- If demand for airline travel falls with tariff increases, it is economy class holiday-makers who will be hit the hardest
- Why new airline tariffs will profit the government, hurt poor British families reeling from economic downturn
- Tariffs on airline travel in the UK allows US carriers to inflate prices, pass substantial burden to British travelers
In 1994, the Major government implemented the first ‘environmental tax’ on airline travel.Tariffs are likely to increase in the near future, to increase government revenue and deter increases in greenhouse gas emissions. But even with existing tariffs, air travel is set to increase in the UK over the next twenty years. The Department for Transport projects that, if not constrained by airport capacity, traffic could grow from 241 million passengers annually in 2007 to 465 million in 2030. Of course airport capacity is constrained. The British Air Transport Association claims that existing limited capacity 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.
Perversely this is viewed as good news by the government, because it provides an excuse to increase revenue by slowing demand. Air travel is fairly price inelastic. So existing tariffs only slightly depressed the speed with which creased demand raised significant revenue. UK industry wants new airport capacity and the UK government wants more revenue, and although both are possible, only the latter will occur.
"UK industry wants new airport capacity and the UK government wants more revenue, and although both are possible, only the latter will occur."
No direct levies are raised on air travel in the USA. Yet there is international competition for travel into and out of UK, and US airlines do not pay the tariffs. A quick comparison of carriers flying the popular London- ami route demonstrates the challenge that British carriers already face – the prices across carriers were quite close. Slight differences could probably be accounted for by different services provided, customer loyalty or differences in the number of passengers already registered at the time of flight booking. The current state of affairs hurts consumers by allowing US carriers to inflate prices and also places a substantial burden on British airlines.
I wondered how many BA flyers were aware of the tariffs which start at £60. Since many passengers may not be in favour of the tariffs, I decided to ask the flyers who had bought the tickets.1 Last August, I surveyed passengers checking in at Heathrow airport for international economy flights to the USA: 116 passengers were approached, 21 declined to participate, and 95 answered questions.
Most passengers know that tariffs exist, but are not aware of the size. Passengers seem to believe that tariffs will depress travel, and implicit in the answers is the knowledge that railways and bus services do not charge tariffs for security or environmental costs, which prompts the question, ‘ why should airlines?’ Nearly three quarters of respondents said that, if the tariffs were increased further (by the proposed £60), it would affect their decision to fly. Perhaps a tipping point has been reached, suggesting that demand for airline tickets has peaked, but this answer may also be just a warning and protest against the tariffs.
If demand falls because of tariff increases, it is economy class holiday-makers who will probably be hardest hit, affecting not only airlines but the entire tourism industry. Tariffs harm low cost airlines such as Ryanair and easyJet. For these airlines, the tariff has often become the main cost of the ticket, limiting the bargains available. And, since the plane was flying anyway, these marginal flyers contributed almost nothing to emissions.
Poor British families, already reeling from the economic downturn, increasingly cannot afford to fly. There is strong support from nearly three quarters of economy flyers for levying higher taxes on business and first class tickets. This is in line with the current system of taxation, which results in the more expensive ticket consumers paying more in taxes. But most business flyers will not be paying for the tickets themselves and their companies probably deem the travel a necessary cost of business, and the tariff is far lower as a percentage of the ticket cost anyway.
Much remains to be answered, and many questions should be posed to travellers in further larger 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 rise inexorably.
Roger Bate is the Legatum Fellow in Global Prosperity at AEI