- How @SouthwestAir and @JetBlue would be affected by a tariff system similar to @BritishAirways:
- Britain has the highest explicit tariffs on air travel of any nation, and this is set to increase in November.
- How US travelers might react to explicit tariffs on air travel in the US:
Successive British Governments have not significantly increased the size and scope of Heathrow, Britain's largest airport, even though the travel industry has called for such expansion for decades. Capacity at Heathrow is nearly reached. Rather than increase supply, British Governments have aimed to lower demand and raise revenue at the same time-by instituting tariffs to cover security, airport operations and to combat emissions (and hence limit impact on climate change). Today Britain has the highest explicit tariffs on air travel of any nation, and this is set to increase in November.
"These tariffs are highly regressive, hitting cut price airlines and their passengers most significantly." In August, I interviewed 95 economy travelers on British Airways, Britain's largest air carrier, to see whether they were aware of these tariffs and if so what they thought of them. Most were unaware of the tariffs but many were prepared to play their part in paying for the environmental costs of their travel. Some were concerned that this was unfair since other forms of transport were not equally affected, and a majority thought further increases in tariffs might lower the chances they would fly in future. And these tariffs are highly regressive hitting cut price airlines and their passengers most significantly, since tariffs are set at a fixed rate, undermining the marginal cost pricing of bargain hunting vacationers.
Since US often follows EU green tax initiatives this research provides some insights as how US travelers might react to such tariffs in US.
Air travel is set to increase globally and in the UK in particular over the next twenty years. The UK's Department of Transportation projects that if not constrained by airport capacity, traffic could grow from 241 million passengers annually in 2007 to 465 million in 2030. Global estimates suggest air travel could double every twelve years. However, there in increasing concern in the British transportation department over the industry's environmental impact, which is estimated globally to contribute 4.6% to total human greenhouse gas emissions.
In 1994, the British government implemented the first "environmental tax" on airline travel with the Air Passenger Duty (APD).This November, the tax regimen will be expanded substantially to achieve what the British government refers to as the "double dividend:" increasing government revenue and deterring environmentally damaging behavior. A summary and analysis of the literature suggests that airline prices are fairly price inelastic. Perhaps unsurprisingly, the demand for business travel in particular is affected little by price changes. While pleasure travel is more price-sensitive, it also showed resilience to price change. Since there are few alternatives to long-distance air travel in particular, demand for longer flights was found to be particularly price inelastic. Price increases over the short run had little impact on consumer behavior. This suggests that the air tax may be successful in raising government revenues but it will be much more difficult to change passenger's behavior. So increasing tariffs is expected to slightly lower demand (or depress the speed that demand increases) and significantly raise revenue. But there is a risk to the airline industry, which supports more than 500,000 jobs domestically and enables much of the UK's business success.
UK: A leader on green travel taxes
The UK Government explained earlier this fall that they expect British airports to be full by 2030. The UK Department of Transport said they expected the number of travelers flying through Britain to increase from 211 million in 2010, to 335 million in 2030. The aviation industry wants new runways and expanded capacity, Carolyn McCall, CEO of budget airline Easyjet said "Given that any new runway would take over ten years to plan and build, time is running out for the Government to get a grip on aviation policy". But environmental campaigners have prevented most new runways from being developed-and capacity at Heathrow, London's premier hub, is already at 98%. Nearly all the increase in demand after 2030 will be filled from other regional British locations and from European hubs. The British Air Transport Association claims that existing capacity constraints will cost the UK economy over $10 billion over the next 20 years, and with no new runways planned for the South East of England, impact on the economy will be even worse after 2030.
Theresa Villiers, the UK Government Aviation Minister told the Times newspaper that "We are committed to developing a new policy framework for aviation which supports economic growth whilst also reflecting the environmental impacts of flying….We are currently seeking views from the industry on the key issues we need to address".
With 34 million tons of carbon dioxide (UK's travel accounted for 6.4% total CO2 emissions), a key greenhouse gas, attributed to British aviation last year, and like all western nations Britain has a budget crisis, the UK government has seen an opportunity to limit pollution and raise a lot of revenue, and does not appear to be worried about the impact on economic growth.
