Feature

TAXING TIMES

The government has increased the controversial APD according to distance travelled. Mark Frary looks at how this will affect business travel

The current economic downturn has caused buyers to look at every item in their business travel budgets like never before. Air fares may be falling because of weak demand, but that is making one of those items stand out like a sore thumb - air passenger duty (APD).

APD was first introduced by the Conservatives in 1994. At the time, Chancellor Kenneth Clarke said: "Air travel is under-taxed compared to other sectors of the economy."

It may have been under-taxed then but things have changed dramatically since. It is incredible to think that air passenger duty now pours £2 billion into government coffers every year. With increases in APD planned for November 2009 and 2010, this figure looks set to balloon, probably to at least £5bn if previous changes in the levels of duty are anything to go by.

Taking the brunt of these increases will be corporate UK. Long-haul business travellers will pay substantially more than others under the new rates (see timeline below) and it will be their companies footing the bill.

Amazingly, there seems to be little reaction from buyers so far, which contrasts starkly with the response to the introduction and ramping up of fuel surcharges by airlines in the wake of the rocketing oil price in 2008.

HRG's commercial director Chris Fry says fuel surcharges had a different motive.

"People saw fuel surcharges as a price rise in disguise," he says. He believes there was little understanding of how fuel surcharges were calculated and did not seem to reflect changes in the underlying oil price. For example, many surcharges still remain in place despite the oil price falling to around US$50 a barrel from nearly US$150 a barrel.

There is also a feeling that because APD is a government levy rather than an airline surcharge, little can be done. Fry says: "The government needs more money, which we all recognised even before the latest problems over spending."

Paul Tilstone, chief executive of the Institute of Travel & Meetings (ITM), says the organisation's members do not seem to be too worried yet about the increases in APD. "However, when they see the increases on their invoices they may start to worry," he adds.

Others think corporate buyers will eventually revolt over APD. Philip Carlisle, chief executive of the Guild of Travel Management Companies (GTMC), says: "You are going to be hit by this cost every time you travel. If you are a company doing 1,000 long-haul air trips, then a thousand times APD of £80 is a lot of money. It just makes UK plc less attractive."

One member of the ITM press panel, a forum of buyers including companies such as Airbus, E.ON, John Lewis Partnership, JP Morgan, Omnicom, UBS and The Wellcome Trust, says: "I feel the government has been extremely short-sighted regarding APD fees, and the cost of taxes and fees on the overall price of the average tickets is verging on prohibitive in some instances. In light of the recent announcement by Ryanair over the reduction of its services from Stansted, I am concerned this could lead to other carriers following suit with a reduction in capacity overall. We, like many other organisations, have not budgeted for this increase and the effects will remain to be seen."

ITM's Paul Tilstone also believes that there may be more of an issue when airlines become part of the EU's Emissions Trading Scheme in 2012: "People think that it will be unfair to have both APD and a duplicate tax on emissions." He reports that most members would prefer APD to be ring-fenced and put back into sustainable aviation.

Airlines have a similar view. Legacy airlines, already struggling with huge losses caused by the downturn in premium class travel, are arguing that the APD increases pencilled in for November this year and 2010 will be the last straw.

In July, Virgin Atlantic president, Sir Richard Branson, said the increases in APD were "out of control". Branson said: "Air Passenger Duty is one of the most unjust taxes out there. The UK government has been quietly increasing APD by huge amounts and claiming it is an environmental tax. Yet, there's not a shred of evidence to suggest the £2bnplus currently raised is going towards environmental or sustainable projects." The airline has launched a campaign website at www.virginatlantic.com/unjusttax and plans to place an anti-APD message on all its e-tickets.

However, ring-fencing the £2bn raised by APD is an anathema to the current government. Transport secretary Lord Adonis told the Transport Select Committee in July that although the "primary purpose [of APD] is to meet the environmental impacts of aviation ... it is also a contribution to the wider cost of public services". He said the money would go into "the general Treasury pot".

If scrapping APD is not an option for the cash-strapped government, then perhaps postponement of the increases might be. HRG's Chris Fry says: "I had hoped that there would be a delay to allow further consultation and good communication [with the business travel sector] but in the current economic environment there is less opportunity for that to happen." His preferred option would be for the government to postpone the introduction until the economy - and business travel - has recovered.

However, another factor may cause changes to APD. If the latest opinion polls and the result of the Norwich North by-election are anything to go by, we look almost certain to be seeing a change of government in 2010. In the past, the Conservatives have made clear their preference for a per-plane tax. In 2008, the Labour government appeared to go along with this, saying that APD would be replaced by a per-plane tax in November 2009. However, this idea was scrapped in late 2008 and one of the main reasons cited by the government was "the need to ensure greater stability in tax policy at a time of economic uncertainty".

What is fairly clear is that with travel budgets being capped, and even slashed, the government may yet have found the answer to the current hot topic - demand management. If the increases in APD go through unchanged, companies will be forced to cut the number of trips, particularly if air fares start to increase again as carriers get their capacity back in line with demand.

NOVEMBER 2009 APD RATES RISES
Distance between capitals	Lowest class of travel	Other classes
Less than 2,000 miles	£1	1 £22
2,001-4,000 miles	£45	£90
4,001-6,000 miles	£50	£100
6,001-8,000 miles	£55	£110
NOVEMBER 2010 APD RATES TO BE INCREASED FURTHER
Distance between capitals	Lowest class of travel	Other classes
Less than 2,000 miles	£12	£24
2,001-4,000 miles	£60	£120
4,001-6,000 miles	£75	£150
6,001-8,000 miles	£85	£170

HOW MUCH THE GOVERNMENT HAS RAISED FROM APD
Year	Receipts (£ million)	Change (%)	Notes
1994/95	84		Part year (from 01/11/94)
1995/96	343
1996/97	356	3.8%
1997/98	493	38.5%	Rates doubled 01/11/97
1998/99	837	69.8%
1999/00	882	5.4%
2000/01	948	7.5%
2001/02	806	-15%	Rates re-structured 01/04/01
2002/03	816	1.2%
2003/04	791	-3.1%
2004/05	864	9.2%
2005/06	905	4.7%
2006/07	971	7.3%	Rates doubled 01/02/07
2007/08	1,994	105.4%
2008/09	1,862	-6.6%	Provisional figure

Source: HMRC, APD Bulletin, Crown Copyright, BATA UK