1. Introduction
1. The Welsh Government welcomes the opportunity to provide a submission to the Welsh Affairs Committee's inquiry on Devolution of Air Passenger Duty to Wales. The Cabinet Secretaries for Finance and Economy & Transport would welcome the opportunity to present evidence in person at the Committee’s forthcoming oral evidence sessions.
2. The Welsh Government continues to make the case for devolution of Air Passenger Duty (APD) so we have an approach which is right for Wales. This is consistent with the wider principle that powers, which are devolved to Scotland and Northern Ireland should also be offered to Wales.
3. The UK Government’s asymmetric approach to APD underpins the Welsh Government’s genuine concern about the impact of APD on international connectivity and by extension on business, trade and tourism in Wales, especially as we approach the point at which the UK will leave European Union.
4. With the prospect of full and partial devolution of APD in Scotland and Northern Ireland, as well as the potential for regional airports in England to receive further support after the UK has left the European Union[1], the competitive position of Wales is being put at further risk.
5. Whilst the Welsh Government has not received any formal notification, the UK Government has indicated in the past that state aid rules might prevent the UK Government from devolving APD to Wales. The Welsh Government does not consider that devolution of APD would breach the state aid rules. The Welsh Government would be able to establish sufficient autonomy under the ‘Azores’ criteria[2], meaning that were the UK Government to proceed to devolve APD, the WG would be at liberty to adopt a lower or no rate of APD without this constituting unlawful state aid in reliance on the Azores principles. The fact that Cardiff Airport is in state ownership does not alter this analysis.
2. Potential benefits and drawbacks of devolving Air Passenger Duty to the National Assembly for Wales
Potential Benefits
6. Devolution of APD would be a useful policy tool which, as part of a suite of interventions, could help to unlock the full potential of Cardiff and other smaller airports across Wales.
7. It is well established that the presence of an airport which offers access to key global markets provides significant economic benefits across the economy[3]. Businesses value ready access to international transport links and choose to locate in areas where access is available. Aviation also plays a crucial role in contributing to the growth of the wider economy through facilitating the movements of goods and services, workers and tourists, investment and ideas[4].
8. The presence of a well-connected airport attracts foreign direct investment and generates positive spill-over impacts which improve an economy’s productive capacity. Thriving airports contribute to the development of economically-successful cities by supporting agglomeration effects, which provide increasingly important benefits for cities and wider regions. Connections to other regions and countries can help to deepen labour and capital markets, as well as increasing competition and innovation. Enhancing connectivity between Wales and the rest of the UK and the wider world is key to our Economic Action Plan.
9. An independent report commissioned by Welsh Government estimates that if APD were to be removed in Wales[5] it would result in around an additional quarter of a million passengers in 2025 over and above any effects at any other airports. This increase in air passengers would also result in net additional economic output to the UK as a whole, not just to Wales. A conservative estimate of the overall effect on annual economic output in Wales is £4.6m to £6.1m in 2025, assuming the proportion of business traffic using Cardiff Airport remains at 2015 levels. However, with more services being provided at Cardiff, with APD serving as a catalyst for growth, it is estimated the increase in economic output would be between £7m and £9.5m.
10. In addition to these economic benefits, if APD were devolved to Wales and reduced, consumers would benefit from paying lower air fares. Further benefits may also be achieved by Welsh residents if they were to fly from Cardiff Airport instead of an English airport through surface journey-time savings and reduced non-air travel costs.
11. The benefits to Wales are clear but the evidence indicates there would be wider economic benefits to the UK economy also. At present, UK airport capacity is not being used to its optimum efficiency. The UK Government established the Airports Commission, chaired by Sir Howard Davies, to examine the need for additional capacity. The commission’s final report concluded capacity constraints are having an impact on the UK’s connectivity[6]. The commission’s analysis shows expanding airport capacity is crucial for the UK’s longer-term prosperity. The UK Government has accepted the conclusions of the Airports Commission.
12. The commission recommended a new runway be built at Heathrow Airport to meet the medium to longer term capacity constraints. The devolution of APD to Wales would contribute to the package of measures which would help reduce airport congestion in the South East of England, by making more efficient use of the existing runway and airport capacity across the UK. Without constraints to airport growth, the central air passenger demand forecasts by the UK Government are for an increase of 84% from 2016 to 2050[7], with growth rates over the period expected to be higher in the earlier years. When UK airport capacity constraints are included however, the central growth forecast between 2016 and 2050 is only 55%. A lack of capacity and inefficient use of existing air transport infrastructure will create limits to future UK economic growth.
