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Aviation Taxation: Air Passenger Duty (APD) and EU ETS: a Caribbean perspective

David Jessop

3 November, 2012

Air Passenger Duty

Some recent history

  • The UK consultation process: Caribbean participated fully
  • It proposed a widely supported two band solution
  • Position had significant support within the Treasury
  • All evidence is that the recommendation to re-band Caribbean was set aside by Chancellor
  • Inflationary increase in April was not evenly applied

Recent developments

  • In the Caribbean a bruising exchange at the UK Caribbean Forum
  • The issue is politically alive: debate in the House of Commons
  • Interest of officials at the FCO and the Treasury in reopening the Caribbean case
  • APD damaging UK relations with the Caribbean
  • Caribbean community active but require direction and support

The impact

  • UK CAA indicated decline in UK Traffic to Caribbean of 10.7 per cent between 2008 and 2011 compared to a 1.1 per cent overall increase in the UK’s international passenger traffic
  • The UK Office for National Statistics (ONS) figures also indicate that Caribbean arrivals are declining, with a 7.6 per cent fall in visits by air to the region by UK residents between 2008 and 2011.
  • Airlines indicate APD has damaged leisure and VFR market and are reducing Caribbean services
  • Other charges and taxes by airlines and Governments in the region have increased
  • Difficult to disaggregate cause without detailed study

APD is a political issue

  • Resolution for the Caribbean can only be political
  • Requires high level dialogue
  • A solution requires political agreement
  • Political pressure from the community in marginal seats important

The next steps

  • A detailed impact study
  • Wider political awareness of the low cost of re-banding the Caribbean
  • Re-energising the Diaspora around simple messages (but who pays)
  • Wider awareness of effects of APD among all Caribbean ministers
  • Linking the issue in the UK with Caribbean development

EU Emissions Trading Scheme (EU ETS)

Present status

  • A cap and trade scheme for charging airlines for carbon emission on a per flight basis
  • At present no cost
  • Airlines' first EU deadline in April 2013 to pay for their emissions.
  • Carbon trading price so low at present as to have no impact
  • But some airlines have added a figure to their fuel surcharge
  • Causing serious international concerns

Reaction

  • ICAO under pressure to devise a global alternative to the EU scheme
  • Weighing three market-based approaches to cut aviation emissions.
  • Draft plan by March 2013for approval at autumn 2013 assembly.
  • IATA wants a global deal through ICAO
  • Bill in US Congressto ban US airlines from complying with the EU ETS
  • China, struck a deal to work with the European Union to cut overall greenhouse gas emissions
  • Unclear whether further development of Chinese carbon trading would include aviation emissions.
  • China Airbus A330 deal worth US$14Billion frozen

Other developments

  • The European Commission and Australia agreed a process to link EU ETS and the Australian emissions trading scheme from July 2018.
  • Negotiations with Switzerland
  • Domestic national or regional cap-and-trade systems are also being implemented or discussed in the US, Canada, South Korea and New Zealand.
  • The EU looking at how to work with developing countriesmore generally on new sectoral crediting mechanisms

Implications

  • It will not go away
  • Scheme will eventually have a cost
  • Can the Caribbean benefit as a low carbon emitter
  • Will countries like the UK retain existing taxes like APD

Temple Chambers

3-7 Temple Avenue

London EC4Y 0HP

Tel: +44 (0) 207 583 8739

Fax: +44 (0) 207 583 9652

E mail:

Website:

Air Passenger Duty (APD) and the Caribbean

Key issues for the Caribbean

  • The four band system is discriminatory. It unduly favours the United States, a competitor destination.
  • The cost to the UK Government of re-banding the Caribbean to the same level as US would be approximately £18.6m in 2012 out of total APD revenue of £2.9bn.
  • St Lucia’s Prime Minister, Dr Kenny Anthony, wrote as Chairman on Caricom to the UK Chancellor in July 2012 highlighting the damage that APD is doing to Caribbean tourism, the Caribbean community in the UK and the UK Caribbean relationship.
  • There was a10.7 per cent decrease in passenger traffic between the UK and Caribbean between 2008 and 2011 compared to a 1.1 per cent overall increase in the UK’s international passenger traffic over the same period, indicating that APD is having an disproportionally negative effect on the Caribbean
  • A recent study by the Caribbean Tourism Organization (CTO) confirms fears that APD is squeezing the Caribbean’s UK market British Airways has reduced flights to the Caribbean due to rises in APD
  • The Caribbean is the most tourism dependent region in the world. At a time when the Caribbean is experiencing low GDP growth and high levels of debt and food and energy prices are rising, re-banding the Caribbean could provide a boost to the Caribbean economy in a way that is both valuable and effective.

The four band system is discriminatory

In 2009, with the introduction of the four band system, the British government placed the Caribbean in Band C because Caribbean capitals are just over 4000 miles from London. However, because Washington DC is just under 4000 miles from London, the whole of the USA, including Los Angeles (over 5,300 miles from London) and Hawaii (over 7,200 miles from London), were placed in Band B. South Florida a competitor destination benefits from this. The APD cost for a family of four flying to the Caribbean is currently £324 in economy, whilst the equivalent APD cost to the United States is only £260.

Cost to the UK Government of re-banding the Caribbean

New research undertaken for the Caribbean Tourism Organisation (CTO) shows that if the Caribbean alone were to be re-banded at the same level as the US, the cost to the UK Treasury would be £18.6m out of an overall APD take by the UK Treasury of £2.9bn in 2012. The British Government has already demonstrated that it can make exceptions and adjust the rate of increase between bands.

