AIR PASSENGER DUTYRESEARCH

SPECIFICATION FOR A RESEARCHPROJECT

1. INTRODUCTION

This tender is focused to understand the potential commercial

and economic effects of changing APD (Air Passenger Duty) in

Wales, UK. This tender is specially focused on the reduction

of air passenger duty in Wales and in particular Cardiff

Airport. The potential economic effects of the reduction in

air passenger duty are looked at. Additionally the impact of

reduction in air passenger duty on economic policies is

reviewed. Recommendations are made to improve the financial

accountability of Welsh government with regards to air

passenger duty. Cardiff airport being the only international

airport in Wales is considered for this tender. Political,

economic, social and technological factors are considered to

evaluate this tender.

The approach towards this tender is formulated by initially

analysing the contribution of aviation sector to the economy

of UK. A thorough understanding of the contribution of

Aviation sector to the economy of UK, gives us the insight

into the pros and cons of the decision in devolving air1

passenger duty in Wales. Holtman commission in 2010 recommendedWelsh Government to undertake an assessment of few taxes which also

include Air Passenger Duty. The UK Government has plans to devolve

APD for Scotland and Wales which forms the background of this

research. The reason or rationale behind this tender is to

understand the potential economic and commercial effects of varying

Air Passenger Duty in Wales with specific focus on Cardiff Airport

which is the only international airport in Wales. The performance of

Cardiff airport has been a concern in the recent times. The analysis

will consider PEST analysis although the report as a methodology.

The following section gives an insight into the aim and objectives

of this research with regards to the APD tender. [WALESONLINE, 2012]

2. AIM AND OBJECTIVES.

The project is aimed to provide the Welsh government with

independent and robust research that reviews the implications of

devolving air passenger duty. The following points combine to become

the objectives of this research:

Practical barriers that imply by devolving air passenger

duty

Competitive advantages of Cardiff airport by devolving APD

Understand potential economic and commercial effects of

varying APD in Wales.

The impact of devolving Air Passenger Duty on Welsh economy– the wider costs and benefits to the Welsh government bydevolving air passenger duty.

In addition to the above objectives and in order to attain a precise

output, factors such as the impact of air passenger duty on airline

companies is also studied. Cardiff airport has been a concern for

the Welsh government due to its poor performance in the recent

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times. Factors that contribute to the effective improvement of the

performance of Cardiff airport is also looked at in this report to

achieve an overall impact of devolving air passenger duty.

The recent advancements or rather changes that have come to air

passenger duty policy in UK are the devolution of air passenger duty

(DEVOLUTIONMATTERS, 2012). Strong debates on the topic exist in many

academic journals and scholarly articles questioning the credibility

of devolution of air passenger duty. It has been based on the idea

that less mobile items in the market are unlikely to contribute more

or effect significantly on the economy of UK (FRONTIER ECONOMICS,

2011). The policies were to solve economic inefficiencies although

there have been political disagreements from many politicians in the

government. Welsh government’s calculation was that competition

considerations, state aid rules and international aviation

agreements limit the ability of devolving air passenger duty. The

future of aviation and the companies operating in this industry will

be thoroughly if not to the maximum affected by devolving air

passenger duty. The idea proposed to charge air passenger duty per

plane basis rather that charging air passenger duty per person

flying in an aircraft. This scenario creates a liaison between air

travellers and airline companies. Airlines are hence forced to fill

up their seats and operate to avoid operating loss in case the plane

flies empty. Airlines are forced to offer better rates to their

customers to avoid loss. Airlines can take advantage of other

industry sectors such as tourism to help them gain business and

attain maximum profits. An example of this scenario is listed

further in the conclusion section of this report considering

Caribbean airlines, reduce in air passenger duty and the benefit of

tourism to the airline industry in Caribbean region. This helps in

doing a comparitive study with the situation in UK providing a

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further scope of this research. In the change in air passenger duty

policy, important changes such as different rates to different

flights will be applicable depending on the overhaul of the flights.

A flight with a short overhaul will be charged less air passenger

duty whereas a flight with long overhaul will be charged with more

air passenger duty. To understand the effectiveness of this change

with respect to Welsh government and Cardiff airport, we first

understand the overall airline industry in UK. This also helps in

understanding the competitive advantages of Cardiff airport and the

ways to increase air traffic in it.

3. GANTT CHART

Below is the Gantt chart which details the timelines of activities framed in this tender. (Henry Gantt, 1915)

TASKS TIMEFRAME

Week 1 -3 Week 4 Week 5 – 7 Week 8 - 10

Week 8 – 11

Preliminary research on Aviation sector and APD

Redefine objectivesof the tender

Statistical analysisof Air Passenger

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traffic inUK and Cardiff inparticular

Comparisonof major UK airports

Research on political economic and socialbarriers on APD

Identifying the Advantagesof devolving APD

Tender final execution stage

The above Gantt chart details the timelines of the project tender.