13. Services from Cardiff Airport could relieve some of the immediate pressures on Heathrow – and other UK airports in time – resulting in fewer delays at airports and on the surrounding transport network. Airports outside of the South East of England can play an important role in helping accommodate the forecast growth in demand for aviation across the UK.
14. Previous analysis by HMRC has suggested that devolving APD to Wales, and reducing it to zero, would reduce air passenger traffic at Heathrow by 2% to 3%[8]. This is in contrast to the impact from the same policy response in Scotland (cutting APD in Scotland to zero), which would add to passenger traffic at Heathrow by between 2% to 4%, undermining efforts to reduce congestion there. It is clear, that using APD to attract air passenger traffic to Cardiff would contribute to measures to address capacity constraints within the UK.
15. Cardiff Airport is currently an under-used economic asset. The runway is long and wide enough to accommodate the majority of aircraft required for long-haul destinations and the terminal building, at its peak, can cater for 2.1 million passengers and has the capacity to serve 3 million passengers without expansion. Cardiff Airport does not have the same range of restrictions on development and expansion that other regional and hub airports across the UK have, making it an ideal airport to accommodate the growth in air passenger traffic forecast by the UK Government.
Potential drawbacks
16. In terms of the costs to the Welsh Government, we recognise that tax devolution does not come in addition to current funding levels. If APD were to be devolved to Wales, then the Welsh Government’s funding would be correspondingly reduced through a block grant adjustment. This is likely to be initially equivalent to the amount of APD revenue generated in Wales. Latest estimates by HMRC for 2017-18 suggest APD revenues were £6m[9]. In addition, there are likely to be some administration costs for the Welsh Government from operating a devolved system of APD in Wales. The costs will depend on whether APD is fully devolved – as proposed in Scotland – or partially devolved, as in Northern Ireland. These costs will be lower than the block grant adjustment.
17. There should no administrative costs for passengers, as with the current system of APD run by HMRC, airlines are obligated to make the tax returns. There is the potential for some minimal additional administration costs to businesses as a result of devolution, but this is only likely if the devolved tax was not administered by HMRC.
18. There is the potential for additional environmental costs if devolved APD generates more air traffic in Wales. This would be mitigated however by reduced surface transport travel times for those passengers who would have flown anyway but used a non-local airport. The most recent estimates show there are around 1.2 million passengers from Wales who currently use Bristol Airport[10]. Many of these may have shorter surface journeys if their flights are available from Cardiff Airport as a result of devolved APD, reducing environmental and congestion costs of travel.
19. It is difficult to extrapolate any environmental costs from current aircraft technology. If APD devolution resulted in more flights from Wales, these are likely to occur gradually over many years as air schedules adjust to gradual shifts in demand. Over such a period, it is expected the aviation industry will continue to improve the efficiency of aircraft, helping to mitigate their environmental impact in future years; aircraft produced today are about 80% more fuel efficient per passenger kilometer than in the 1960s. (ICAO 2016: p. 97)[11].
20. Any environmental costs, including carbon emissions impacts, arising from devolution of APD and subsequent rate setting would be considered by Welsh Ministers under requirements of the Environment (Wales) 2016 Act.
3. What impact devolution would have on Welsh airports, including those not currently operating international flights
21. APD is a significant financial constraint to the development of new routes and air connectivity across Wales. Devolving APD to Wales would mean the Welsh Government would have the ability to set tax rates which would apply across all Wales. Any potential reductions from the prevailing UK rates would enable existing and potential air services to benefit. This includes air routes from existing airports and potentially new routes from other airports in Wales, which are not currently commercially viable with the current tax rates.
22. Given that range of services currently offered by Cardiff Airport, together with its potential for growth, much of the Welsh Government’s attention and studies has been concentrated on the effect of discounting APD on Cardiff Airport and the catchment it serves. Anglesey Airport (RAF Valley) is currently the only other airport in Wales which offers scheduled services but on a much more limited scale than those offered by Cardiff Airport. The only current commercial flight from Anglesey is to Cardiff Airport. This route is a designated public service obligation route and is exempt from APD. However, we conclude that reductions to APD in Wales could support this route looking ahead as onward connections from Cardiff may benefit from a reduction in APD, thereby increasing the demand for services from Anglesey.
23. The Welsh Government has been exploring the development of commercial air transport services from airports elsewhere in Wales including Aberporth, Caernarvon, Haverfordwest (Withybush), Hawarden, Llanbedr and Swansea. APD devolution could have the potential to enhance the financial viability of potential services from other smaller airports and airfields in Wales.
4. Different options for the devolution of Air Passenger Duty, including full devolution, or devolution for long-haul flights only
24. The ability to only vary the long-haul rate of APD in Wales rather than full devolution would provide far more limited policy options for the Welsh Government. Analysis of the potential long-haul market from Cardiff Airport[12] concludes the most likely services which could be developed are to New York, Canada and the Middle East hub – the latter is now available with a daily service. Other long-haul opportunities may also exist, particularly those involving low-cost long-haul carriers to a gateway hub.
