English airports cry foul over Scottish air tax competition

The promise to hand the Scottish Government control of APD is part of the UK government's devolution package for Scotland following the Smith Commission recommendations. The Scottish Government last week said it would halve the rate within the next Parliament and abolish completely "when the public finances allow".

But airports as well as tourism bodies south of the border are up in arms, fearing that it will create an uneven playing field for the aviation sector as passengers in the catchment areas of airports such as Newcastle, Manchester and Liverpool will simply drive across the border to rival airports in Scotland to avoid potentially huge APD costs.

Newcastle airport - the closest international airport to Scotland - calculates that the abolition of APD in Scotland could cost the north-east of England 1,000 jobs and £400 million gross value added within a decade. The airport also believes that it could lose around 10 per cent or passenger traffic, amounting to 400,000 passengers a year.

Newcastle airport's planning director Graeme Mason told the Sunday Herald that Scotland cutting or scrapping the passenger levy would create an unfair "cross-border market distortion" that would fester unless the UK government matches any reduction in APD south of the border.

But Chancellor George Osborne has so far dismissed the calls for the tax to be abolished in England and Wales, although he recently hinted that airports in the north of the country could be given help with marketing.

When Osborne appeared before a Treasury select committee earlier this month he admitted that the concerns of airports in northern England were "perfectly legitimate" and that the Treasury's own figures showed that Manchester - the UK's third largest airport - could lose as much as 3 per cent of its traffic, which amounts to 600,000 passengers a year.

Of course it is unlikely that a passenger in the north of England would go to the trouble of travelling to a Scottish airport rather than one closer to home to save £13 in APD on a return short-haul trip, but anyone travelling long-haul could potentially save themselves hundreds of pounds. The saving could be enough, for example, to undermine direct flights between Newcastle and New York that are set to launch in the May.

But in Scotland, the decision to devolve APD to Holyrood has been greeted with delight by airports, the tourist industry and businesses which have campaigned both before and since the independence referendum to get rid of the tax.

And many of those behind the campaign say that airports in England will eventually benefit from the abolition of the tax in Scotland, as this increases pressure on the UK government to follow suit and create a level playing field across the country.

Describing the move as a "huge step in the right direction" Gordon Dewar, the chief executive of Edinburgh airport, said that an extra one million passengers a year will travel through Scottish airports, the national economy will get a massive boost, jobs will be created and up to 30 new routes could be launched.

He hopes the 50 per cent cut in APD will be implemented by the Scottish Government as soon as possible as airlines are already beginning to plan their schedules for summer 2016. Airlines mulling whether to launch new routes between tourist draws such as Copenhagen or Barcelona might just be tempted to open new routes to Scotland instead once they see that APD is on the way out.

But Dewar played down the possibility that thousands of passengers will stop using airports in the north of England to take advantage of lower APD in Scotland. "I understand that fear but we think that only modest numbers of people will do that. The important thing is that we demonstrate the value of having no APD."

Dewar stressed that Scottish airports are not seeking a competitive advantage over English airports. The hope is that Scotland's experience will act as a beacon and eventually lead to the tax being dismantled south of the border, he said.

Exactly such a scenario was played out in the Netherlands. After introducing a form of APD in 2008 the Dutch government scrapped the tax within a year after Dutch residents started travelling in their droves to airports in neighbouring Germany to avoid the tax. Belgium, Denmark, Malta and Norway have also scrapped flight taxes for similar reasons.

That leaves the UK as one of only five countries in Europe to levy a passenger departure tax (the others being Austria, France, Germany and Italy) but the UK tax is, on average, five times higher than those other countries and is thought to be the highest in the world (see separate panel).

The London-based lobby group "A Fair Tax on Flying", a coalition of airports, airlines, travel and tourism firms, said it expected that a similar domino effect would happen in England and Wales once APD is phased out in Scotland.

There have already been calls from politicians in Wales to wrest control of APD. With the increasing likelihood of differing forms of the tax being established in different regions of the UK, it was possible that "market distortions" would damage the aviation sector in the UK for some time to come.

A spokesman for the group said: "We believe that it is essential a cut in APD anywhere should be matched, as soon as possible, across the whole of the UK so that the benefits are shared by all, and no part of the country is disadvantaged in any way."

Amanda McMillan, the managing director of Glasgow airport - and since December the chief executive of the new AGS Airports Limited, the Spanish-Australian partnership established to invest in Aberdeen, Glasgow and Southampton airports - also believes that a dismantling of the tax in Scotland could hasten the end of APD south of the border.

