Mark Wadsworth

This is a spare 'blog in case my main 'blog at markwadsworth.blogspot.com isn't working

Air Passenger Duty Fun

There was a nice bit of special pleading by the big airlines in today’s papers, see for example The Metro, along the lines of “nobody move or the puppy* gets it!”:

Virgin say Air Passenger Duty (APD) raised £2billion in 2010 but that figure could hit £3billion a year under proposals being considered by the government.

Virgin, British Airways, Thomson and First Choice say it is too high and unfair. A family of four flying in economy class to Florida would pay £240 in duty this year. A trip to Australia would cost them £340 in duty.

Virgin’s chief commercial officer Julie Southern said: ‘We already know that more than half of long-haul flyers say they would consider cutting down their number of long haul flights if there were further rises in APD.’

As privatised tax collectors, they would say that, wouldn’t they?

As we well know, if people can make government-protected monopoly profits from an activity, the monopoly right itself is very valuable, being the capitalised net present value of all the future extra income you can generate (which is purely a balancing figure between the scarcity price and the true cost) and which cannot be competed away.

Any tax on this monopoly right cannot be passed on to consumers (by definition the scarcity price and true costs remain unchanged), it merely claws back some of the value of the monopoly right. The monopoly right of which I speak is of course the value of the landing slots themselves, and AFAIAC, people who make money from government-protected privileges are just privatised tax collectors.

There’s a good summary on the subject by Deloittes here, which appears to be from 2008. On page 8, it says that British Airways’ slots are worth around £2 bn, being mainly the 41% of slots at Heathrow which they own. The CAA tell us that in 2008, Heathrow’s capacity was 28.1% of total UK airport capacity.

If we multiply those figures up and add on existing APD receipts, we get a ball park capital valuation for all landing slots at all UK airports of £19 billion. This is subject to large margin of error, but it will do for now.

Hey ho.

Now, if you wanted to raise £3 billion from UK aircraft movements without the puppy* getting it, why not scrap Air Passenger Duty and slap a £3 billion annual tax on the value of the slots? Or even better, just auction them off every year – the auction price will never exceed the value of the monopoly profit (unless people get their sums or forecasts very wrong), ergo, consumers unaffected, there’s no need for airlines to fly ghost flights, reduces barriers to entry etc. The fact that this would blow a £2 billion-sized hole in International Consolidated Airline Group’s market capitalisation might be a good thing or a bad thing, depending on which side of the fence you are.

* Substitute “hard working families”, “hard pressed pensioners”, “the asset-rich, cash-poor” depending on context.

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