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?
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.
© Copyright 2013. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”.
The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.
In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht. In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange regulated by the Financial Services Authority for the conduct of investment business in the UK. This information is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Limited, Tokyo Branch. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product.