2 Levelling the playing field
10. We expect the Government to maintain a fiscal
and regulatory regime that encourages investment, allows fair
and open competition between airlines and airports, supports regional
connectivity and addresses damaging market distortions. This chapter
examines how the Government is addressing those issues.
Air Passenger Duty
11. Air Passenger Duty (APD) is an excise duty which
is charged on nearly all passenger flights departing from airports
in the UK and the Isle of Man.[15]
The rate of duty varies according to passenger destination and
class of travel. Darren Caplan, Chief Executive, AOA, highlighted
the impact of APD on smaller airports:
Before I came here today I asked several small
airports, "What is the single biggest issue? You can say
anything. Surface access? Planning?" APD comes back again
and again. It is the airlines that are being charged, and they
are saying that APD is the thing affecting their growth. It is
a big issue.[16]
APD directly affects the growth and viability of
smaller airports. We heard that several airlines decided either
not to route to the UK or to fly less frequently because of the
impact of APD.[17]
12. Because APD is a departure tax, it is currently
applied to both the inbound and outbound legs of domestic return
flights in the UK. Such domestic flights might involve travelling
point to point or transferring to/from further flights at a hub
airport in the UK. Domestic return flights are core business for
airlines operating from regional smaller airports. The double-charging
of APD disproportionately affects passengers travelling from UK
smaller airports in addition to placing all UK airports at a disadvantage
compared with their EU competitors. For example, a passenger who
took a return flight from Leeds-Bradford airport to New York via
Heathrow would be charged APD on the outbound flights from Leeds-Bradford
to Heathrow and from Heathrow to New York. In addition, they would
be charged APD on the return inbound flight from Heathrow to Leeds-Bradford.
In comparison, a passenger who flew from Leeds-Bradford airport
to New York via Paris Charles de Gaulle would only be charged
APD on the outbound flight from Leeds-Bradford to Paris.
13. Following its introduction in 1994, the disproportionate
effect of APD was recognised by an APD exemption on the return
leg of domestic flights. In June 1998, the European Commission
ruled that that exemption for domestic flights was legally defective,
because it did not provide the same effective tax treatment for
all EU flights.[18] The
APD exemption for the return leg of domestic flights was subsequently
scrapped in the Budget 2000.[19]
14. In addition to its effect on domestic flights,
APD curbs demand for international tourism to the UK. World Economic
Forum data places the UK 139th out of 140 countries in terms of
tourism competitiveness with respect to air taxes and charges.
Only Chad operates a less competitive air taxation regime than
the UK.[20]
15. In the autumn statement 2014, the Treasury attempted
to mitigate the effect of APD on airports and airlines by scrapping
APD for children under 12 from May 2015, with the revision being
extended to children under 16 in 2016. Larger airports host the
majority of international family holiday traffic. Indeed, many
smaller airports do not have long enough runways to land the large
jets that are used to run long-haul holiday flights. We welcome
the acknowledgement of the negative impact of APD on the aviation
sector in the autumn statement 2014. However, exempting children
from APD was a marginal change which did nothing for business
travellers and little for smaller airports.
16. Following the Scottish independence referendum,
the Smith Commission was set up to examine the further devolution
of powers to Scotland. In November 2014, it recommended devolving
APD to the Scottish Parliament.[21]
In line with the Smith Commission recommendation, clause 14 of
the draft Scotland Bill would disapply APD from passengers departing
from Scottish airports and allow the Scottish Parliament to set
a tax for passengers departing from Scottish airports.[22]
It is, of course, conceivable that the Scottish Government would
set a tax at the same rate as APD in England, in which case this
devolutionary measure would have no effect beyond increasing tax
revenues to the Scottish Government.
17. Northern Ireland is currently the only part of
the UK to share a land border with another state—in this
case, the Republic of Ireland—which applies lower rates
of aviation tax. Belfast International Airport explained how the
variation in aviation taxes between Belfast and Dublin has affected
its operations:
The imposition of such a costly 'penalty' creates
significant price advantage for competitor airlines operating
out of Dublin Airport. It is estimated that Northern Ireland is
losing 1.5 million passenger journeys to Dublin which translates
into the loss of 1,500 jobs capable of generating £30 million
approximately in wages and salaries coupled with the creation
of new downstream enterprises … For the foreseeable future,
Dublin will continue to 'poach' passengers from Northern Ireland,
something that will continue to have a deleterious effect on both
profitability and route development. In confidential talks we
have had with a number of prospective carriers, they have indicated
that APD is preventing them from making favourable decisions which,
when added up, would amount to an additional 3 million passengers
or 3,000 new jobs.[23]
APD prevents airports in Northern Ireland competing
on a level playing field with airports in the Republic of Ireland.
