Revisiting air passenger duty now that the numbers are in

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by J. Miller

The BBC reported on September 27th that Chancellor George Osborne had announced air passenger duty (APD) would be cut for direct long-haul routes from Northern Ireland airports.

The report went on to say that the direct long-haul rate of APD will fall to the lower short-haul rate – £12 per passenger in economy and £24 for business and first class passengers.

by J. Miller

The BBC reported on September 27th that Chancellor George Osborne had announced air passenger duty (APD) would be cut for direct long-haul routes from Northern Ireland airports.

The report went on to say that the direct long-haul rate of APD will fall to the lower short-haul rate – £12 per passenger in economy and £24 for business and first class passengers.

Currently the tax adds £60 to an economy fare and £120 to a business ticket.  The report noted that the cost of the tax had been threatening to kill off daily flights between Belfast and New York.

The report added: “The flight is operated by Continental Airlines which also operates a daily service from Dublin.

However, the tax out of Dublin airport is just three euros and Continental said it had been absorbing the cost in Belfast in order to avoid passengers simply opting for Dublin.

This, the company told MPs recently, would cost them £3.2m this year and meant the route was no longer viable.”

Apart from Dublin and Belfast, Continental Airlines also operates flights to other UK airports, including, London, Heathrow, Edinburgh and Glasgow.  The reduction of APD and its impact on the development of direct international routes is of interest to the Scottish Government which is seeking the devolution of APD.

The arcane world of airline fare setting is beyond my comprehension but as a passenger who flies from the USA to Scotland on a fairly regular basis I am interested in the end result.  I have on occasion used Dublin as my gateway to Edinburgh rather than London. Could Belfast with its new low Airline Passenger Duty regime now be beckoning?  Not exactly!

I took a look at Continental’s quoted fares for the UK airports mentioned above for the same dates.  New York outbound on May 14th, 2012 and return on May 29th, 2012.  The results may surprise you, but then again, if you are as cynical as I am, perhaps not.

A little decoding first:

Airports: EWR – New York, Newark, LHR – London, Heathrow, DUB – Dublin, BFS – Belfast, GLA – Glasgow, EDI – Edinburgh

Taxes and Service Charges: APD – Airline Passenger Duty, PSC – Passenger Service Charge (levied by the individual airports)

 

All prices quoted are in US$.

  Continental Airlines Route Quoted fare US taxes UK/Irish APD UK/Irish PSC Total fare
1 EWR-LHR-EWR 670.00 57.10 92.60 47.30 867.00
2 EWR-DUB-EWR 796.00 57.10 4.00 15.20 872.30
3 EWR-GLA-EWR 710.00 57.10 92.60 17.50 877.20
4 EWR-EDI-EWR via LHR 710.00 57.10 92.60 74.20 933.00
5 EWR-BFS-EWR 847.00 57.10 18.50 20.10 942.70
6 EWR-BFS-EWR via LHR inbound 810.00 57.10 18.50 73.40 959.00
7 EWR-EDI-EWR 920.00 57.10 92.60 17.40 1087.10

The New York – Dublin return fare (2) has an additional charge of US$9.90 for pre inspection by US Customs and Immigration in Ireland making a total fare of $882.20.  This still leaves the New York – Belfast non-stop return air fare (5) at US$942.70 or $60.50 more than the Dublin fare, alternatively you can go via London (6) for US$959 or US$76.80 more than the Dublin fare.

Compare this to the New York – London airfare (1) which at US$867 is the cheapest to a UK destination and lower than the New York – Dublin fare by US$5.30, despite significantly higher taxes and service charges than Dublin.

And now to Scotland, the highest air fare for the dates requested is the non-stop New York to Edinburgh (7) at US$1,087.10.  The requested dates are nine months away but the return flight is apparently almost fully booked resulting in a sharply higher fare for the return leg.  Is this an indication of high load factors making this a hugely profitable route for the airline or are there special circumstances?  An alternative flight via London (4) is offered at a lower fare of US$933.90 or a non-stop to Glasgow (3) at US$877.20.

So what conclusions can we arrive at from these air fares? The answer lies in the quoted fares;

Belfast remains at a disadvantage vis a vis Dublin because the quoted fare is US$51 higher than that for Dublin offsetting most of the reduction in the Air Passenger Duty.  The question here is what are the relative load factors like and has the UK Government simply boosted Continental’s profits on this route?

Continental claimed that the cost of the APD in Northern Ireland “threatened to kill off the route” yet they seem to be quite happy to absorb the cost of the higher Passenger Service Charges (PSC) for operating into Heathrow, US$47.30 as compared to US$20.10 for Belfast, US$17.40 for Edinburgh and US$17.50 for Glasgow.  In theory Belfast, Edinburgh and Glasgow should be at a competitive advantage vis a vis Heathrow but this is not happening because the airline is soaking up that advantage in higher quoted airfares.  Add to that the limited competition on the non-stop routes which should be resulting in high load factors and consequently high profits for Continental on these routes.

If the Scottish Government should succeed in getting control of Air Passenger Duty then they will have to use a judicious mix of carrot and stick to ensure that any discounting of APD combined with the lower Passenger Service Charges for Scottish airports will result in a real competitive advantage for Scotland and not simply fuel additional profits for the airlines.