers were flying to/from short-haul destinations (including domestic passengers), with this market segment accounting for nearly 23.8 million passengers, or 92% of passengers in total. In contrast, there were 0.8

1 For a full list of destinations, please refer to the MoF website http://english.bmf.gv.at/allgemeines/airtransportlevy_918.htm





Short-Haul 8.0 7.0 6.0 0.0



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million passengers flying to/from medium-haul destinations and just over 1.0 million flying to/from long-haul destinations (Chart 2.1).

Chart 2.1: Total air passengers by market segment, 2011

Source: Statistics Austria, Eurostat, Oxford Economics

The impact of a change in ATL on passenger numbers flying to/from and within Austria can only be determined if airfares are known prior to a change. Using operating statistics provided by Austrian Airlines for 2011, combined with a breakdown of total air passengers by international destination, obtained from Eurostat, Oxford Economics were able to estimate the average airfare by market segment; weighted by the number of passengers travelling to each destination within the relevant market segment of travel Table 2.2 presents the results of this exercise, both including and excluding the relevant rate of ATL2. Across all market segments, both domestic and international, the weighted average return fare for 2011 was estimated to be €267.

2 The ATL is charged on the departure of any passenger from a domestic airport. As such, a domestic passenger with a return ticket will be charged twice the short-haul rate while international passengers will only be charged for the return leg of their journey.

Short-haul, 92%

Medium-haul, 3%

Long-haul, 4%

Total Passengers 2011: 25.7 million


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Table 2.2: Average airfares for a return journey to /from or within Austria, 2011 3

Changing the cost of air travel for passengers will impact on the number of people choosing to travel by air. The scale of this effect can be estimated using a model of the demand for air travel, and more specifically through the use of a measure of the responsiveness of passengers to changes in air fares, known as the price elasticity of demand for air travel. Oxford Economics conducted a search of publically available literature, assisted by Austrian Airlines, to establish the most appropriate estimates for the price elasticity of demand for air travel for the purposes of this analysis. In the absence of any estimates specific to the Austrian market, Oxford Economics choose to use figures contained within a far-reaching global study conducted on behalf of IATA4. In this study, a comprehensive econometric analysis was undertaken, making use of IATA Passenger Intelligence Services (PaxIS) data, claimed by IATA to be the most comprehensive airline passenger market intelligence database available today. The advantage of using this study is that it contains a highly disaggregated set of elasticities that vary by length of route (short or long-haul), by purpose of travel (business or leisure), by region of origin/destination and by level of aggregation (i.e. whether price changes are at a route, national or pan-national level), facilitating a more comprehensive analysis of the different market segments in Austria. Table 2.3 presents the elasticity estimates used for this research, indicating the percentage change in passenger numbers that would occur following a 1% increase in airfares (for example, a 1% increase in prices in the Trans Atlantic market would lead to a 0.96% decrease in passengers).

Table 2.3: InterVISTAS’ estimates of price elastici ties for air travel

3 Given a near unit elasticity of demand, the direct economic benefit is insensitive to assumptions about airline industry's cost structure. Domestic flights include VAT of 10%.

4 ‘Estimating Air Travel Demand Elasticities’, InterVISTAS Consulting, prepared for IATA, 2007

Short-haul Long-haul

Intra Europe-1.23 -1.12

Trans Atlantic (North America - Europe) n/a -0.96

Europe-Asia n/a -0.72Source: InterVISTAS Consulting (2007)

Market SegmentAverage Fare for a return flight (€)

Average Fare for a return flight, including ATL (€)

Domestic 163 179Short-haul 258 266Medium-Haul 565 585Long-Haul 886 921Source: Austrian Airlines, Eurostat, Oxford Economics


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Combining the estimates for average fare and price elasticity of demand for each destination, the impact on total passenger numbers can be modelled for each destination such that estimates for the change in passenger numbers for each market segment following a change in the structure of the ATL can be calculated.

2.2 Stage 2: Modelling the impact on the Austrian economy

The second stage of the process is taking this change in passenger numbers and estimating what impact this would have on the Austrian economy, in terms of the output and employment in both the aviation and tourism sectors. In order to model this, Oxford Economics began by estimating the economic impact of the air transport in Austria in 2011, updating the figures presented for calendar year 2009, in a recent study by Oxford Economics on behalf of IATA, in terms of its contribution to Gross Value Added (‘GVA’) and employment5. A more detailed explanation of what constitutes the aviation and tourism sectors for the purposes of this study and how the economic impact is measured, including a definition of GVA, is detailed in the Appendix. In order to update the estimates for the economic impact of air transport, data was obtained from a variety of sources, including official statistics from Statistics Austria, Austrian Airlines and published airport company annual financial accounts.