This has cost Northern Ireland jobs, growth and connectivity.
18. If APD were scrapped in Scotland, airports
in England would be subject to a similar competitive disadvantage
to that currently experienced in Northern Ireland. The further
devolution of APD to, for example, north-east England or Wales
would ultimately serve to extend a patchwork of APD-derived market
distortions across the UK and drive a race to the bottom on regional
APD rates. We would prefer the Government to act strategically
and in the national interest to address APD.
19. The DfT acknowledged smaller airports' concerns
about APD in its written evidence to this inquiry, but balanced
that observation by highlighting the contribution APD makes to
Exchequer revenues.[24]
We acknowledge the importance of maintaining tax revenues but
question whether APD is an efficient means of achieving that end.
In 2013, a report by PricewaterhouseCoopers, The Economic Impact
of APD, found that abolition of APD could provide an initial
short-term boost to UK GDP of around 0.45 % in the first 12 months,
averaging at just under 0.3 % in subsequent years. In addition,
it found that abolition would result in an increase in investment
and exports, arguing that investment might rise by 6% in total
between 2013 and 2015, with exports rising by 5% in the same period.
The report argued that almost 60,000 jobs could be created between
2013 and 2020 if APD were axed. PricewaterhouseCoopers concluded
that the abolition of APD would more than pay for itself through
increased tax revenues from other sources due to the consequent
increase in economic activity.[25]
20. The way
in which APD is double-charged on domestic return flights is damaging
to UK smaller airports. In effect, it incentivises airlines and
passengers to fly from airports located in other EU member states.
It cannot be revised to allow UK airports to compete on a level
playing field in the European marketplace because of the operation
of EU competition law. The proposed devolution of APD to Scotland
threatens to create further market distortions which could severely
disadvantage airports in England. It
is disappointing that the concerns we raised previously about
APD in our First Report of Session 2013-14 on Aviation strategy
were ignored by the Treasury.[26]
We urge Transport Ministers to pursue those recommendations and
the important concerns raised by smaller airports with the Treasury.
Public Service Obligations
21. A Public Service Obligation (PSO) is an arrangement
by which a governing body or other authority runs an auction for
subsidies which allows the winning company a monopoly to operate
an air service for a period of time for the given subsidy. PSOs
are used in cases where there is insufficient revenue for routes
to be profitable in a free market, but where it is socially, economically
and/or politically desirable to maintain the transport link. In
short, PSOs allow the state to subsidise air travel that is not
commercially viable.
22. PSOs must be offered for tender in the Official
Journal of the European Union and bidding is open to any transport
operator registered in an EU member state. The winning tenderer
usually receives a monopoly on the route, but they may have to
conform to one or more conditions of service, such as the type
and size of aircraft, the timing of services, maximum fares or
service quality.
23. In 2014, the Government introduced a policy to
promote the use of PSOs to maintain routes from smaller airports
to London which might otherwise be lost. The funding stream for
that policy is known as the Regional Air Connectivity Fund. In
June 2014, the Government announced support from the Regional
Air Connectivity Fund to maintain the air link between Dundee
airport and London Stansted until 2016 through a PSO agreed with
Dundee City Council.[27]
In October 2014, the Government announced a second new PSO to
maintain the Newquay to London Gatwick air link, which was agreed
with Cornwall County Council.[28]
24. On 22 January 2015, the Government extended its
PSO policy to include state support for new air routes rather
than simply supporting existing routes at risk of closure. It
made £56 million available over the next three years to fund
PSOs that support new air routes. Airports and airlines were invited
to bid for this funding, with the first round of applications
closing on 25 February 2015.[29]
The DfT should regularly report on the number of applicants
and of successful applications to the Regional Air Connectivity
Fund to support new air routes and publish this information on
its website.
25. State support for air transport is governed by
European Commission aviation state aid guidelines. PSOs can only
be implemented with the agreement of the European Commission.
The DfT has submitted a "Draft protocol for UK start-up
aid for airports handling fewer than 3 million passengers per
annum" for clearance by the European Commission.[30]
If the European Commission agrees this protocol, the DfT will
be able to award start-up aid for air transport to airports handling
fewer than 3 million passengers per annum without further reference
to the European Commission. The DfT should set out a timetable
for negotiations with the European Commission on its "Draft
Protocol for UK start-up aid for airports handling fewer than
3 million passengers per annum" to allow smaller airports
and local authorities that are considering accessing the Regional
Air Connectivity Fund to plan effectively.