In rich nations, travel is seen as a necessary part of maintaining social networks and business interconnectedness over growing distances. Americans add low cost travel to a host of other expectations. Even in the UK and Europe, air travel is not longer seen as a privilege reserved for a wealthy few. A recent study demonstrated that despite the fact that European cities are closer and better connected by public transportation, air travelers in Europe are no more likely than US or Australian travelers to modify their travel plans based on the cost of flying.
But US energy and transportation interests have been more successful than their European counterparts at limiting the tax rates on gasoline and other fuels, which are far lower in the US than in Europe. No direct levies are raised on air travel in US. But unlike domestic issues such as gasoline for cars and heating, there is international competition for travel into and out of Europe and US airlines do not pay the same tariffs. A quick comparison of US and European carriers flying the popular London-Miami route demonstrates the challenge that British carriers already face. This preliminary analysis suggested that prices across carriers were quite close. Slight differences could probably be accounted for by differences in services offered, customer's loyalty to a particular brand, or differences in the number of passengers already registered at the time of flight booking. The continuity in price belied a different tax environment-taxes on flights in and out of the UK were higher than those in the US. British airlines have either made substantial productivity gains where their US counterparts lag behind, or the US companies are simply turning a much larger profit on these transatlantic flights. The current state of affairs hurts consumers across the US and Europe, and places a substantial burden on British airlines.
But while US interests benefit from lower taxes today that may not last. European nations are the first to try new taxes, so it is worthwhile to analyze what is being contemplated and enacted in Europe, because what starts in Europe often comes to California and then the rest of US.
I analyze one specific set of the taxes added to air travel of the major British carrier, British Airways, and interview BA passengers about their attitude to toward these tariffs.
How many flyers were aware of the tariffs at their current levels? Since many passengers may not be in favor of the tariffs, I decided to ask the flyers who had bought the tickets.
To assess passenger knowledge of tariffs, I asked passengers checking in for international economy flights to the United States to answer our survey on ticketing costs. 116 passengers were approached, 21 declined to participate, and 95 answered my questions. The passengers who chose to participate were informed of the cost basis of tickets with the card (see Appendix). The more detailed questions are found in the appendix below.
Appendix). The more detailed questions are found in the appendix below.
A small minority (15%, 14/95) of passengers claimed to be aware of the approximate proportions of the charges making up their total ticket cost. A higher number (32%, 31/95) claimed to be aware of the different categories of charges but 30% were not sure of the proportions of those charges.
Perhaps more interesting is that fewer than half (41%, 40/95) of the passengers thought that customs fees, immigration and security costs should be paid directly by the travelers. As one respondent put it, "we pay general taxation for security don't we?" Sixty-three percent (62/95) thought it reasonable for them to cover airport services directly.
While only a third of the travelers (33%, 32/95) thought that they should personally be paying for the environmental costs (greenhouse gas offsets) of flying, 52% (51/95) suggested this would discourage air travel and curb emissions.
Only 15% (14/95) thought that all passengers should pay the same tariffs regardless of class of travel or ticket cost. 73% (72/95) indicated that more expensive (particularly business and first) tickets should have larger fees than economy tickets. This suggests that most travelers support the current practice of charging higher tariffs to business/first class.
Passenger's Perceptions and Knowledge
Passengers appear to know that tariffs exist, but are not aware of the size of the tariffs. Passengers seem to believe that tariffs will depress travel, but, of course, all of them were traveling. The most insightful comments appeared to be about who should be funding the activities claimed to be supported by the tariffs and other costs at Heathrow. Implicit in the answers is knowledge that railways and bus services do not charge tariffs for security or environmental costs, and hence the implied question, so why should airlines? The explicit answer of a few of the people who discussed this point, is that a summer holiday is viewed as a luxury and hence the Government will tax it more.
Nearly three quarters (73%, 72/95) said that if the tariffs were increased further (by £60, $95) it would affect their decision to fly. This answer can be interpreted in several ways. It could mean a tipping point has been reached, suggesting that demand for airline tickets is set to become more price elastic at the proposed new tariff level. But it also could be interpreted as a protest or warning, that travelers are becoming more angry by these tariffs. Additionally, since passengers are generally unaware of tariff levels, they may assume that price hikes due to bolstered tariffs were a natural rise in costs and continue to fly anyway. Low knowledge levels could also play a role, and the fact that these passengers were flying despite Britain's already high environmental tariffs costs support this idea.