The tasks identified are preliminary research on aviation sector and

APD, redefining tender objectives to make a clear understanding,

statistical analysis of air passenger traffic in UK and Cardiff in

particular, comparison of major airports in UK, research on

political, economic and social barriers on APD, identifying the

advantages of devolving APD and the final execution of the project.

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The time lines are considered on a week to week basis over a span of

12 weeks.

4. THEORITICAL FRAMEWORK

This section helps in understanding the theoritical framework

of this report. The report initially tries to understand the

contribution af aviation sector to the UK economy. This

section has been chosen as the analysis is focused basing on

the economic factors that contribute in making Cardiff airport

more attractive and also devolving APD. This report further

analyses different airports in UK to understand the main

distinguishing factors that Cardiff Airport is lacking from

the others. Finally the report focuses on the analysis of

statistical and economic aspects effecting the UK airports

(Cardiff in particular).

5. CONTRIBUTION OF AVIATION SECTOR TO THE UK ECONOMY.

The aviation sectors contribution towards the economy of UK

includes airlines, aircraft service providers and the

activities of airports in the UK. The aviation sector employs

0.5% of the entire employment in the UK (AIR LEAGUE, 2012).

The measure of GVA (Gross Value Added), by the aviation sector

constitutes to about 0.7% of the entire Gross Value Added of

the UK economy. £8.8 billion is generated from the aviation

industry alone which sums up to 0.7% of the economy of UK.

There has been a significant increase of 8.3% in revenue

generated by this industry since the year 1995. Although gross

value added (GVA) does not include the benefits of consumers

of airlines, it is solely the profits that the government

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makes through the aviation industry in the UK. There has been

a through decrease of prices of airline tickets over the last

10 years to sustain competition in the highly competitive

airline market in the West. The aviation industry in UK

contributes to about £4.8 billion on tax revenues to the

government annually. Air passenger duty comes to account or

rather a very important entity as the revenue is increased by

54.5% which when APD is included. The aviation industry has a

significant effect in the wider economy.

There are three important sectors where the aviation

industry stands out and has a significant effect which are

connectivity, trade and investment.

i. Connectivity helps as reduced travel time and a choice

of more destinations leads to better access to untapped

or new or potential markets.

ii. Similarly lower transport costs help in handling the

inventory or shipping for many industries thereby

increasing trade.

iii. Additionally it gives the flexibility to invest in

foreign regions and as well as local regions.

The importance of these factors is being considered in this

study as APD has a significant effect on the operations of

airline companies and has a simultaneous effect on all the

industries that are associated with it or rather dependent

on it for their business operations. The effect of increase

in APD is prominent as it has a possibility to decrease the

economic contribution or the market share of airline

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industries. Several arguments also state otherwise. Examples

of aviation industry taking support of other industries to

improve their market share have been discussed further in

this research. The above figures or statistics of aviation

industry form the economic fraction of air passenger duty

which is thoroughly detailed in the figure below. For

example, an average increase of 5 % of air passenger duty

will increase the average airfare by 28%. However the

context on which this research focuses is the devolution of

air passenger duty. So, the impact of devolution of APD is

justified in this report. The below report shows the wealth

impact if APD is increased by 5 % every year.

Figure 1: Wealth impact of APD by 5 %.

Source: (HM TREASURY, 2012)

Results show that there is a significant decrease in the

investment sector, trade, connectivity and economic footprint

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of the aviation industry if air passenger duty is increased.

Other factors such as employment and tax revenues per year

also have a significant impact due to the increase in air

passenger duty. (HM TREASURY, 2012)

6. COMPARISON OF MAJOR AIRPORTS IN UK

In an attempt to consider and understand the impact of other

major airports in UK on Cardiff airport, a comparison is made

on selected airports in this section. At the end of this

section, a detailed analysis of devolution of air passenger

duty (APD) by the Welsh government, its advantages and

disadvantages are discussed.

The attractiveness of an airport that an airline and airline

contractual terms at any operating base is the hub of a

network of locations around the base location. These factors

depend on operating performance and the average yield revenue

of the location.

Additionally, factors such as terminal facilities of an

airport, infrastructure of the airport, ILS (Instrument

Landing System) and the potential for future expansions are

considered as key attributes for creating interest in an

airport. Factors such as operating limitations and aviation

policies also fall into the attributes contributing to the

attractiveness of an airport.