"Scottish airports do not compete substantially with airports in the north of England for flights. Our most energetic competition is in Europe where there is no tax at all," she said.

Stephen Leckie, chairman of the Scottish Tourism Alliance, said that anything that makes Scotland more accessible for potential tourists - in particular though lower fares and the launch of new air international air routes - will be warmly welcomed by the tourist industry of a country in a relatively remote corner of north-west Europe to which most tourists travel by plane.

The City of Glasgow, meanwhile, hoeps that seeing the back of APD will provide a significant boost to its valuable conference trade. The city's marketing bureau calculates that Glasgow has over recent years lost £25 million in conference business with organisers opting for cities which are cheaper to fly to. The leader of Glasgow City Council Gordon Matheson said that slashing APD will "help Glasgow compete on a level playing field with other international cities".

In 2011 the UK government was forced to slash APD on long-haul flights in Northern Ireland, to stem the flow of passengers travelling south to Dublin to take advantage of the Republic of Ireland's low and now abolished tax on flights. In 2013 this led to the Northern Ireland Assembly winning control of APD on long-haul flights from the province from Westminster.

Previously, Continental Airlines had only agreed to continue its flights between Belfast and Newark if APD was reduced.

Kevin Thom of the Scottish Passenger Agents' Association said he has "no sympathy at all" with airports in northern England if they lose passengers because of a reduction in APD in Scotland.

For decades passengers in Scotland have travelled to airports in northern England to take advantage of cheaper flights which the larger English airports could offer because of greater competition on routes to popular destinations and because of the reduced flying time on many routes. Now they might start to do the opposite, and the extra business would be welcome by all involved in the travel trade in Scotland.

When APD was introduced by Chancellor Kenneth Clarke in 1994 he justified the tax as a green measure that would contribute to a reduction in greenhouse gas emissions from aircraft, but critics claim that the tax takes no account of the efficiency of aircraft, with old fuel-guzzling planes being treated equally to the aircraft with the latest most efficient engines.

Thom believes that the high level of APD in the UK, allied with the fact that most European countries either have much lower flight taxes or none at all, has become detrimental to the environment as it encourages travellers to use make longer journeys involving more flying time. For example, transatlantic flights via non-UK hub airports such as Amsterdam or Frankfurt rather than London.

Successive UK governments have become increasingly addicted to the tax because the £3 billion annual APD revenues have never been ring-fenced to promote green transport.

Many are hoping that APD could be reduced by the Scottish Government by the end of the year, although some industry insiders say that the first quarter of next year is more likely as the next Scotland Bill will not complete its Parliamentary stages after the General Election in May. Once the bill is given assent, the Scottish Parliament will then have to lay down its own legislation to enact a reduction in APD from a date to be specified.

Over the last couple of decades many European countries, under pressure to be seen to be helping the environment, have experimented with some form of passenger departure tax. But in at least half of those countries the tax was withdrawn when governments realised that passengers were voting with their feet and travelling from countries where such taxes had been abolished or reduced.

A similar inexorable unravelling of the tax now seems to be underway within the UK and it is unlikely that businesses in England and Wales will continue to tolerate paying a tax that has been drastically cut in Northern Ireland and will now be devolved to Scotland.

Whose idea was it anyway?

Air Passenger Duty (APD) was introduced by John Major's UK Conservative government in 1994.

It was originally payable at just £5 for one-way domestic and European flights and £10 elsewhere but it has become a nice little earner for successive governments who have steadily increased the levy to the point that it is now the highest tax of its kind anywhere in the world.

Long-haul flights in the cheapest economy class are now charged between £67 and £94 per flight, depending on the distance travelled. Other classes of travel, including so-called premium economy class, are charged between £138 and £194 per long-haul flight while anyone travelling in a small plane is charged between £276 and £388 per flight.

The charge now brings in £3 billion a year into Treasury coffers of which £200 million is paid by passengers starting their journeys in Scotland.

A study published by PricewaterhouseCoopers in 2013 on "The Economic Impact of APD" concluded that the UK economy would be boosted by £16bn within three years of being abolished and that around 60,000 jobs would be created within seven years. The report also concluded that lost Treasury revenue would be offset by increased receipts from other taxes.

Last year Chancellor George Osborne announced that the tax's two highest long-haul tax bands will be abolished from April 2015. He also said that APD on economy flights for children under 12 will no longer be charged from May 2015 and for under-16s from March 2016.