No more fear of flying

Emailed in by Benj, from IATA.org, the Q&A box:

How are slot allocations made?

Slots are handed out twice a year, for summer and winter schedules. “Grandfather” rights entitle incumbent airlines to continue using the slot if it has been used for at least 80 per cent of the previous period. In the UK, slots are traded in the secondary market

What about new slots?

New slots are put into a pool. Half are supposed to go to new airlines

What’s being proposed?

The government wants to promote competition, including auctioning slots to the highest bidder. The existing system provides incentives for “slot hoarding”, when airlines retain as many slots as possible and sell them to make a profit.

From the article itself:

Existing slots are held by airlines using so-called “grandfather rights”. In Britain, they can be traded in a “secondary market”, often commanding huge sums. A record $75 million was paid by Oman Air for a set of rights at Heathrow. 

The government said in its Brexit planning guidance that slot allocations would remain unchanged in the event of no deal. It insisted that the rights would be allocated in a “transparent and non-discriminatory way”.

However, the transport department is understood to be seriously considering the adoption of an auction system. The department’s aviation strategy, published before Christmas, confirmed that the government was considering market-based mechanisms for release of additional capacity”, and added: “This could include auctioning all slots or a limited number that would be most sought-after.” 

A House of Commons library paper from 2017 admitted that auctions “may be more difficult for small carriers with lower purchasing power”.

Lara Maughan, the IATA head of worldwide airport slots, said: “Making airlines pay for entering or growing at an airport means consumers will be the losers. At a time when Britain is looking to improve its competitiveness and to build more connections to the world, these proposed changes will do the exact opposite. 

"Extracting even more cash from airlines and their passengers will mean higher costs, less choice and less investment. The government’s stated objective to improve regional access to Heathrow would be irreparably damaged by an auction system that would force airlines to prioritise the most lucrative long-haul routes.”

IAG said: “We support IATA’s view that slot auctions would negatively impact consumers and undermine Britain’s aviation industry.”

Do these people not proof-read their own propaganda?

1. The easiest way to make money from aviation under current rules is to set up a small airline, be allocated some freebie-slots and then sell the slots. The article says as much. Small new airlines tend to go out of business fairly quickly, and when the majors are buying them, they value them mainly on the slots they own. It's a bit like buying land, getting planning permission and then selling the land again. It's the most profitable part of 'property developing'.

2. If airlines are happy to pay for second-hand slots, how is this any different to paying the government for them? No different. And paying one year in advance in an auction is a lot less risky than paying a lump sum in the hope it will be grandfathered for ever. If their claim that auctions lead to higher ticket prices were correct, then there would be a sudden increase in ticket prices after a slot has been bought by a successor airline. No such evidence.

3. We know that ticket prices are largely 'rent' and have little to do with costs. A flight from Stansted to Gdansk is a longer distance, but cheaper than a flight from London Heathrow to Berlin Tegel. An early morning or late night flight is cheaper than a midday flight etc. Flights to holiday destinations during the school holidays are more expensive than out-of-season. Airlines like to fill planes, so do a weird auction process with rising or falling prices; different passengers on the same flight will have paid different amounts. If costs exceed (potential) ticket price, the route is not used.

4. The balance of ticket prices minus actual costs is the rental element. A slot in itself has no cost of production, they are created - or destroyed - at the stroke of a bureaucrat's pen. Some have huge value (unrelated to cost of production), so they are 'land' in economic terms. Therefore, what you pay for the slot does not influence ticket prices - ticket prices influence slot values!

5. The small airlines are the Poor Widows or the Small Shopkeepers of the aviation business, "They'll go out of business because the majors have deeper pockets." That's easily dealt with, keep giving them free slots, on the condition that if they go out of business or are taken over by a major, the slots are forfeited. or just make them free for the first two or three years until they are up and running.

6. If an auction system "forces airlines to 'prioritise the most lucrative long-haul routes", then that is great news. I note that the IATA lady also claims that auctions would prevent airlines from "build[ing] connections to the world". So which is it? It can't be both.

7. It's the take-off and landing that incur the highest costs (fuel used; risks/risk mitigation and noise pollution), so it is more efficient to fly long haul. If that means fewer, less lucrative domestic flights, so be it. Take the train or drive. All things considered, this is better for the economy.

