Posted by: joachim in Policy on November 4th, 2010

UK airport departure taxes have been increased on 1 November 2010. The government has cited environmental reasons for the rise in order to hit aviation emission targets, and further rises are planned for 2011. But will the increase result in a reduction in carbon emissions? We think not, and here is why.

The Rationale

The naive rationale is that an increase in passenger duty on flight tickets (with higher taxes on longer flights) will force an increase in ticket prices and subsequently dampen the demand. As a result, airlines will deploy fewer planes, and therefore carbon emissions will be reduced.

The design of the UK departure tax and the increase in November 2011

The airport departure tax introduced by the UK government is only indirectly linked to the carbon emissions through bands according to mileage. Economy passengers pay half the price of passengers in other classes. The logic behind this discount is a bit obscure. Maybe the thinking behind it is that business class passengers use up twice the space? Or maybe it was done under the mantle of fairness.

In November 2010, airport departure tax was increased by between £1 (for short-haul economy) and £60 (for long-haul business and first class) per passenger. The relative tax increase in economy and business are the same. E.g. the departure tax on a ticket from London to New York increased by 33% in both economy and business class. No distinction is made between different non-economy class tickets, e.g. business and first class.

Tax band (distance in miles) < 2000 2001 – 4000 4001 – 6000 > 6000

Example: London to …

Berlin New York Miami Hong Kong
 
Economy

ADT pre Nov 2010

£11 £45 £50 £55

ADT post Nove 2010

£12 £60 £75 £85

Change in ADT %

9% 33% 50% 55%

Return ticket price

 £110  £380  £400  £700

ADT % of ticket price

11% 16% 19% 12%

Ticket price increase

0.9% 4.1% 6.7% 4.5%

Number of seats (typical)

114 180 180 180

Tax revenue (per flight)

£1,368 £10,800 £13,500 £15,300
 
Business

ADT pre Nov 2010

£22 £90 £100 £110

ADT post Nove 2010

£24 £120 £150 £170

Change in ADT %

9% 33% 50% 55%

Return ticket price

 £390  £1,600  £2,200  £2,600

ADT % of ticket price

6% 8% 7% 7%

Ticket price increase

0.5% 1.9% 2.3% 2.4%

Number of seats (typical)

15 70 70 70

Tax revenue (per flight)

£360 £8,400 £10,500 £11,900
         
First        

ADT same as business

       

Return ticket price

n/a £2,700 £3,200 £4,040

ADT % of ticket price

  4.4% 4.7% 4.2%

Ticket price increase

  1.1% 1.6% 1.5%

Number of seats (typical)

0 14 14 14

Tax revenue (per flight)

£0 £1,680 £2,100 £2,380

Likely Effects

Short-haul Flights

On short-haul flights, the departure tax has risen by only 9%. On a typical economy return flight ticket with a full-service airline at £110, the tax increase results in a benign increase of 0.9%. For business class tickets the effect on the ticket price is even less with just 0.5%. However, this is assuming that the airline will pass on the tax increase to the passenger. Many low-cost airlines offer ticket prices (including taxes) that are well below the tax levy. They can easily absorb the tax increase by increasing prices in ancillary revenue streams. I.e. in order to keep ticket prices low, they may increase prices for drinks, scratch cards or hotels. Since the ticket price has not increased, the decision whether or not to fly is not affected by the tax hike. Because the tax is not transparent to customers, the tax rise will probably not change their behaviour either.

Long-haul Flights

Because of relatively high ticket prices for business and first class tickets, the impact of the tax increase on those is (in relative terms) less than on economy tickets. We have examined prices for non-flexible tickets, 3 months advanced purchase and found that on a flight from London to Hong Kong, ticket prices of economy tickets would increase by 4.5%, business by 2.4% and first class by just 1.5%. Hence, the classes (business and first) that provide most of the revenue for the airline are least affected by the tax increase. If the aim of the departure tax was to decrease demand in flights, it would have to target the profitable section rather than the economy class passengers.

Luckily, cost-conscious economy class travellers have an alternative: They can use a short-haul flight (subject to a benign rise of 0.9%) to hubs like Amsterdam or Zurich that have lower departure levies. However, this would lead to an increase in carbon emissions rather than a reduction.

Conclusion

The recent increase in the UK departure tax is ill-designed to trigger any reduction in carbon emissions. Thanks to lower effective tax rates (tax paid as a percentage of the ticket price) on business and first class travellers, it is ensured that demand in those tickets (that are so important for the profitability) will not ebb away drastically, thus optimizing tax revenues. Two other effects are predicted: Use of alternatives via continental hubs and an opaque rise in anicllary costs within the realms of low-cost airlines. None of those effects, however, will result in a reduction in carbon emissions.

If the government was really committed to combating climate change, surely, it would have introduced measures that directly relate to actual carbon emissions or directly influence customers (rather than through an airline).

 

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