Air Passenger Duty reforms: is there a sting in the tail for the airlines?

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Many of the more elderly readers may remember from their school days the story of the Trojan Horse, which gave rise to a comment by the Greek playwright, Sophocles:

Foes’ gifts are no gifts: profit bring they none.

 

Could this be the case with the Chancellor’s announcement of the removal of Air Passenger Duty for children under 12 from May 2015, and the extension to children under 16 from May 2016? As part of the process of budgeting, Treasury carries out a simple impact assessment, to understand how much any tax change will either cost or benefit the UK government. Their calculation shows that the change next year will cost £45 million in reduced tax take to the UK, rising to £85 million in the following year when the age threshold is extended. However, they also predict that the change will encourage some additional air traffic, but interestingly, believe that this will only add some £5 million to the tax take. On the basis that around 80% of air travellers pay the lower rate and 20% the higher rate, this means that Treasury is only predicting that the changes will result in around an additional 320,000 passengers, or a 0.32% increase. Whilst Treasury may just be adopting a cautious approach, this doesn’t really seem to support the industry’s view that APD reductions will lead to increased demand – so let’s hope that the industry is right, and that the Treasury economists are wrong!

 

It could easily have escaped most people’s attention that as well as the reduction in child APD which was announced, the Chancellor also made comments about the airline industry’s pricing policies, and these comments may amount to the nasty sting in the tail for airlines.

 

What the Chancellor actually said was:

And just as we demand that falls in oil prices should be passed on to people at the pumps, other fuel price surcharges should also come down.

We’re going to require airlines to list the charges separately from taxes on tickets.”

 

It appears that Treasury have become concerned that airlines are blaming governments for a lot of the cost of travel – and whilst this may be partly true, it is also true that airline pricing policies are not always completely transparent.

 

Over the past 10 years, the traditional scheduled carriers in particular have drifted into a practice of charging a base price for most journeys and then adding on numerous supplements, all lumped together under a generic heading of “taxes, fees and charges”. For some time, the concept of a base price + a so called “fuel surcharge” was popular with the scheduled carriers, even though it is difficult to understand how any airline could fly anywhere without fuel, and as the cost of fuel is so essential to the flight, surely it should form part of the basic price?

 

With the falling cost of oil, the scheduled airlines seem to have moved away from this practice, but doing some research this week, there still seems to be a habit of selling at a low fare, with a lot of additional charges. Whilst 10 years ago, there was a logical reason for this, as agent commission was generally a percentage of the ticket price, and a lower ticket price meant a lower cost of commission. On the basis that travel agent commissions are now rarely paid by airlines, it is a little difficult to understand why this practice continues.

 

Doing a random search with some major flag carriers this week, it was interesting to see what is still included under the “taxes, fees and charges” heading. I found some very good value seats from Manchester to Moscow with one carrier, at a return price of £238.89. that price was made up of £71 for the tickets – can anyone really operate that cheaply? But there were then £167.89 in taxes fees and charges, of which £74 was described as a “Carrier imposed charge” – This charge is based on flight duration and applies to all passengers, including children and infants travelling on [our] operated international and domestic services. Forgive my cynicism, but shouldn’t that just be part of the ticket price? To be fair, that airline did show in separate boxes the “government, authority and airport charges” and the “carrier imposed charges”.

 

Another major carrier was selling return flights from Manchester to Moscow for £462.30, made up of £261 ticket price, and £201.30 taxes fees and charges, including £136.80, termed an “International/domestic surcharge”. Again, that sounds like simply part of the ticket price to me.

 

Now that airlines do generally show the full price to be paid at the search stage, it is difficult for government to make the case that consumers are suffering any real detriment from prices being broken down in this way, but equally, it does seem to amount to an unnecessary level of confusion.

 

If the Chancellor has his way, and these charges are either incorporated back into the ticket price or broken out separately from genuine taxes, it is likely that airlines are going to have to incur system costs in making those changes. The old practice of adding fuel surcharges may also be much more difficult to reintroduce, even if the current trend of falling oil prices is reversed.

 

As a result, any gains made from increased demand arising from reduced APD could be at least partly offset by the additional costs of compliance incurred by the airlines. Life is never simple!