From this baseline estimate of the economic impact, varying approaches were used to estimate the impact of a change in passenger numbers on GVA. Historical data on passengers and revenues, obtained from annual accounts data, suggests there is a strong correlation between passengers handled at airports and their GVA. This historical relationship was therefore used to estimate the impact of an increase in passengers at Austrian airports. Applying the same approach to airline data however displayed very little correlation, such that a different approach was required. Therefore in this instance, the ratio of GVA contribution per passenger for 2011 was used to estimate the impact of additional passengers on the GVA of airlines. For other on-airport site activities, extrapolation was done using the growth in total passengers. All figures assume a base year of 2011 to allow for comparison between the different scenarios. Estimates for employment were derived by exploring the relationship between GVA and employment.

The level of direct tax contribution was estimated through operating statistics, obtained from Austrian Airlines and annual financial accounts. Gaps were filled using official government statistics on the average levels of revenue collected through the different channels of tax as a proportion of GVA6. Indirect and Induced Tax contribution is approximated by applying an economy wide average tax figure (as a proportion of GDP) to the Indirect and Induced GVA estimates, using data from the Oxford Economics Global Macroeconomic Model.

2.3 Stage 3: Modelling the impact on tourism

A reduction in the cost of air transport will enhance the attractiveness of Austria as a tourism destination, increasing the number of international visitors choosing to holiday in Austria. Austria is a net benefactor from international tourism. According to official travel balance of payments statistics7, inbound tourism

5 ‘Economic Benefits from Air Transport in Austria’, Oxford Economics, prepared for IATA, 2011.

6 Statistics Austria

7 International Travel: Receipts and expenditure 2011, Statistics Austria


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receipts amounted to €14.3 billion in 2011 while outbound tourism expenditure was €7.5 billion. As such, there was a net benefit in terms of spending to the Austrian economy of €6.7 billion. Over 23 million people travelled to Austria for either leisure or business purposes – 90% of which travelled from other short haul destinations. In comparison, there were less than 10 million outbound trips taken by Austrian residents8.

Due to Austria’s proximity to its primary markets, such as Germany and Italy, the majority of foreign visitors still travel by land. While arrivals by road accounted for 86% of international arrivals and train passengers accounted for a further 7%, it is estimated that only 6% of inbound visitors in 2011 arrived by air9.

The starting point for calculating the impact on tourism was to estimate the average expenditure of inbound tourists. This was done by comparing official balance of payments statistics on tourism expenditure by country of origin with data on the number of arrivals from the same countries. Countries were separated into market segment (short-, medium- or long-haul), allowing for an estimate of the average spend per trip for inbound foreign visitors. The next step was to grow total inbound tourism arrivals using the growth in total air passengers under each scenario in order to estimate the number of additional tourists induced to travel to Austria as a consequence of reduced travel costs which, when multiplied by the average spend per visit, approximated the gross effect on the travel and tourism balance of payments. From this, the impact on GDP and employment could be estimated.

8 Holiday and business trips of the Austrian population, 2011. Statistics Austria

9 Austrian Economic Chambers, Tourism in Numbers, 48th Edition, May 2012


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3 The economic impact of air transport in Austria

Air transport services in Austria make a significant contribution to the domestic economy, both through the domestic resources that the sector deploys to deliver its services, the Austrian produced goods and services consumed by the workers who depend on the sector for their employment, and the tourism reliant on the international connections that only the air transport network can provide. This section provides up to date estimates for the economic footprint of the aviation sector in Austria, in terms of its contribution to GDP and employment.

3.1 The aviation sector

The aviation sector in Austria, comprising the airlines, the airports and ground services, and the aerospace manufacturing industry, makes a significant contribution to the domestic economy. In 2011, the contribution of the sector in terms of its GVA was approximately €2.1 billion, equivalent to 0.7% of the Austrian economy10. The sector is also a major employer – providing jobs for 33,100 people in the process.

In addition to its direct contribution, the aviation sector supports other businesses across the Austrian economy through its purchases of goods and services. This is known as the indirect effect. A further important channel through which the aviation sector supports the Austrian economy comes through wage expenditure. Employees of the aviation sector and of firms in its Austrian based supply chain (indirect employment) spend part of their income on goods and services produced domestically. The GVA and jobs supported by this expenditure, in sectors such as retail trade and leisure activities, is known as the induced impact. Through the indirect and induced impacts, the aviation sector supports jobs and businesses throughout the Austrian economy11.