8. Whatever the merits of auctions, they are infinitely better than Air Passenger Duty. We don't know whether auctions would raise more or less money than APD; of whether this would lead to more or less flying, but that is irrelevant. It would be the 'right' amount of money and the 'right' amount of flying.

Air Passenger Duty bleating LOLZ

More rent seeking in the City AM:

In one part of Whitehall, the Department for Transport, ministers and civil servants recognise the importance of developing policies over the next decade to help UK aviation to grow sustainably...

But their efforts will be largely in vain if the Treasury cannot be persuaded to abandon hopelessly uncompetitive APD rates that are a major obstacle to UK businesses seeking to follow the Prime Minister’s lead by going into the world and building new trading relationships...

Of course, it is good news that the government has given the green light to the construction of a new runway, but the fact is that we will massively reduce the impact of expanding aviation capacity if we don’t have a competitive tax regime that will enable us to take advantage of it...

The government should also ensure that aviation-related negotiations and decisions are prioritised during the EU withdrawal process – but unless the UK tax environment is competitive, all the air services agreements in the world won’t make it viable for airlines to open new routes to and from the UK.

A few facts:

Gatwick and Heathrow are running at close to 100% capacity, so by definition, APD cannot be reducing the number of flights there. APD might have a marginal impact on the number of flights at less popular/regional airports, but the rentiers don't care about 'the regions'.

The bulk of the value/price of an airline ticket is where you are flying to and from and at what time of the day etc, the actual cost of doing it is surprisingly small. Compare the price of a ticket from Stansted to Riga with the price of a ticket from Heathrow to Berlin, or the price of a very early/late flight with one in the daytime! The difference in price is rent/location value.

Admittedly, APD is a dreadfully clunky way of collecting part of the rental value, but compared to VAT-liable businesses, airlines are still getting a fairly good deal overall:

Air transport is VAT zero-rated. That means that they can reclaim all input VAT but do not have to charge VAT, a best-of-both worlds status also enjoyed by 'home builders' and proper exporters.

Total revenues of UK airlines £22 billion per annum.

Total UK APD revenues £3 billion per annum.

Ignoring the fact that UK airlines also have non-UK revenues and some APD is payable on flights with non-UK airlines, passengers are paying £25 billion all in.

If air travel were VAT-able, the VAT due would be one-sixth of that = £4.2 billion, a lot more than the £3 billion they are actually paying.

Under the circumstances, it would probably be better to get rid of APD and impose VAT instead; that would bear more heavily on flights to and from Heathrow and Gatwick and would reduce the tax paid on flight to and from less popular/regional airports, as well as collecting a larger share of the rental income. The problem then would be collecting VAT from non-UK airlines, I'm not sure how you'd enforce that.

So as ever, the best kind of tax on air travel is a charge on the value of the landing slots, whether the airlines pay it directly or it is included in the Business Rates assessment of the airports is by the by. Airports themselves are probably in the best position to negotiate this and they can just add it to their landing fees.

Heathrow wants a new runway? Fine, they can haggle with HM Treasury over what the extra Business Rates will be; they are in the best position to work out how much extra pure profit they can make. HM Treasury can run a parallel auction with Gatwick, and whoever bids the most is allowed to build a new runway.

Sorted.

First rule of Land Value Tax club...

... don't talk about Land Value Tax unless you know about land values.

The LVT campaign linked to an article in The Guardian about Business Rates. By far and away, the single largest BR bill is on Heathrow airport, if you add together the airport, the maintenance area and Terminal 5 (ignore cargo terminal), it's £150 million a year. The next biggest is Sellafield, at £32 million.

(The LVTC article appeared to suggest that Heathrow was overtaxed. Sellafield might or might not be; in terms of 'alternative use of the land they are occupying', they are wildly overtaxed, but what they are paying for is 'the right to run a nuclear power station' which as we know is worth ££billions. Even if the right is only worth £1 billion, then £32 million a year BR looks about right

UPDATE: LVTC blog has now amended the article to clarify their stance, excellent.)