A third (32/95) thought it fair that they directly paid for the environmental costs of their tickets (in some sense to cover the costs of those emissions). People also separate their green lifestyle at home from their vacation habits, leading Europeans who compost and recycle to book the annual vacation to Miami without a second thought. Perhaps the social benefits of the summer vacation may considerably outweigh any environmental angst about the travel.
Better service? Higher Tariff.
If demand were to shrink due to tariff increases, it is economy pleasure travelers who will probably be hardest hit, affecting not only airlines but the entire tourism industry. There is strong support from nearly three quarters of economy travelers for levying higher taxes on business and first class travelers. This is in line with the current system of taxation, which results in the more expensive ticket consumers paying more in taxes. But is this just another revenue raising ruse, hiding behind a desire on government's part to appear to be green? Most business travelers will not be paying for the tickets themselves and their companies probably deem the travel a necessary cost of business.
Even if companies are cost conscious, it is likely that the tariffs on business travelers have very little impact on their decisions to fly, given they pay a lower percentage of their total ticket cost (tariffs are six percent of average ticket cost) as compared with economy class traveler (tariffs are 10.8 percent of average ticket cost) . So these tariffs are regressive, and discourage economy class travelers, particularly those who fly infrequently, from flying.
These tariffs also harm low cost airlines like Ryanair and easyJet and not just their passengers. These airlines became famous in the 1990s for pricing some seats at close to marginal cost, and not just as an occasional promotion. Often as the travel date approached they cut prices very low, selling a few tickets for as low as 5 pounds ($8). With fixed rate tariffs, the tariff became the main cost of the ticket, limiting the bargains these airlines could offer. And since the plane was flying anyway, these marginal flyers contributed nothing to emissions (save the additional fuel required to cover their weight and that of their baggage, which must be vanishingly small by comparison to the total weight of the aircraft).
One wonders how again American counterparts, Southwest and Jet Blue, would be affected with a similar tariff system. Poor British families already reeling from the economic downtown, increasingly cannot afford to fly to somewhere sunny for a summer vacation. Meanwhile corporate employees often benefit from cheap frequent flyer miles tickets when traveling for leisure (interestingly BA frequent flyer "free" tickets still charge the same tariffs as normal tickets of the class redeemed).
Much remains to be answered, and many questions should be posed to travelers in further surveys. For now, it appears that the British summer holiday has joined smoking and drinking as sins to be disapproved of by the British Government, with taxes set to inexorably rise.
Questionnaire for tourists flying economy on BA
Below is a typical cost charge for a British Airways flight from London to Miami, a favored route amongst British travelers. The ticket costs include various Government charges and various airline charges. We decided to ask travelers buying these flights how aware they were of the tariffs and whether they thought them justified.
Good Morning, we are conducting research for a study on airline ticket costs and tariff components. Do you mind if I ask you a few questions about your ticket purchase?
1. Do you know the rough breakdown of the flight cost, taxes, fuel and other airline charges which determine the total cost of your ticket?
2. An economy ticket to Miami costs around £550. In addition to the basic cost of the ticket, there are surcharges of about £300. These include about £125 in taxes and £165 in fuel charges. Did you know about these extra charges?
3. Some of the smaller fees [see sample ticket and price breakdown below] are for things such as customs, immigration services, and security in US and UK. Do you think these should be covered by you as a special traveler tax or paid from general taxes collected from all people in Britain?
Of the £125 in taxes, the largest charge is a £60 air passenger duty, which aims to cover the environmental costs of flying. This charge is meant to curb greenhouse gas emissions and combat global warming. Do you think this tax will be effective in discouraging air travel and curbing emissions? Do you think passengers should have to pay for this? If the tariffs were increased, by say another £60,  would that affect your decision to fly (buy this ticket)?
1. The Passenger Service Charge, the second largest tax charge at £30.63/flight, covers the costs of the airport services. Do you think that cost should that be covered by individual travelers or by general taxation?
2. Not all tickets are charged the same tariffs. The tickets below demonstrate that passengers in premium economy and business class pay higher tariffs than economy passengers. Do you think all passengers should pay the same tariffs or do you think people with more expensive tickets should pay more?
Sample Flight Itinerary
Roger Bate is the Legatum Fellow in Global Prosperity at AEI