Flight Subsidies - Myths and Facts

Whilst I have always believed that the aviation industry should cover is external costs just like any other, a frequent statistic often quoted blindly without question is that the aviation industry actually enjoys subsidies to the tune of £10 billion per year or more.

Let's have a look at a few of these claims:

Myth 1 -- Jet fuel should be subject to the same levels of tax and duty applied to petrol and diesel used by motorists. As it is not, the airline industry enjoys a massive subsidy.

Fact -- Aviation fuel is covered by the Chicago Convention of 1944. This prevents any government from imposing taxes on fuel used for commercial flights. As the UK Government is unable to impose such a tax, this cannot be defined as a subsidy.

It has been suggested that imposing a £0.25 per litre tax on aviation fuel would result in an 11% reduction in demand for flights from the UK. However, unilaterally imposing such a charge would put the UK at a significant disadvantage compared to other countries. Potential passengers comparing the costs of flights via the UK compared with flights through other European hubs would switch in much greater numbers, whereas there would also be a proportionally greater shift away from people taking holiday flights out of the UK, as the flight cost is one of the most significant factors considered when weighing up the cost of a holiday.

Myth 2 -- Aviation receives a hidden subsidy because for every £1 spent by inbound tourists, £3 is spent by British tourists abroad. This creates a tourist deficit of over £7 billion per year.

Fact -- The tourism deficit is a function of climate just as much as the method of transport used to get there. Most northern European countries are in a similar position, and the same southbound trend applies to untaxed ferry journeys just as much as it does to flights.

Furthermore, the current taxation regime actually discourages UK domestic tourism. For example, a Belfast family taking flights to Malaga will only be taxed once at £13 per person, whereas the same family holidaying on the English south coast will also have to pay a Air Passenger Duty (APD) on the return flight.

Myth 3 -- The lack of VAT on aircraft purchases means airlines are getting yet another subsidy.

Fact -- Even if such a tax were introduced, it would have no impact. Airlines, like any other businesses are registered for VAT purposes, so if the transaction took place in the UK, they would simply reclaim the VAT on their next tax return, whereas purchases from other European countries would not be subject to VAT. Were some kind of special duty to be applied on new aircraft purchased by UK airlines, this would result in claims of unfair competition, as Virgin Atlantic for example, being based in the UK would have to pay the charge, but Ryanair, as an Irish airline, would not. In reality, airlines would simply register the aircraft elsewhere -- for example easyJet could easily run their UK based aircraft through their Swiss subsidiary.

Worse still, taxing new aircraft would be totally counter-productive, as the modern next generation models, such as the Boeing Dreamliner, are 20% to 30% more efficient than the aircraft they are replacing.

In accounting terms, there is also a huge difference between a direct subsidy payment from a national or local government and a product or service simply not being liable to tax. Is food, for example, "subsidised" because it is not taxed at the standard rate of 20% (as opposed to farm subsidies)? Of course it isn't, so why make a similar claim for aviation?

Myth 4 -- Airline passengers receive a special exemption as unlike other services, flight tickets are not subject to VAT.

Fact -- This is simply not comparing like with like. Firstly, VAT could only be applied on domestic flights, further adding to the existing double taxation penalty. Secondly, VAT isn't applied to any other public transport ticket either. In fact the rail network is subsidised to the tune of £5 billion per year, whereas buses received numerous local subsidies, both to cover the operating costs and in the form of concessionary bus passes.

Myth 5 -- Airlines receive millions of pounds in Public Service Obligations (PSO) and route development subsidies

Fact -- Only a very small number of flight routes in the Scottish Highlands and Islands, together with flights from Cardiff to Anglesey receive PSO funding, and this is a tiny fraction of the amount made available to rural bus companies. Route development subsidies are no longer used.

Whereas some UK airports have given incentives to airlines to develop more routes, these have always been on a commercial basis, and they haven't always been successful. For example, for a long while, Ryanair paid very low landing charges at Glasgow Prestwick airport. As these have expired, they have slowly added more flights from Edinburgh instead, and Prestwick has declined.

Myth 6 -- Airports receive special exemptions -- for example for air traffic control

Fact -- Under the airports act, any airport in the UK with a turnover above £1,000,000 per year has to operate as a commercial venture, and in doing so, the full costs of operation are borne by the airport operator. Airports also meet the full costs of security scanning and border control, whereas the cost of the British Transport Police (BTP) who patrol the railway network, are borne by the taxpayer.

Myth 7 -- The planning system is biased in favour of airport development, and external costs are not considered.

Fact -- The inherent assumption of any planning application is to grant permission unless overwhelming evidence is presented against development. Whilst it is true that major airport developments, such as Heathrow Terminal Five and Manchester Airport's second runway gained approval, others such Heathrow's third runway proposal and plans for a permanent terminal at Coventry Airport have been blocked.

When airports upgrade facilities, they are just as likely as any other major development to be subject to "Section106" agreements, which can cover anything from local road improvements to noise compensation to hours of operation. For example, when Doncaster Sheffield airport opened in 2004, they were required to fund improved insulation on nearby homes, whereas London City airport has always been subject to very strong noise controls and weekend usage restrictions.

Meanwhile, Gatwick airport was only granted permission for its second terminal on the basis that no additional runway would be built before 2019 at the earliest. Given the likely environmental problems and huge costs involved, combined with the complete lack of appetite within the airline industry, it is highly unlikely that the 'Boris Island' Thames estruary airport will ever get off the drawing board.

Myth 8 -- More UK domestic flights should be transferred from air to rail

Fact -- On numerous routes, and especially between London and northern England, the train has already won. Given the rising cost of fuel, the double taxation of Air Passenger Duty (APD), airport charges and the cost of getting to and from the airport, domestic flights are already at a massive disadvantage compared to rail services, so there are no longer any flights from London to Liverpool, Blackpool, Leeds Bradford or Durham Tees Valley. No-frills flights to Newcastle and Glasgow Prestwick have also recently been axed from Stansted airport.

Meanwhile, proposals to develop a high-speed train service (HS2) are likely to have very little impact on domestic flights, as the route only goes as far as Leeds and Manchester, and even this is only in the second phase. Whilst trains will be able to continue on existing tracks to Glasgow and Edinburgh, it is unlikely that time savings will be much more than around 45 minutes, not enough to capture a significantly high portion of the market.

If a high-speed rail service could be provided all the way from London to Glasgow and Edinburgh, then this could have an impact on domestic flights, but it is highly unlikely that this will be developed before 2040 at the earliest.

Myth 9 -- The airline industry is a major cause of ill-health

Fact -- No peer-reviewed scientific study has ever demonstrated a major causal link between air pollution around airports and respiratory illness. If there are any effect on health, these are as much due to road traffic around airports than they are to the aircraft themselves. Studies on the noise impact of airports have tended to show that the majority of people who move into properties underneath flight paths tend to adapt to the increased noise levels within a few weeks.

Noise pollution is also a significant problem around busy roads and railway lines. Any detrimental effects of air travel have to be weighed against the significant relaxation benefits of holidays.

Myth 10 -- The airline industry does not bear the cost of accidents

Fact -- Aviation accidents are actually extremely rare. There has not been a fatal accident involving passenger aircraft on UK soil in over two decades. In fact, the biggest risk of any air journey is getting to and from the airport, especially if driving tired in a hire car on unfamiliar foreign roads. Airport fire cover, like air traffic control, is paid for by airports, who in turn pass these costs onto airlines.