Returning to Heathrow, their BR bill is tuppence ha'penny, frankly.

What Heathrow airport is paying for is not so much the site itself (all 3,000 acres of it!) but the privilege of using London's airspace and quick transport links into London.

Acording to Heathrow's website, there are about 480,000 aircraft movements a year (one landing plus one take-off).

Check: one every forty seconds, 14.5 hours a day, 363 days a year = 473,000. Looks about right. There are different figures for the number of passengers, so let's take the mid-point 65 million.

[Update: Curtis adds, rather curtly: Where do you get "14.5 hours a day, 363 days a year"? Heathrow is open 365 days a year and planes are in action from 0430-2330 every day.

Answer: I was doing a rough check to see whether 480,000 aircraft movements looked plausible, and it does. Maybe it's 1 plane every 47 seconds x 17 hours a day x 365 days a year. This is what is referred to as 'missing the wood for trees'.]

Divide our BR bill of £150 million by 480,000 movements = £ 313 per aeroplane landing and taking off, or about £2 per passenger. Seems pretty good value to me.
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There's far more to it than just BR of course.

The biggie is actually Air Passenger Duty. Let's assume that Heathrow airport generates half of all APD in the UK (it might be two-thirds, who knows?), that's £1,600 million a year. Ten times as much as their BR bill.

Heathrow is running at capacity, so whatever taxes they pay, they are clearly not so high as to depress demand/output.

APD is a tax on transactions (the worst kind of tax); a flat per 'plane tax would be far better; but best of all is to scrap APD and hike Heathrow's BR bill to £1,750 million all-in. That's £3,300 per aircraft movement or £25 per passenger (return trip).

Relieved of the faffy and inefficient APD, airlines will be able to increase ticket prices accordingy, and the regulator would then allow Heathrow to increase its landing charges from £20 to £45 per passenger.

(Clearly, it makes more sense for Heathrow to charge per aircraft movement than per passenger. All things being equal they want fewer aircraft movements (expensive and risky) and more passengers (very lucrative, they spend money at the airport), but there you go.)

Air Passenger Duty and rent seeking

The rent-seekers have decided to keep up their attack on Air Passenger Duty, with the Faux Libs at City AM are happily regurgitating as Gospel truth:

The annual £3bn APD take is significant, but robust evidence now exists which highlights that a reduction to the tax would be revenue neutral. Independent PwC research has shown that scrapping the tax would stimulate the creation of 60,000 jobs and lead to £16bn in additional growth, and therefore be self-financing.

APD is first and foremost an economic matter. However, there is also a question of fairness that should be considered. We feel passionately that, for families and for ordinary travellers, the tax is regressive and damaging.

Families receive no “break” on child fares as they do for other goods and services, and a family of four now pays an average of £52 in APD to travel to short-haul destinations, and £284 for long-haul destinations.

We know that Heathrow and other London airports are running at full capacity, demand for slots vastly exceeds the availability and the airlines ration flights by bumping up prices accordingly. Their ticket prices have nothing to do with their actual costs, a large part of it is scarcity value i.e. rent.

So as long as the APD merely takes a chunk of the rent element of ticket prices, no harm done, it does not discourage activity or investment in the slightest. Or else those airports would not be running at full capacity, would they? The same does not necessarily apply to regional airports.

But that £3 billion figure does not reconcile with the headlines figures he bandies about ("£284 for long-haul desinations"). According to Wiki, there are 240 million passenger movements in the UK each year, i.e. 120 million get on a plane and 120 million get off. If APD were a straight per-passenger duty, it would be £25 per person per round trip.

A per passenger duty is a stupid idea of course, a per plane tax is better and the best designed tax would only claw back some of the rent element, so it would be set differently at different airports.

The rent element is highest at Heathrow and other London airports. Going by Wiki's figures, to raise £3 billion, all you would need is a £4,000 tax on each aircraft movement at Heathrow and (say) £2,000 at the other London airports (Gatwick, Stansted, Luton and City). Flights to or from any other UK airport would be completely tax free.

