OAG reports floats idea of Manchester APD devolution

OAG reports floats idea of Manchester APD devolution

The prospect of Manchester adding devolution of Air Passenger Duty to a wish-list as part of the government’s ‘northern powerhouse’ strategy is raised in a new report.

The question comes as part of a study into APD devolution to Scotland by aviation data and analysis provider OAG.

The report suggests that Manchester could follow suit following prime minister David Cameron’s pledge to give the city more autonomy over its health budget and business rates.

“Could Manchester add devolution of APD to its wish-list as part of a ‘northern powerhouse’ strategy?

“If Scottish airports can use the lower APD to leverage advantage, attracting new flights or even winning air services away from other UK airports, then the reaction from other regions may be much stronger than seen to date,” the report says.

“Once regions have control of APD there is only one direction for it, downwards.

“Inevitably airports, cities and regions will seek the competitive advantage that lower air travel costs bring, and the UK is likely to see yet more redistribution of passengers around its regional airports, rather than a boost to overall UK air passengers.

“Increasingly these tax revenues will be lost to the Treasury. The firm stand taken by successive governments, based on the assumption of a relatively inelastic UK air transport market, will be undone,” it argues.

“What will remain is APD as a tax on the south-east but it could at least have the unintended side effect of redistributing traffic to regional airports which have capacity to grow while the industry waits for much needed capacity in the south-east of England.”

OAG adds: “The motivation for devolution of APD to Scotland may have been electioneering but the end result could just possibly be positive for the whole air transport industry.

“However, in this scenario, unless the regions can present a compelling and cohesive case for the economic benefits of removing APD, perhaps inevitably the industry will become a target for VAT on air fares, or fuel duty – both of which would have a far greater effect than APD.

“Whilst we are likely to see little change in the short term, the term of the next UK government will have to deal with the unintended consequences of devolving APD to Northern Ireland and now Scotland.

“Will it be a lot of hot air over nothing, or will there be real change in passenger flows between regions with differing levels of APD? What is harder to see is what, if any, net benefit there will be to overall passenger growth.”

The fact that APD is still in place reflects more on its convenience as a revenue stream than its economic merits, the OAG report argues, pointing out that the tax is expected to raise £3.2 billion in 2014-15 for the Treasury, equivalent to £50 for every person in the UK.

The total annual income from APD has trebled since its introduction in 1994. If APD income went into supporting the UK aviation industry it could have paid for Heathrow Terminal 5 four times over by now or been put towards much needed runways in the south-east.

“What would it take for the industry to provide convincing arguments that could lead to removal of this tax and how realistic is it that the government would forgo this revenue stream?” the report asks

“Perhaps the answer has come from the government itself. In chaos theory, the butterfly effect is the unexpected and much larger consequence occurring from an initial relatively small change. Is it possible that the devolution of APD to Scotland will come to be seen in this way?”

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