The 2012-13 inflationary increase was not evenly applied. The lowest band, band A (short haul within Europe) did not increase at all, band B (which includes the US) increased by 3.1%, Band C which includes the Caribbean, by 2.5%, and the furthest band D, was increased by 2.2%. The figures were said to reflect a process of rounding. The measure took the UK Treasury a further step away from consistency.

APD damaging UK relations with the Caribbean

St Lucia’s Prime Minister, Dr Kenny Anthony, wrote as Chairman of Caricom to the UK Chancellor in July indicating the damage being done by APD to Caribbean tourism and the Caribbean community in the UK. He noted that despite the commitment by the UK to “assisting the region in mitigating any deleterious effects that the application of the APD may have on its economies” , made during the January 2012 UK-Caribbean Forum by the UK Foreign Secretary, nothing has been done and the issue remains “a continuing sore in the UK Caribbean relationship”.

Whilst recognizing, the UK’s fiscal challenge in raising revenue, Dr Anthony made clear the Caribbean’s view that APD “should not be imposed unfairly, or at the expense of the Caribbean economy (or its) community in the UK”.

He highlighted the fact that the Caribbean is the “most tourism dependent region of the world” and recalled that Prime Minister Cameron had acknowledged the tourism sector as developmental and one that could contribute to growth at a time of economic difficulty.

Decrease in passenger traffic between the UK and Caribbean

Data from the UK’s Civil Aviation Authority (CAA) makes clear that international passenger traffic between the UK and the Caribbean decreased by 10.7 per cent between 2008 and 2011. This compares with a 1.1 per cent overall increase in the UK’s international passenger traffic over the same period. The UK Office for National Statistics (ONS) figures also indicates that Caribbean arrivals are declining, with a 7.6 per cent fall in visits by air to the region by UK residents between 2008 and 2011.

Recent analysis by the Caribbean Tourism Organisation (CTO) shows that UK arrivals to the Caribbean fell by 10 per cent in the first quarter of 2012 in comparison to a 3 per cent fall in UK holiday departures worldwide in the same period. Almost all the decline has been in the lower end price sensitive part of the market. The Dominican Republic saw almost 13,000 fewer visitors and Cuba 11,000 fewer from the UK for example.

APD is clearly affecting travel to the Caribbean more acutely than to other foreign destinations.

Caribbean Diaspora travel from the UK declining

The UK Office of National Statistics (ONS) Travel Trends Survey estimates that in 2010 there were 115,000 Visiting Friends and Relatives (VFR) visits from the UK to the Caribbean, staying a total of over 3.5 million nights and spending £97 million. ONS data also suggests that the decrease in VFR visitors to the Caribbean from 2009 to 2010 was 3.4 per cent. If the VFR visits have reduced by 3.4%, the value of lost VFR business using ONS 2010 statistics on average spend would be approximately £3.4 million. This suggests that a 1 per cent reduction in VFR traffic equates to £1 million in lost revenue.

One London based VFR specialist travel agent in the UK has indicated that since the increases in APD, their VFR bookings to the Caribbean have decreased annually at a rate of around 3 per cent and that sale of package holidays as opposed to just flights to the VFR market have reduced by around 50 per cent. ONS data suggesting a decrease in VFR visitors from 2009 to 2010 as noted above supports the figure suggested by the travel agent.

VFR travel agents have also indicated that they have seen a change in travel patterns since 2009, with VFR clients tending to travel on their own rather than as a family unit as before, suggesting that APD is having not only a financial impact on the Diaspora but that it is also having a social impact which will arguably have an effect on the UK-Caribbean relationship where it relates to the Diaspora.

Airlines reducing flight s to the Caribbean

British Airways (BA) has reduced the number of flights to Caribbean. The airline has confirmed that it has switched flights from the Caribbean to the US this year because of the impact of APD on demand. BA planned growth to the region two years ago, announcing in 2010 new routes, and adding an extra aircraft to its schedule for 2011. However, BA took three services from the Caribbean this summer to add extra Orlando services making clear that the decision was due to increases in both APD and fuel, as well as a fall in demand. BA will switch further capacity in October to start a three-times-a-week service to Las Vegas from Gatwick.

According to Colm Lacy, BA’s Head of Commercial at Gatwick, “The Caribbean is unfairly penalised.” He also said, “APD has damaged the leisure business.” BA has noticed that VFR (visiting friends and relations) passengers are flying less frequently to the Caribbean.

Re-banding would boost the Caribbean economy

The Caribbean is the most tourism dependent region in the world. At a time when the Caribbean is experiencing low GDP growth and high levels of debt and food and energy prices are rising, re-banding the Caribbean could provide a boost to the Caribbean economy in a way that is both valuable and effective.

As taxes on air travel and tourism are extra-territorial in effect, their impact on development should be fully considered. Tourism is the largest contributor to economic growth in the Caribbean: Travel and Tourism contributed an average of 14.7 per cent to of all Caribbean GDP in 2011. However in countries that are tourism dependent this figure rises to as much as 74.2% of GDP (Antigua and Barbuda). Supporting a reform in APD for the region could boost tourism, which would in turn help the Caribbean economy which is at a fragile state.

26.10.12

APD is most affecting the Caribbean community in the UK

Specialist travel agents that deal with Diaspora travel suggests that APD particularly affects the ability of the Caribbean Diaspora to travel as a family unit. This is evidenced by reductions in services to key cities such as Kingston, Jamaica that relied on Diaspora travellers to keep services viable.

2.11.12