The aviation sector’s total contribution to the Austrian economy is the sum of its direct, indirect and induced impacts. Oxford Economics estimate this impact to be worth €4.2 billion in 2011 (1.4% of GDP). When accounting for jobs supported through its direct, indirect and induced impacts, the aviation sector supports a total of 61,600 jobs in the Austrian economy (1.5% of total employment).

The aviation sector is also an important contributor to Austrian public finances. Through the taxes levied on GVA, such as employee and corporation taxes, domestic VAT and, not forgetting, the ATL, the aviation sector supports government finances and the public services that depend on them. It is estimated that the direct activities of the aviation sector in 2011 generated approximately €848 million in tax revenue, equivalent to 40% its GDP contribution.

3.2 Tourism

Travel and tourism in Austria makes a significant contribution to the domestic economy. In 2011, the sector generated some €14.5 billion in direct GDP, equivalent to 4.8% of the economy, supporting over

10 GVA is measured as the value of output (essentially income of airlines and airports) less the value of goods and services purchased from other sectors of the economy. It represents the aviation sector’s contribution to national output (GDP). See Appendix for a more detailed definition.

11 See Appendix for more detail on how these channels of impact are estimated.


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216,000 jobs in the process12. When considering the wider impacts of the industry, through the indirect and induced channels, the travel and tourism sector supported nearly 607,000 jobs. Putting this into some context, approximately 1 in every 7 jobs in Austria is reliant on the travel and tourism sector.

The aviation sector is instrumental to international tourism. Visitors from medium and long-haul destinations are particularly dependant on the speed and affordability of air transport services. In total, it is estimated that 6% of foreign visitors arrive by air13, such that Oxford Economics estimate that foreign visitors arriving by air contribute €439 million in GDP to the Austrian economy, supporting 6,500 jobs in the process. Taking into account the direct, indirect and induced impacts, it is estimated that aviation related tourism contributes €1,136 million in GDP and 16,600 jobs to the Austrian economy.

Chart 3.1: Austrian jobs and GDP supported by the aviation sector, 2011

Source: Austrian Airlines, Statistics Austria, Eurostat, Oxford Economics

12 WTTC

13 Austrian Economic Chambers, Tourism in Numbers, 48th Edition, May 2012

33.1

9.8

16.6

18.7

2,130

716

1,363

1,136

-

10

20

30

40

50

60

70

80

90

Jobs0

1,000

2,000

3,000

4,000

5,000

6,000

Direct Indirect Induced Tourism

Headcount'000

€ million

GDP


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4 Impact of alternative ATL structures

This section presents the results of the analysis on three distinct changes to the structure of the ATL in Austria. The three different scenarios are outlined in section 2 of the report, with table 4.1 reproduced for reference.


4.3 Direct economic impact

In 2011, over 25.7 million passengers were handled at Austrian airports, the vast majority of which were handled at Vienna airport, Austria’s largest international airport (Chart 4.1). The propensity for people to use air transport services to/from and within Austria increases as the cost of using those services decreases. Therefore, as the ATL is reduced under each scenario, there will be more passengers handled annually at Austrian airports. Under scenario 1, based on 2011 passenger numbers, it is estimated that there would have been up to 141,000 additional passengers handled at Austrian airports than there were under the existing ATL structure. This figure doubles to approximately 282,000 additional passengers under scenario 2, following a uniform 25% reduction in the ATL rate across each market segment, while abolishing the ATL would have induced over 1.13 million additional passengers, equivalent to an increase in passenger volume of 4.4% over actual figures (Chart 4.2).

Chart 4.1: Total passengers handled at Austrian airports, 2011

Source: Statistics Austria, Oxford Economics

Vienna, 82%

Graz, 4%

Innsbruck, 4%

Klagenfurt, 1%

Linz, 3%

Salzburg, 7%

Total Passengers 2011: 25.7 million





Short-Haul 8.0 7.0 6.0 0.0



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Chart 4.2: Total passengers under different scenari os, 2011

Source: Statistics Austria, Oxford Economics

An increase in passenger numbers will boost revenues for domestic firms operating in the Austrian aviation sector. Airlines will be able to offer more flights to a greater range of destinations, at higher levels of occupancy. Airports will see an increase in aviation related revenue such as landing fees, while an increase in the flow of passengers passing through airports will boost sales in shops and restaurants located on-site.