26. European Commission guidelines allow start-up
aid to be provided for air routes involving airports that handle
between 3 million to 5 million passengers per annum in "duly
substantiated exceptional cases".[31]
Such cases must be individually notified to the European Commission
and require individual clearance from the European Commission
before funding can be made available. The DfT stated:
Discussions with the Commission have not identified
what evidence would need to be provided but have indicated that
the bar is likely to be set very high. Therefore application for
routes from airports of between 3-5 million passengers per annum
will need to submit as part of the initial application stage very
strong evidence to demonstrate that funding of the route is a
'duly substantiated exceptional case'.[32]
The DfT should work with the European Commission
to clarify what a "duly substantiated exceptional case"
means in practice. Certainty on that point will allow UK smaller
airports handling between 3 million and 5 million passengers a
year to engage with the DfT's PSO policy, which could play an
important role in facilitating regional air connectivity.
27. We welcome the DfT's policy of promoting PSOs
both to support existing air routes and to start up new air routes.
As currently implemented and given its current level of funding,
however, this policy represents a marginal change to the smaller
airports market rather than a strategic intervention. For example,
although the maintenance of air routes from Dundee to London Stansted
and from Newquay to London Gatwick may be desirable, it is unclear
why those air routes should attract public subsidy while others
do not. PSOs could become strategically significant if they were
used to facilitate regional connectivity to an expanded hub airport
in the south-east.
Airports Commission
28. The Airports Commission is currently examining
the need for additional airport capacity in the UK. In its interim
report, the Airports Commission concluded that one additional
runway is needed in the south-east by 2030 and that a second new
runway will probably be required in the south-east by 2050 if
the UK is to retain international connectivity. The Airports Commission
has identified two options at London Heathrow and one option at
London Gatwick where new runways might be constructed.[33]
It will make its final report and recommendations to the next
Government in summer 2015.
29. The UK is currently suffering from a shortage
of hub airport capacity rather than a shortage of airport capacity
per se. We discussed the nature and importance of hub airports
in detail in our Aviation strategy report.[34]
Hub airports serve both their own catchment areas and incoming
traffic from other airports. The volume of traffic handled by
hub airports enables them to serve additional destinations and
to maintain high service volumes. The UK currently has one hub
airport, Heathrow, which has been short of capacity for a decade
and which is currently operating at full capacity. Constrained
capacity has damaged domestic air connectivity from smaller airports
to Heathrow, and the number of UK destinations served from Heathrow
has steadily declined over the past decade. In 2015, the only
smaller airports with an air route to Heathrow are Aberdeen, Belfast
City, Leeds-Bradford and Newcastle.[35]
30. Many smaller airports have replaced withdrawn
flights to Heathrow with flights to European hub airports. While
airport hubs in northern Europe—in particular, Amsterdam-Schiphol,
Frankfurt and Paris Charles de Gaulle—are attracting more
transfer traffic from the UK, Heathrow remains a key access point
to international and long-haul travel for many passengers from
smaller airports. In its interim report, the Airports Commission
identified that connections to other European airport hubs enhance
connectivity from the UK's regional airports but are not an adequate
replacement for links to Heathrow.[36]
Heathrow offers strong connectivity to a number of important markets,
notably North America, which is not replicated at other hub airports.
The value of regional links to Heathrow is demonstrated by the
fall in passenger numbers at smaller airports where such services
were withdrawn. For example, Durham Tees Valley airport experienced
a 75% reduction in passenger numbers following the withdrawal
of its Heathrow service in 2009.[37]
31. If the next Government were to implement a recommendation
by the Airports Commission to construct a new runway at either
Heathrow or Gatwick regional connectivity could be hugely increased.
Such a step change in regional connectivity would only occur,
however, if smaller airports were able to link to enhanced hub
capacity by securing slots at the expanded airport.
32. The CAA explained why airlines have withdrawn
services from UK smaller airports to Heathrow:
The lack of runway capacity at Heathrow …
has probably priced off services that generate a smaller profit
per slot. Since domestic services tend to be served with smaller
aircraft and cover shorter distances than other routes, they are
likely to generate a smaller profit per slot to airlines.[38]
Although an increase in hub capacity in the south-east
would deliver more slots for airlines, the economic barrier to
regional connectivity to smaller airports highlighted by the CAA
would still apply, because the slots would be released in tranches
to maintain demand. This means that the market alone may never
deliver sufficient slots to facilitate regional connectivity.
33. The CAA explained how new slots at an expanded
hub airport in the south-east would be released:
There is a collaborative process between airports,
NATS and the airlines to decide who is going to get the slots.