Airline companies assess an airport before starting their

operations. These may include the following:

1. Tourism around the airport or nearby places,

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2. Nearby competiting airports,

3. Depth of population or density of population in the

region looking forward for airtravel

4. Income levels

5. Businesses

6. International trade

7. Transport links from the airport and

8. Airport access time from the businesses / passangers

location.

Access times to a local airport determined by UK CAA show some

interesting results. An average time of 2 hours to reach the

airport was tolerated by most passengers who were frequent

flyers. However, business travellers wanted less time to reach

airports and the average was around 1 hour.

The Analysis of the two-hour drive up to 80 accounted for 90

percent of the time Passengers using an airport. As for the

statistics of large (and more to the Each of these serve a

large number of destinations in the rest of UK-based)

airports. A second scenario depicts, the small size of

passenger traffic at airports that may have gained more from

restricted timings, probably 1.0 to 1.5 hours of drive time to

the airport. From a competitive point of view, the problem is,

allocating how much time it takes to travel to an airport.

The performance of individual airports has its highs and lows.

UK's airport industry structure (at least outside of the tight

competition under dominant BAA London region and Scotland), is

limited to the individual airports Market power, and it comes

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to negotiations, especially in the higher price takers

Contracts to attract new business.

Airports are generally loss-making in a competitive

environment, (or, to examine the Airports are so different and

profits, whether or not competition is so incomplete)

Substance Summary of financial performance figures used for UK

airports are Compiled by the Welsh goverment in the regulated

industries.

The comparison of major airports in UK, leaves us with insight

into several aspects relating to the operations, profitability

and convinence of an airport. All these facts and figures help

in enhancing the position of Cardiff airport and also to

increase the attractiveness of the airport. Devolving APD (Air

Passanger Duty) does not alone fetch more passangers to the

airport but can be a major factor in gaining passangers. All

the factors discussed in this section contribute to the growth

an airport.

7. STATISTICAL ANALYSIS AND ECONOMIC EFFECTS OF AIRPORTS:

The below figure explains the economic effects on airports.

Factors such as Aviation sector, wider economy are measured

with direct and indirect effects on the economic footprint of

the overall aviation industry. Simultaneously the effect of

these effects on trade, investment, efficiency, innovation and

competition are also explained.

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The impact of air passenger duty would have individual effectsdirectly and indirectly on the aviation sector. Direct effectsinclude the cost and operating costs of the airlines. Therecan be a significant increase in the air passengers as theprices will go down. Indirect effects would be more businesscoming into the country through foreign investors and traderswho would avail airline transport as their main mode oftransport.

The current and projected demand for air passenger travel fromthe UK is listed below.

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Figure 3: Current and projected demand for air passengertravel from UK.

Source: http://assets.dft.gov.uk , 2012

The statistics show that there is a significant increase inthe air travel by passengers in the UK and statistics alsoshow that there is a significant increase in demand aspredicted by transport authority of UK. There has been a lumpfrom the year 2006 to 2010 due to the global recession.Airliners have increased the ticket prices to meet theoperating costs. This has forced many short overhaulpassangers to use alternative means of transport fortravelling in the UK (AIR LEAGUE, 2011).

However, the decrease of taxes on airlines and increase inspending power of the people of UK has resulted in such anoutcome.

The forecasting framework of UK airline industry is detailedin the figure below:

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Figure 4: Forecasting chart of aviation industry in UK.

Source: http://assets.dft.gov.uk , 2012

Airline companies follow the above type of business models forpreparing a forecasting chart. These factors play an importantrole in simultaneously complying with their requirements whileincreasing the attractiveness of an airport.

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The above factors contribute to the forecasting of aviationindustry in the UK. The important factors in considerationinclude Oil prices, APD (Air Passenger Duty), and allowancesto the airline industry by the government. Rest is as followsin the above chart.

Similarly, the below figure details the income elasticity ofterminal passenger demand in the UK.

Figure 5: The income elasticity of terminal passenger demandin the UK.

Source: http://assets.dft.gov.uk , 2012

It can be observed that different passengers from differentsectors avail airline services in the UK from different partsof the world. Cardiff airport mainly focuses on connections tothe EU region. UK being the trade hub of Europe, Cardiffairport can take advantage of its location and increase itsfeasibility of having more aircrafts. However, the ease ofaccess, services and other factors contribute to the successof the airport.

The factors that Cardiff airport has to consider and developto increase its airbase or to increase the airline overhaul islisted in the figure below:

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Figure 6: The factors that Cardiff airport has to consider anddevelop to increase its airbase

Source: http://assets.dft.gov.uk , 2012

The above factors such as airport runway and terminalcapacities, demand reallocation routine, airport choice,frequency etcetera have to be worked on to increase therevenue of Cardiff airport. In order to increase the airpassenger frequency from an airport it is not only importantto consider the overall facilities and ease of access to theairport, but also the passengers initial start point and thedestination in UK or any other EU region. These factors haveto be taken into account before working on the development ofthe airport. Devolution of Air Passenger Duty is duly helpful

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for airline companies and can attract more passengers andincrease revenue on an overall basis.