So a round trip to and from Heathrow, assuming average 150 passengers per plane, would work out at £53 per passenger (£4,000/150 x 2) per round trip. There is absolutely no need to distinguish between short and long haul flights, the value is in the slot, and if this encourages airlines to use Heathrow only for long-haul, well so much the better. (Further, aircraft noise is a nuisance, but why would you care whether the airliner roaring overhead is headed to Manchester or Manchuria?)

This would completely demolish their Faux Lib wailing, and they can chuck their stupid PwC 'research' in the bin. IF such a tax did have a negative impact on economic activity, then we can easily measure this - are these airports still running at full capacity? IF yes, then clearly the number of flights has not gone down, so the tax has had no negative impact. AND the chances are that other airports would move closer to full capacity.

Reality check: Heathrow airport charges the airlines about £20 per passenger (£40 per round trip) and this raises £1.5 billion income, double that and there's your £3 billion.

[Heathrow expansion] Yes, but that's not really a "cost", is it?

From This Is Money:

Failing to build a third runway at Heathrow will add £300 to the cost of an average return fare from the airport by 2030, according to a new study.

The report by consultancy Frontier Economics, commissioned by Heathrow, said there was no doubt the South East needed new airports.

And it warned costs would soar at Heathrow if no new runway was built, with demand for flights significantly outweighing supply...

The study also estimates that passengers are paying an extra £95 at present at Heathrow than they would if it had another runway.

Yes, let's assume that because demand has increased but supply is constrained, the amount which airlines can charge for tickets is £95 higher than it would be if there were more supply (more runways).

That's clearly a "cost" from the passenger's point of view.

But the total real "costs" to the airlines and airports are entirely unaffected by demand, their fixed overheads are unaffected and the per-plane cost (fuel, staffing) is also entirely unaffected.

So what this means is that airlines are making a £95 per passenger super-profit (also known as "rent").

It's the same when demand suddenly falls (post 9/11, for example) or when flights are halted because of bad weather or Icelandic volcanoes. The air travel industry's costs were largely unaffected but income fell, so they made losses.

The bitter irony here is that the NIMBYs and anti-expansion campaigners are doing whoever owns the scarce landing slots a huge favour.

Multiply that £95 by 95,000 passengers per day (half of arrivals+departures) times 363 days a year, that's a cool £3 billion extra rental-monopoly-artificial scarcity income.

Further irony is that Air Passenger Duty raises about £3 billion a year, so all the government is doing is clawing back the rental income (in a very crude and inefficient fashion). This duty is, from the point of view of the airlines a real cash "cost", but does not add much to ticket prices.

Rent seekers completely ignoring reality, as per usual.

From City AM Forum:

The deficit needs paying down and Air Passenger Duty is regarded as a relatively painless way of achieving this.

However, an in-depth analysis by PwC found that APD abolition would actually increase government revenues, as other indirect taxes rise from the resulting economic bounce. In the long term, it’s also estimated that 60,000 new British jobs would be created.

The Treasury refutes these findings, but continues to stonewall calls for it to undertake its own study into the economic impact of a reduction or abolition of APD.

APD rises also sit at odds with government rhetoric on ensuring the UK is “open for business”. Levying thousands of pounds on business delegations visiting the UK undermines this aspiration. And flyers are motivated if nothing else than by price.

Unfortunately, they have no evidence to back any of this up and PwC's report is just drivel.

Fact is, London airports are running very near capacity and most flights are full, there is no scope for more 'job creation' until we allow airports to expand, so like in any monopoly/rationing situation, ticket prices are set by "what the market will bear" and the airlines pay the APD out of their gross income inclusive of APD.

Of course, APD is a bad tax in itself, and would be best replaced by simply regularly auctioning off the very limited number of landing slots to the highest bidders, regardless of where the planes came from or are going.

This would easily raise as much money as the APD with no distortions whatsoever - as the article says, people flying to Schiphol and then changing to a long haul flight is a complete waste ot time and resources - but with a payment per slot, regardless of where the plane is headed would solve this once and for all.

Reality check: if airlines had to pay £5,000 for landing and each take-off from Heathrow or Gatwick, that would raise over £3 billion a year. So for a return flight in a 400-seater plane, the total tax would be £50 per passenger; the use of smaller planes and short flights would thus be discouraged, job done. AFAIC, they could exempt all other UK airports, most of which are not running at capacity.