If the role is left with the airports, I would have thought that
capacity—slots—will be released at a pace that sustains
the overall economics, because it is not in any of the commercial
players' interests to drive down values.[39]
It seems likely that new slots at an expanded hub
airport in the south-east would be released in timed tranches
to maintain demand, which would underpin any bonds issued to finance
airport expansion.
34. The Minister set out his view that the market
would deliver sufficient slots to support regional connectivity
from smaller airports:
I am confident that the airlines based in our
UK major airports will see the opportunity of increased slots
being made available to get passengers who are currently going
to Schiphol, Charles de Gaulle, Frankfurt or Brussels into airports
in the London area. I think they will rise to that challenge.[40]
Paul Le Blond, Chair, Aviation Forum, Chartered Institute
of Logistics and Transport, was less confident that the market
would deliver services to smaller airports. He proposed ring-fencing
a certain number of new slots at an expanded hub airport for services
to smaller airports. He argued that ring-fencing "a double
daily service to a reasonable number of small airports would be
a very small proportion of any additional capacity created."[41]
John Spooner, Chairman, Regional and Business Airports Group,
stated that he had discussed with both Heathrow and Gatwick the
question whether slots for services to regional airports should
be ring-fenced.[42] He
added that the time at which flights arrive at a hub airport in
crucial in developing regional connectivity to support business
growth.[43]
35. The whole country will be able to share in
the economic benefits of an expanded hub airport in the south-east
only if that expansion entails airlines securing sufficient slots
to maintain services to smaller airports in the English regions,
Scotland, Wales and Northern Ireland. The way in which new slots
at an expanded hub airport in the south-east might be allocated
is currently opaque. The DfT should assess (a) how new slots might
be allocated; (b) whether some of those slots could be ring-fenced
for domestic services to smaller airports; (c) whether the Public
Service Obligation mechanism could be applied to new services
using any such new slots; and (d) what proportion of new slots
would need to be allocated to flights to UK smaller airports to
support regional connectivity effectively.
36. We recognise that the Airports Commission
has carefully defined the scope of its inquiry. Nevertheless,
we note that it has on occasion considered the role of smaller
airports. We encourage the Airports Commission to reflect
on the role of smaller airports in its final report. In particular,
it should consider how new slots at an expanded hub airport in
the south-east might be allocated to services to smaller airports
in the UK.
15 APD is not charged on flights involving aircraft
with fewer than 20 seats or on flights from airports in the Scottish
Highlands and Islands. Back
16
Q37 Back
17
Q37 Back
18
HC Deb 26 May 1999 col 183W [Commons written answer] Back
19
Finance Act 2000, section 18 Back
20
ABTA (SMA 057) para 22 Back
21
The Smith Commission, Report of the Smith Commission for further devolution of powers to the Scottish Parliament,
November 2014 Back
22
Cabinet Office, Scotland in the United Kingdom: An enduring
settlement, Cm 8990, January 2015 Back
23
Belfast International Airport (SMA 069) Back
24
Department for Transport (SMA 039) para 14 Back
25
PricewaterhouseCoopers, The Economic Impact of APD, February 2013 Back
26
Transport Committee, Sixth Special Report of Session 2013-14,
Aviation strategy: Government Response to the Committee's First Report of Session 2013-14,
HC 78, recommendation 29 Back
27
Department for Transport, UK government funding for Dundee to London Stansted air link,
6 June 2014 Back
28
Department for Transport, Government funding secures Cornwall to London air link,
27 October 2014 Back
29
Department for Transport, Regional airports asked to bid for up to £56 million funding for new routes over next 3 years,
22 January 2015 Back
30
Department for Transport, Airports with fewer than 5 million passengers per year: start-up aid,
22 January 2015 Back
31
Department for Transport, Start-up aid for airports with fewer than 5 million passengers per annum
(January 2015), para 1.6 Back
32
Department for Transport, Start-up aid for airports with fewer than 5 million passengers per annum
(January 2015), para 1.10 Back
33
Airports Commission, Interim Report (December 2013) Back
34
Transport Committee, First Report of Session 2013-14, Aviation strategy,
HC 78-I, chapter 4 Back
35
Department for Transport (SMA 039) para 30 Back
36
Airports Commission, Interim Report (December 2013) Back
37
Department for Transport (SMA 039) para 9 Back
38
Civil Aviation Authority (SMA 024) para 2.17 Back
39
Q42 Back
40
Q256 Back
41
Q42 Back
42
Q44 Back
43
Q44 Back
| 