The domestic tourism sector also stands to benefit. Through its speed, convenience and affordability, air transport lies at the heart of global business and tourism, expanding the possibilities for people to experience a diversity of geography, climate, culture and markets. A reduction in airfares will increase the competitiveness of Austria as a destination for international travellers, boosting a sector that already directly contributes over €14.5 billion to the domestic economy, equivalent to 4.8% of GDP14, and supports nearly 220,000 jobs.

The direct impact of the increase in passenger numbers under each scenario is illustrated in table 4.2. The results represent an ex-post analysis using 2011 statistics, comparing changes in the ATL compared to the current structure. Under scenario 1, it is estimated that the fall in airfares would lead to an increase in GDP contribution from air transport of €13.7 million, split between the aviation sector (€11.6 million) and the gross effect on international tourism (€2.1 million). In the process, approximately 210 additional jobs would be supported.

A similar pattern of results arise when looking at scenario’s 2 and 3, with the increase in passenger numbers boosting national output by €27.6 million and €110.5 million respectively.

14 World Travel & Tourism Council

141282

1,129

25,700

25,000

25,500

26,000

26,500

27,000

Baseline Scenario 1 Scenario 2 Scenario 3

Passengers 2011 ('000)


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Table 4.2: Direct impact of a proposed change in th e air transport levy

4.4 Total economic impact

The additional economic activity generated by an increase in air passengers will also spur wider economic benefits through the indirect and induced channels of impact. These additional impacts are illustrated for each scenario in table 4.3 below. Under scenario 1, economic output will be boosted by an estimated €28.4 million per annum in total, supporting 420 additional jobs in the process. Scenario 2 would generate a further €57.3 million of economic activity across the aviation (€46 million) and tourism (€11.3 million) sectors, supporting up to 840 extra people in employment, while the full abolition of the ATL could boost output by as much as 4.3% compared to current levels and create 3,360 jobs.

Table 4.3: Total impact of a proposed change in the air transport levy








Direct Economic Impact







Total Economic Impact



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4.5 Tax impact

A reduction in the rates of ATL charged on flights departing Austrian airports will impact on the amount of government revenue collected from the aviation sector. Based on official Austrian MoF projections, the ATL is estimated to generate up to €90 million per annum in revenues.

For the purposes of analysing the impact on government tax receipts, Oxford Economics assumes that the current structure of ATL would indeed raise the estimated €90 million. As such, table 4.4 illustrates the impact on government revenues of the three different scenarios under consideration, comparing them to a base ATL intake of €90 million.

Table 4.4: Implications for government revenue

Despite boosting total passenger numbers flying to/from and within Austria, each scenario leads to a fall in ATL revenue through direct channels. Under scenario 1, annual ATL revenues would amount to approximately €80 million, an 11% reduction compared to the current structure, while revenues under scenario 2 would fall by 24% to €68.3 million per annum. Increased output in the aviation and tourism sectors would however limit these losses, as revenue raised from corporation, employee-related and sales taxes would increase. When considering these offsetting revenues increases, the implications for direct tax revenue for the Austrian government under scenarios 1, 2 and 3 would be a fall in revenue of €5.0 million, €11.7 million and €49.9 million respectively.

Activity generated in the wider economy through the indirect and induced channels of economic impact will however stimulate further tax collections. Indirect and Induced Tax contributions are approximated by applying an economy wide average tax figure (as a proportion of GDP) to the Indirect and Induced GVA estimates15. When considering this activity stimulated in the wider Austrian economy, additional revenue is collected such that restructuring the current ATL may actually boost total government revenue for the Austrian government, of between €2.0 million under scenario 1 to €6.5 million under full abolition in scenario 3.

15 Oxford Economics Global Macroeconomic Model

Scenario 1 Scenario 2 Scenario 3Change in Air Transport Levy revenue (€m) -10.0 -21.7 -90.0

Change in Aviation related tax revenue (€m) 4.3 8.5 34.1- of which corporation tax revenue 0.4 0.8 3.3- of which employee tax revenue 2.9 5.9 23.4- of which sales related taxes 0.9 1.9 7.4

Change in tourism related tax revenue (€m) 0.7 1.5 6.0

Change in direct government revenue (€m) -5.0 -11.7 -49.9

Change in indirect government revenue (€m) 4.7 9.4 37.7Change in induced government revenue (€m) 2.3 4.7 18.7