How the years fly by...

I just remembered that I hadn't done my obligatory annual post on Ryanair reducing the number of its flights as a protest against Air Passenger Duty.

Of course, this only applies to the winter season, when business is quiet anyway. There's never the equal and opposite fanfare in spring when all the flights commence again.

So I checked, and to my horror, I realised that the last time I did this round up was three years ago, see here for 2008 - 2010.

So just to catch up...

2013

No-frills airline Ryanair says it will cut fares as well as some flights this winter to help keep its profits up.

The Dublin-based carrier says increased competition and Europe's continued economic problems were having an impact on fares and the amount of money it makes per passenger.

That write-up doesn't blame everything on Air Passenger Duty, maybe even the newspapers have got bored with rehashing the same old Ryanair press release every year?

2012

"Ryanair objects to the Spanish government's decision to double airport taxes at both Madrid and Barcelona airports," said Michael O'Leary, Ryanair chief executive, "Sadly, this will lead to severe traffic, tourism and job cuts at both airports this winter."

He added that the cuts would cause a "combined loss of 2.3 million passengers and over 2,000 jobs at Madrid and Barcelona El Prat airports". The reductions to services – which will amount to 492 fewer flights each week – will be made from November.

2011

Michael O'Leary's airline, Ryanair, is to make sweeping cuts to its winter services at a number of UK airports, including Prestwick and Edinburgh in Scotland, and Stansted Airport in Essex. The move, announced earlier this month, means that 9 of 32 destinations from Edinburgh, and 3 of 15 from Prestwick, will not be available during winter 2011.

Given that Michael O'Leary is a vocal critic of the Air Passenger Duty, it should come as no surprise that Ryanair has cited the tax as the impetus for the winter flight cull.

Reader's Letter Of The Day

From this evening's Evening Standard (page 45, 15 October 2013):

AS a non-resident, Sir Richard Branson is not [liable to] UK income tax, and as far as I am aware his main UK business interest, Virgin Atlantic, pays the correct amount of corporation tax.

But there is one area where Virgin Atlantic is sorely under taxed. The airline's five percent share of Heathrow landing and take-off slots is now worth £100 million, although they were originally given away free by the government in the Eighties.

The value of these slots is dictated by Heathrow's location and enforced scarcity. Much of the true cost of air transport is borne by residents under the flight paths, and without publicly funded transport links, Heathrow would be a less attractive destination.

A tax on the slots' value would be fair compensation for public costs, and a good source of revenue, as unlike air passenger duty they would have no impact on ticket prices.

Mark Wadsworth

"Scrapping air tax would give Britain's airlines a £16bn boost"

From yesterday's Evening Standard:

Scrapping the “destructive” tax on air tickets would give a desperately needed £16 billion boost to the British economy and help create up to 60,000 jobs, a report claims today.

Ditching air passenger duty, which can be as high as £184 for a business-class flight to Australia, would encourage airlines to expand their route networks, increase tourism to the UK and foster business links with the rest of the world.

The study, from consultants PwC, was commissioned by British Airways, easyJet, Ryanair and Virgin Atlantic, which have all campaigned against the tax since its introduction in 1993.

Ahem.

1. The airlines are always wailing that we need more capacity and more runways, because our major airports are running at full capacity (and it would appear that they are).

2. Therefore, whatever happens to ticket prices and APD, they will not be able to "expand their route networks, increase tourism to the UK".

3. We also happen to know, from general observation and economic theory, that APD is not added to the price paid by the passenger, it comes off the price received by the airline. So lower APD = same total ticket price.

4. If it were the case that airlines ran on very tight margins, then they would have to increase ticket prices by the amount of APD (or else they'd be losing money on each flight).

5. But if they were running on such tight margins, then the "slots" (the simple right to fly from A to B once a day) would not be so valuable. And they are very valuable (depending on where A and B are).

6. So we conclude that while APD is not a very good tax at all, it does not make any difference to anything in most cases (yes there is some idiotic re-routing going on whereby people fly from the UK to Amsterdam or Paris to take their connecting flight). Better would be a flat tax for each take-off or landing and best of all would be to auction of the landing slots every year.