The below figure shows the estimate of air passengertravellers in UK as assessed by the transport authority of UK.

Figure 7: Air passenger capacity of UK airports

Source: http://assets.dft.gov.uk , 2012

The commission for funding and finance in Wales, setup by theWelsh government in 2010 has recommended that a 50 percent ofincome tax should be devolved in Wales. Welsh government holdsa deficit of £12 billion pounds. The devolution of airpassenger duty would increase air traffic from Cardiff andthere by more revenue is generated from aviation industry tocover up the deficit.

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Airport operators association has the following facts andfigures to explain the impact of rising APD on the economy ofUK when compared to other EU nations.

Figure 8: Rates of UK aviation per person compared to other EUcountries.

The clear discrepancy of air passenger duty rates in the UKwhen compared to other EU nations is certainly a drawback forthe aviation industry in UK. The rates at which short haulrate / medium haul rate / long haul rate and maximum ratecharged are detailed in the above table. From the table in theprevious section, it is understood that the passanger count atcardiff airport is considerebly very low when compared toother airports in the UK. This gives us a benefit ofunderstanding the implications of devolving the air passengerduty in Wales.

Additionally, the outcome of taxation on air passengers givesarguable results. The reason for this outcome is the way thetaxation is designed. For example, a passenger is charged withVAT (value added tax) if he / she is travelling within the UK,and is not charged with value added tax if travelling abroad.These taxes account to the direct income generated by theWelsh government through air passengers and hence has a

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significant effect on the revenue generated from the airlineindustry. Factors to be considered are the increase in amountof revenue generated just by devolving APD.

Before concluding this report, below is a listed example ofthe impacts of devolving air passenger duty in Caribbeanregions and the major advantages gained by the country.

The Caribbean airline industry had a competitive disadvantageuntil the APD reforms were altered in the year 2009.

“South Florida and the Florida Keys – undeniably competitor holiday destinations tothe

Caribbean – as a part of the USA are in a lower tax band than the Caribbean, eventhough

the Florida Keys are, for example, only around 200 miles closer to London thanKingston,

Jamaica, around 250 miles further away than Bridgetown, Barbados andapproximately 380

Miles further away than St John’s, Antigua and Barbuda.” (ONE CARIBBEAN ORG,2012)

The change in air passenger duty by the government helped inhandling critical changes to the economy. Supportingindustries or rather associated industries such as the tourismindustry had benefitted extremely from the decrease of airpassenger duty in the Caribbean (ONECARIBBEAN ORG, 2012).

The government had foreseen the increasing demand of tourismin Caribbean and the requirement for several airlines to usethe route of flying via Caribbean to reach other destinationsdue to the ease of access.

ADVANTAGES:

The following are the advantages in devolving air passengerduty (APD) by the Welsh economy.

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i. Helps the Welsh government in raising the revenue barfrom sectors of the economy which is often consideredto be undertaxed due to fuel exemption and value addedtax.

ii. The tourism in the UK can be developed and there couldbe a significant contribution from the tourism industrytowards the economy of UK

8. DISCUSSION OF DATA COLLECTED:

i. Air Passanger duty is very suitable tax to be assessedby the commission for devolution and the data collectedin this report proves that the devolution of APD is amajor factor for Cardiff Airport to attract moreairlines and passangers.

ii. Additionally, the report discussed stong facts abouteconomic, political and social benefits by devolvingAir Passanger Duty.

iii. Air transport is a key source of revenue for the Welshgovernment and devolution of APD can be used to attractmore passangers and airlines to increase revenue.

iv. Other supporting industries are also developed with theincrease in air passangers to wales. Industries such astourism, other businesses, transport, logistics favoura mutually beneficial aspect for the airport.

v. APD on long overhaul flights should be entirelyeliminated to attract more international carriers andpassangers. Short overhaul flights can even reduce APD,however the impact of economic growth through devolvingthis aspect will not be large. i.e., there are otheralternative means of transport to travel within the UK.

vi. As discussed in the report, devolving Air PassangerDuty alone will not do the job for Cardiff Airport.However it plays a major role in increasing thepassanger traffic and airline traffic to Cardiff.

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vii. Short overhaul flights to the EU could gain morerevenue to Cardiff Airport. However Heathrow andBristol airports stand as a major competitors forCardiff. Decreasing the Air Passanger Duty in Cardiffairport would help.

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