July 26, 2011

Germany’s air traffic tax, which has been levied since the start of the year, has hit smaller airports with a large proportion of low-cost carriers harder than large airports. In the first half of 2011 passenger numbers were down at many small airports, whereas the overall market expanded by nearly 8% yoy. Smaller airports suffered on the one hand from the cancellation of routes by several airlines and, on the other hand, from the decline in passenger numbers on the remaining routes because the tax causes the biggest percentage hike in airfares in the price sensitive low-cost segment. The ecological benefits of the tax are limited since the airlines that have cancelled flights in Germany are now offering additional flights from foreign airports.

The German government decided as part of its 2010 austerity package to introduce a so-called “air traffic tax” from the beginning of 2011. It is a tax that is incurred when a passenger departs from a German airport. The tax amounts to EUR 8 for short-haul flights (e.g. within Europe), EUR 25 for medium-haul flights (e.g. to the Near and Middle East) and EUR 45 for long-haul flights. On internal German flights the tax burden amounts to EUR 16, because the tax is incurred on both the outward and the return flights. Transfer passengers arriving in Germany from abroad, domestic feeder flights and cargo-only flights are exempt from the tax. The German government hopes the tax will generate additional revenues of EUR 1 bn p.a.

The air traffic tax has been levied for over six months. It is therefore worth analysing the impact of the tax on traffic at German airports. At the same time it must of course be remembered that passenger numbers are influenced by many factors. Despite this proviso there is a discernible general trend in the traffic figures for German airports for the year to date that can be explained by the introduction of the tax on airline tickets: big airports fare much better than small ones. An alternative interpretation is that airports where low-cost carriers have a large share of the market are hit harder by the tax than those airports that are primarily served by traditional airlines. The two statements do tally with one another, as low-cost carriers basically tend to be focused on smaller airports.

Graphic evidence of how things have developed is that in the first half of 2011 the total number of passengers at German airports had risen nearly 8% yoy. This growth was driven by the favourable macroeconomic environment in Germany. In addition, the starting base in 2010 was low on account of the flights that were cancelled following the volcanic eruptions in Iceland. A look at the individual airports reveals the differences between the large and the smaller airports. The growth rate in passenger numbers at Germany’s five biggest airports is much higher than or only just below the average of 8%. Most of the smaller airports, by contrast, have posted below-average performance; many of these airports have even seen passenger numbers decline compared with last year.

This mixed picture is hardly surprising: firstly, the low-cost-carrier segment is the most price sensitive in the aviation business. In this low price segment the tax causes the biggest percentage increase in ticket prices. And the customers’ reaction to this is correspondingly sensitive. The second associated factor is that the share of business travellers, whose demand is less price elastic, is lower with low-cost carriers than with traditional airlines. Thirdly, the share of tax-exempt transfer passengers at small airports is lower than at hubs. The fourth and final reason is that some low-cost carriers have cancelled specific services to German airports because of the tax. This means there is now a lack of airlines that are jumping into the breach. There are, however, also smaller airports that have managed to make up for the thinning-out of the flight plan on individual routes by adding new services.

What other conclusions can be drawn from the experience gathered with the air traffic tax to date?

• The airlines’ already thin margins have been squeezed by the tax, as the intensely competitive environment does not always allow costs to be passed on to the passenger. However, jet fuel surcharges in the past have been higher than the tax burden.
• The German government’s aim of generating additional revenues of EUR 1 bn will probably be achieved; it remains to be seen how the tax will harmonise with EU emissions trading from 2012 in practice.
• The tax has slowed the momentum of the air transport market in Germany: without it overall growth would be higher.
• Estimating its impact on the economy as a whole and the labour market is difficult at the current moment. Most research conducted prior to the introduction of the air traffic tax comes to the conclusion, however, that the tax would have a negative impact on employment and that welfare losses would outweigh the benefits of higher tax revenues for the state; experience gained in foreign countries with similar charges back up this expectation.
• The ecological benefits of the tax are limited since the airlines that have cancelled flights in Germany are now offering additional flights from foreign airports. So it is not surprising that some airports located near the border with Germany have benefited hugely from the introduction of new routes.

This shows that in the end domestic go-it-alone policies to implement fiscal and/or ecological regulation of a global industry like aviation are problematic because evasive action can easily be taken.

Eric Heymann (+49) 69 910-31730

 

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