Flights from Heathrow to China etc.

1. Let's take the facts as stated in a recent Evening Standard article as given:

- London's four main airports are running at capacity.
- London businesses want there to be more direct flights from London to the BRIC countries, Brazil, India, China etc.
- People who live near the airports don't want any more flights or runways because of the noise.
- Expanding airport capacity is not only politically difficult but also very expensive and takes years to sort out.

2. What you also have to know is that inbound tourism is hugely important to the London economy, foreign visitors spend £13.6 billion a year in London; and that London airports employ 100,000 people directly and handle about a million aircraft movements a year.

3. What would be nice to know is quite how airline landing slots are allocated, it appears to be a bizarre mixture of old international treaties which nobody dares break; what the government of the day thinks; all sorts of back room deals between airlines, airport operators, regulators, local councils, EU subsidies; and the grey market in slots. But we'll never find out, so we'll have to assume that the system is half-way rational.

4. Heathrow is mainly international stuff, it handles 2.7 million passengers a year to/from the USA and 1.9 million to/from Dubai. But there are plenty of local flights as well (i.e. where a journey by train would be a reasonable alternative): 1.2 million to/from Manchester and Newcastle. And there are also 2.7 million to/from Amsterdam and Paris, not only are those journeys do-able by train but I believe that a lot of those people then take connecting flights to elsewhere.

5. Again, AFAIAA, the reason why people go via Amsterdam or Paris is because of the stupid Air Passenger Duty - you pay a much smaller amount to fly there than you would if you flew direct (there's little or no APD on the main onward flight). Which is a wildly inefficient use of people's time (queuing up twice over) and airline fuel (aeroplanes are quite efficient when they are whizzing along, what wastes fuel is landing and taking off). And it means that those airports earn money which we could be earning instead.

6. So how about we just accept that the total number of aircraft movements is fixed and a given and that air travel does place a burden on others? Aircraft noise is annoying, but whether an aircraft flies over your house on a short haul to Leeds-Bradford airport or to Hong Kong doesn't make any difference.

7. So it strikes me, all they have to do is reduce the number of short haul flights and use those slots for long haul to the BRIC countries instead. Instead of flying people to Amsterdam or Paris who then get on another aeroplane to elsewhere, we can send them straight where they want to go. And instead of ferrying people to and from the rest of England, we can use those slots for taking people on long haul flights etc.

UPDATE: Jorge in the comments points out that a passenger only gets the APD saving if he books two entirely separate flights, e.g. one from London to Paris and then another from Paris to [end destination]. If you book "[End destination] via Paris" then you pay full APD. I would have hoped that was clear anyway.

8. As mentioned, nobody really knows how the airlines end up with the slots they end up with, but the best thing the government could do in the short term is to replace the counter-productive Air Passenger Duty (revenues £3 billion a year) with a flat rate duty of £3,000 per plane per landing/take-off (or whatever is needed to make the figures balance, or maybe £5,000 for Heathrow and £500 for Leeds-Bradford). That would give the airlines every incentive to shift from short to long haul, take away a bit of business from the Dutch and the French, make internal flights more expensive (thus encouraging people to use rail or road) and make international flights cheaper.

9. Pretty much a win-win, in other words.

10. It's a bit like Land Value Tax for the airspace. It makes the airlines pay for the external cost (the noise pollution); it means less fuel per passenger-mile on average; it brings business to the UK; and it's a levy on the monopoly value of the slots - the highest price ever paid for the best slots was $52 million each, i.e. the value of the right to land and take off once, on one day a year, for the foreseeable is £90,000 (and that's the net value after deducting the Air Passenger Duty, which can be over £10,000 per plane if you're going far enough), which amortised over ten years is £9,000 per flight, so a £5,000 per flight duty wouldn't even make a dent in that.

UPDATE: Jorge points out another advantage, it's better use of a slot if a large aeroplane takes hundreds of people a long way instead of a small aeroplane etc. Yes, from the point view of the slot owner (the airline) obviously, but I believe that by and large large aeroplanes make more noise than small ones, so the argument that the per-plane duty is a charge for the noise pollution would be weakened.