Change in total in Government revenue (€m) 2.0 2.4 6.5

Source: Stat ist ics Austria, Euros tat, Oxford Economics

Total tax impact

Wider tax impacts

Direct tax imapct


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4.6 Tax revenue forecasts

Projecting passenger numbers forward using the IATA airline industry forecasts 2011-2015 for the European market gives an indication as to how government revenues may evolve under each scenario. Based on figures published by the ministry of finance on the monthly tax collected from the ATL, revenues collected for 2011 amounted to €74.4 million16. Extrapolating this to produce an annual figure (accounting for negligible revenues collected in June of that year17), it is estimated that, if the ATL was in place for the entire year, total revenues collected for 2011 would have amounted to €107.1 million. Under the current structure, nominal revenues from the ATL could amount to over €130 million by 2015, an increase over 21% from 2011 (table 4.5). This is in stark contrast to the Austrian MoF forecasts of annual revenues to remain at €90 million per annum going forward.

Table 4.5: Estimated ATL revenue projections 2011-2 01518

Assuming each scenario was in place for the beginning of 2012, estimated revenues would be €12.5 million lower under scenario 1 and €27.2 million lower under a uniform 25% reduction in rates across each market segment for the calendar year 2012. Projecting these figures to 2015 suggests that, for scenario 1, there could be an annual shortfall in revenue by as much as €14.4 million per annum by 2015 compared to the current levels of taxation. This figure increases to €31.4 million under scenario 2, while a full abolition of the tax would lead to zero revenue for the government.

16 The air transport levy is paid on or before the due date, 2 calendar months after the period for which it arose (http://english.bmf.gv.at/allgemeines/air_transport_levy.pdf). As such, revenue figures reported in January and February 2012 correspond to calendar months November and December 2011 respectively.

17 Revenues collected in June 2011 were minimal due to additional exemptions in place during the initial implementation phase

18 Excluded from this analysis are additional indirect costs associated with administration, collection and monitoring of the ATL. As such, revenue estimates are presented gross of any administration costs.

ATL Revenue (€ million) 2011* 2012 2013 2014 2015

Forecast annual passenger growth 5.1% 4.7% 4.9% 4.6%Current Rate 107.1 112.8 118.3 124.2 130.1Scenario 1 - 100.3 105.2 110.4 115.7Scenario 2 - 85.6 89.7 94.2 98.7Scenario 3 - 0.0 0.0 0.0 0.0Source: Stat ist ics Austria, IATA Airline Industry Forecast 2011-2015, Oxford Economics

* Based on off icial passenger stat is tics (Statistics Austria), assumes the ATL was in place for the whole year, scenarios in place for start of 2012


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5 Other impacts of changes in the ATL structure

In addition to the primary implications of reducing the ATL outlined in section 4, there are other channels, often less quantifiable, through which the increased number of passengers flying to/from and within Austria will impact the domestic economy. This section of the report provides some further discussion on two important secondary impacts, those on connectivity and the environment.

5.1 Connectivity and the implications for economic development

Connectivity reflects the range, frequency of service, the economic importance of destinations and the number of onward connections available through each country’s aviation network. In recent decades, significant improvements have been made in the level of connectivity, driven largely by a steady decrease in the real cost of air travel. This has brought benefits to users of air transport services by: reducing time spent in transit, increasing the frequency of service, allowing for shorter waiting times and better targeting of departure and arrival times; and improving the quality of service, such as reliability, punctuality and quality of the travel experience.

A number of these city-pair connections have point-to-point services, where passenger flow density is sufficient to make the economics work. However, many of the city-pair connections that make up Austria’s connectivity to both international and domestic markets can only be served by airlines aggregating flows from a number of origins through a hub airport in order to generate a sufficiently dense flow of passengers. Vienna airport is a key hub, particularly well placed for providing connectivity to Eastern Europe and the Far East.

Arguably however, the largest economic benefit from increased connectivity comes through its impact on the long-term performance of the wider economy through enhancing the overall level of productivity. This improvement in productivity in firms outside the aviation sector comes through two main channels: through the effects on domestic firms of increased access to foreign markets, and increased foreign competition in the home market, and through the freer movement of investment capital and workers between countries. Improved connectivity can also enhance an economy’s performance by making it easier for firms to invest outside their home country, which is known as foreign direct investment (FDI). FDI may come about because foreign investment entails some movement of staff; whether to transfer technical know-how or management oversight; or it may arise through creating a more favourable environment for foreign firms to locate their operations, by improving links with both their home country and trading partners. Located in the heart of Europe, Austria offers an outstanding geographical location for international companies. Most European destinations are accessible by air in less than 3 hours, while its central location makes Austria a key gateway into the Central and Eastern European growth markets. As a consequence, Austria is an attractive location in which many international companies choose to locate their regional headquarters. The onward connections available at Austrian airports (in particular at Vienna) play a vital role in attracting and retaining this level of inward investment.

Measuring connectivity is difficult and, given that the supply-side benefits are likely to manifest themselves over time, it is very challenging to disentangle and isolate the contribution of connectivity on long-term economic growth. Despite this, a number of recent studies have attempted to quantify the positive impact of connectivity. One such study suggests that a 10% increase in connectivity (relative to GDP) will raise


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the level of productivity in the economy by a little under 0.5% in the long run19. A more recent, far reaching study concludes that the boost in long run productivity is however a more conservative 0.07%20.

Aviation taxes will stifle growth in the aviation sector and limit the number of passengers using air transport services. As a consequence, it will inhibit the ability of airlines to expand services in terms of both frequency of routes and destinations. This in turn will constrain levels connectivity which will have knock-on effects in the wider economy. This is especially pertinent at a time of financial austerity when governments are struggling to stimulate domestic economic growth across the whole of Europe. The coming years will be key in shaping the structure of the aviation market in Europe, with countries competing to maintain their hub airports and with it, the connectivity benefits that flow from this.

The Dutch government recognised the impact of connectivity when suspending its own aviation tax in 2009. Research into the impacts of the tax domestically indicated that at Amsterdam Schiphol airport, approximately 2 million passengers were lost during the period in which the tax was in force, instead choosing to either cancel travel plans or use airports in neighbouring countries such as Germany and Belgium. If similar behavioural responses are to be expected, then the proximity of alternative airports to both Vienna and the other regional airports in Austria makes them obvious candidates for substitution. Likewise, a cut in the ATL could boost the competitiveness of Innsbruck, Salzburg and Linz airports as alternatives, especially to Munich, as Germany imposes its own ticket tax. The Dutch also found that passengers were slow to return to Schiphol following the abolition of the tax; it is estimated that there was a further loss of 1 million passengers in the period immediately thereafter21. The Netherlands is not an isolated case; other European countries have also decided against the imposition of additional passenger taxes on the aviation sector. In 2011, Ireland announced its intentions to abolish aviation taxes in a bid to increase inbound visitors, while both Sweden (2006) and Belgium (2008) decided against introducing similar taxes in the first place.

The importance of air transport on the European economy and the potential impact of reduced connectivity are no better illustrated than through the experience immediately following the eruption of the Icelandic Eyjafjallajokull volcano in 2010. As an ash plume descended across Europe, assisted by prevailing winds, large portions of European airspace was closed for the preceding week following the eruption. Over 100,000 flights were cancelled during this time, with 80% of airport capacity affected. The effects of the air space closures extended beyond just the direct impact on air transport industry.

Oxford Economics estimate that the total impact on the European economy amounted to nearly €2.0 billion for the week preceding the eruption, equivalent to 0.67% of one-weeks GDP in the region. This was split between the total net impact on the air transport sector as a consequence of the sheer number of cancelled flights (when accounting for rearranged and deferred travel), destination impacts due to forgone spending from lost scheduled arrivals (net effect allowing for alternative travel options and the additional spending of stranded travellers), and productivity impacts stemming from stranded workers (Table 5.1).

19 ‘The Economic Catalytic Effects of Air transport in Europe’, by Oxford Economic Forecasting (2005) on behalf of EUROCONTROL Experimental Centre.

20 ‘Measuring the Economic Rate of Return on Investment in Aviation‘, InterVISTAS Consulting, prepared for IATA, 2007

21 ‘Effects of the Air Passenger Tax: Behavioral responses of passengers, airlines and airports’, KiM Netherlands Institute for Transport Policy Analysis, 2011


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Table 5.1: Impact of the Icelandic volcanic eruptio n in Europe, 2010 22

These ‘knock-on’ effects keenly illustrate how modern economies of Europe are dependant on air transport connectivity; facilitating tourism, trade and underpinning the wider aims of the European single market. The impact was felt acutely not just by the aviation sector, but by travellers and destinations; exporters and those reliant on imported inputs; as well as general production and productivity globally. In just one week the sharp contraction in air transport connectivity in Europe had a measurable impact on GDP, affecting a diverse cross-section of individuals and businesses. Any longer and the closures across Europe would have compounded these negative impacts and inhibited the recovery further.

5.2 Consequences for the environment

In comparison to other EU countries, the impact of greenhouse gas (GHG) emissions by the Austrian Aviation sector is relatively modest. Austria accounts for just 0.4% of total civil aviation emissions in the EU, despite accounting for over 2.0% of total passengers. However, the sector is still keenly aware of its obligations to combat climate change. With fuel costs on average accounting for around 26% of total operating costs, there is no better incentive for airlines to improve efficiency. As such, the aviation industry collectively agreed in 2008 to the worlds first set of sector-specific climate change targets. The ambitious target of reducing its net carbon footprint to 50% below what it was in 2005 reflects the seriousness in which the industry approaches the issue23. These targets will only be achieved through a combination of different efficiency opportunities and working with the support of governments and supra-national institutions.

A key argument against abolishing the ATL is that an increase in passengers will lead to a proportional increase in aviation related emissions. However, this will not necessarily transpire. In 2011, airplane occupancy rates for flights to/from and within Austria were at 70.7%, an increase of over 5 percentage points since 2004 and representing a very similar level to that of the EU as a whole24. A significant number of additional international passengers will originate from countries such as Germany, Spain and the UK, where the infrastructure is already in place. As such, the reduction in taxes may help to facilitate

22 ‘The Economic Impacts of Air travel Restrictions due to Volcanic Ash’, Oxford Economics, prepared for on behalf of Airbus, 2010

23 ‘Aviation: Benefits Beyond Boarders’, ATAG, 2012

24 Eurostat, occupancy rates calculated as total passengers on board divided by the total seats available

Passengers Affected 5.9 mill ionGDP Impact € millionDirect - Air Transport 698Indirect - Air Transport 323Induced - Air Transport 102Destination Impacts 710Productivity Losses 128Total 1,962

Share of one-week GDP 0.67%Source: Oxford Economics


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improvements in efficiency through higher levels of flight occupancy rates, limiting the potential environmental impacts through higher emissions.

One of the primary justifications of the Austrian ATL was to negate and compensate for the environmental impact of air transport. However, with the inclusion of aviation within the scope of the EU Emissions Trading Scheme (‘ETS’) in 2012, this aim now becomes redundant.

The EU Emissions Trading Scheme (‘ETS’) is a major pillar of EU climate policy designed to reduce the emission of harmful greenhouse gases and combat climate change. At the time of its inception in 2005, it was the first and largest international scheme of its type in the world. By 2020, the aim is to deliver a reduction in the emission of greenhouse gases in the EU of 21% on 2005 levels.

The mechanism by which the ETS works is through a ‘cap-and-trade’ principle. Total emissions are capped by the European Commission and then allocated – either directly or through an auction – to companies which can then trade them on the open market. Establishing a market for emissions ensures that emissions will have an associated cost attached to them for the companies concerned. As such, as the cap is incrementally decreased every year by the European Commission, the cost of emissions will increase, encouraging firms to invest in better technology and ensuring a more efficient allocation of emissions across sectors.

From 2012, the emissions from all domestic and international flights that arrive or depart an EU airport are included in the EU ETS, regardless of whether the carrier is based in the EU or not. Following a consultation of stakeholders, the European Commission concluded that incorporating aviation into the ETS was the ‘most cost-efficient and environmentally effective option for controlling aviation emissions’. The result is that airlines in Austria, and ultimately their passengers, are now being charged twice to compensate for their impact on the environment, disproportionately penalising the aviation sector and diminishing global competitiveness of an industry that punches above its weight in terms of contribution to economic growth.


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6 Appendix – methodology

6.1 Channels of economic impact

Section 3 of the report details the contribution that the aviation sector makes to the Austrian economy in terms of the value of the sector’s output and the number of people it employs. The output component is measured by Gross Value Added (‘GVA’). The sum of GVA across all industries in the economy will approximate the economy’s overall GDP.

GVA is the contribution to the economy of an individual producer, industry or sector. It is probably easiest understood as the value of a producer’s output (goods or services) less the value of inputs used in the production process for that output. An equivalent measure of GVA is the sum of profits and employee costs generated by the producer’s activity. GVA differs from Gross Domestic Product (GDP) in the price used to value goods and services. GVA is measured at producer prices that reflect the price at the ‘factory gate’ together with cost of distribution. GDP is measured at market prices that reflect the price paid by the consumer. The two prices therefore differ by the taxes less subsidies levied on the goods or services.

The Direct Impact of the aviation sector is calculated by summing the GVA and employment (measured in terms of headcount, to enable comparisons with national statistics) contributions for all those firms engaged in the aviation sector. Data was sourced from a combination of annual financial accounts, supplemented by operating statistics provided by Austrian Airlines. For the purposes of this study, the aviation sector comprises three distinct types of activity:

- Airlines transporting people and freight.

- Ground-based infrastructure that includes the airport facilities, the services provided for passengers on-site at airports, such as baggage handling, ticketing and retail and catering services, together with essential services provided off-site, such as air navigation and air regulation.

- Aerospace manufacturing that builds and maintains aircraft systems, airframes and engines.

In addition to its direct impact, the aviation sector contributes to the economy through two other channels, known as the indirect and induced channels of impact. The Indirect Impact of the aviation sector quantifies the activity supported in the national supply chain, as a result of the procurement of inputs of goods and services from the aviation sectors suppliers. Without the presence of a thriving aviation sector, this domestic supply chain activity would not exist and thus it is important to consider when evaluating the sectors impact. The Induced Impact of the aviation sector quantifies the activity supported by the consumer spending of those individuals employed through both the direct and indirect channels outlined above. Through the spending of their wage income, activity is supported in the industries that supply these purchases, including retail and leisure outlets and in a range of service industries. Taken together, these three channels give the aviation sector’s total economic impact in terms of GVA and jobs.

6.2 Input-output tables

The indirect impact is measured using an input-output table. Input-output tables are designed to give a snapshot of an economy at a particular time, showing the major spending flows from “final demand” (i.e. consumer spending, government spending and exports to the rest of the world); intermediate spending patterns (i.e. what each sector buys from every other sector – the supply chain); how much of that


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spending stays within the economy; and the distribution of income between employment income and other income (mainly profits).

The idea behind the input-output table is that the economy can be divided into a number of producing industries, and that the output of each industry is either used as an input into another industry, or in final consumption. For example, grain produced by the farm sector becomes an input into flour milling; flour produced by the milling sector becomes an input into the baking sector, and so on. In essence an input-output model is a table which shows who buys what from whom in the economy.

As input-output tables describe how an industry uses the output of other industries as inputs in the production of its goods or service, they describe its full supply chain – its direct suppliers, those industries that supply its direct suppliers, and so on – as well as the proportion of the inputs that are imported. This is reported as the indirect output component.

The input-output table reports how much of final output is sold in the domestic economy. Using similar methods as that used to derive the indirect output component, the input-output table can be used to estimate how much spending on completed goods (known as final domestic consumption) is supported through the employees of the industry and its full supply chain. This is reported as the induced output component.

6.3 Tourism

In quantifying the benefits from Travel & Tourism (T&T) we were seeking to capture the spending by tourists and businesses on accommodation, food etc outside of their airfare (which forms part of our estimate of the direct calculation). In doing this we relied heavily on the Oxford Economics Travel & Tourism model prepared on behalf of the World Travel & Tourism Council (WTTC) which simulates Tourism Satellite Account (TSA) data across over 180 countries. From the model we obtained an estimate of the level of GVA created by foreign visitors, and assigned a share of this to the aviation industry based on the share of foreign visitor arrivals travelling by air. We then used coefficients within the model to divide this between T&T providers (direct) and their supply chain (indirect). Finally, we attributed a share of the total induced effect to the aviation industry by dividing our estimates of aviation-related direct and indirect GDP by total T&T direct and indirect GDP. It should be noted that the initial figure presented for the contribution of aviation related tourism is a gross measure of the benefit from tourism and therefore does not account for the spending which is effectively “lost” when domestic residents travel abroad by air.

There is some uncertainty on the correct number to use for the proportion of foreign visitors arriving by air. In order to be consistent with previous research on aviation's economic contribution to the Austrian economy25, we use data sourced from the Austrian Economic Chambers – Tourism in Numbers publication (48th Edition, May 2012), that gives the proportion of foreign visitors arriving by air as 6%. This estimate may however be on the conservative side, as the Austrian Tourism Board (Oesterreich Werbung) has indicated that they believe the proportion to be nearer 10%. We have chosen to base our calculations on the estimate contained within the Austrian Economic Chambers publication. Had we instead taken an average of the two, our headline finding for the total economic impact for air transport (including tourism) would have been higher by 7.1%.

25 ‘Economic Benefits from Air Transport in Austria’, by Oxford Economics (2011)

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