25. Civil Aviation Authority data shows that up to and including September this year, over 18,000 outbound passengers have used the new Cardiff to Doha service, which only commenced in May this year[13]. Further analysis[14] suggests a change in the tax regime could also lead to new trans-Atlantic services from Cardiff resulting in a further substantial increase in additional long haul passengers every year, before considering those that might have flown previously from elsewhere.
26. In addition, extra long-haul services could be attracted to Cardiff Airport, generating up to 250,000 passengers in 2025 who would otherwise have flown from other UK airports with long haul services. A conservative estimate suggests this would increase annual economic output by nearly £5m. If a more ambitious network of long-haul routes were secured at Cardiff Airport, this could attract around 500,000 passengers by 2025. This is estimated to increase annual economic output by nearly £10m. These estimates are only slightly lower than those assuming full APD devolution, as reductions to the short haul rate are assumed to mostly generate additional leisure trips from Cardiff Airport, which are excluded from the estimates of economic output.
5. How Air Passenger Duty fits with responsibilities that are already devolved, such as regional economic development, aspects of environmental policy and tourism
27. In an increasingly global market, the Welsh Government believes aviation is playing a progressively more important role in regional economic development. The Davies Commission[15] and UK Government[16] also acknowledge the contribution that UK aviation and associated aerospace industries make to national and regional economies. Aviation can also provide catalytic benefits arising from enhanced air connectivity to other aspects such as trade and tourism.
28. As APD can have potentially significant effects on air passenger activity, it can also play an important role in helping the Welsh Government deliver on its devolved competencies in tourism and regional economic development, and also help to rebalance the UK economy.
29. The Silk Commission’s first report[17] suggested the devolution of APD would increase financial accountability and would empower the Welsh Government to deliver policy objectives in devolved areas. The full implementation of the recommendations from the first (and second) reports of the Silk Commission has cross-party support in the National Assembly for Wales.
30. Following the agreement of the fiscal framework between the UK and Welsh governments[18], APD devolution is now the only recommendation for the UK Government from the Silk Commission’s first report which is yet to be implemented. The other recommendations, which have been implemented, include changes to the Barnett formula to be more reflective of relative need in Wales and a significant degree of tax devolution – Welsh rates of income tax will be introduced in April 2019 and stamp duty land tax and landfill tax were replaced by land transaction tax and landfill disposals tax, respectively, in April 2018.
31. As with stamp duty land tax and landfill tax and their effects on delivering housing and waste devolved policy, the Welsh Government considers APD to be a useful potential lever in delivering other devolved responsibilities, relating to regional economic development and tourism. Therefore devolving APD, or at least the long-haul element, would be welcome and consistent with the UK Government’s approach to devolving taxes, which overlap with other devolved responsibilities.
32. Aviation currently has potentially important implications for environmental policy. As environmental protection and management of natural resources are devolved issues, the Welsh Government believes it should have the ability to make decisions about how best to deliver economic growth and secure environmental objectives.
6. Cross-border issues, including the impact on passengers and airports in England
33. The Silk Commission examined the available evidence to assess whether the devolution of APD to Wales, and any subsequent reduction[19], would create economic distortions in the UK aviation market. The Silk Commission’s review of the evidence suggests price does not appear to be a decisive factor in determining the choice of airport for passengers. In any event, as discussed above, some movement of air passenger traffic within the UK would help generate a more efficient use of UK capacity.
34. There has been wide discussion about the implications of devolving APD to Scotland and Wales for regional airports in England, which resulted in a UK Government review[20]. The UK Government has accepted the case that it is appropriate for there to be some tax competition, given its decision to devolve other tax powers to the devolved administrations. Through potential changes to income tax in Scotland and Wales, the devolved administrations have tax powers which might generate considerable cross-border effects. These are potentially far greater than those arising from the devolution of APD.
35. In terms of potential effects on airports close to Wales, their distance and relative catchments areas should be considered. When the UK Government created its Regional Air Connectivity Fund in 2015, it provided a set of guidelines to limit any potential adverse effects from airports within close proximity receiving funding for routes to the same destination. These guidelines are consistent with EU state aid guidance on defining the catchment area of an airport. The guidelines define the catchment area of an airport as “a geographic market boundary set at 100 kilometers or 60 minutes’ travelling time by car, bus, train or high-speed train”. The closest airport in England to Cardiff Airport is Bristol Airport and according to these guidelines it is at the very limits of this definition of the catchment area for Cardiff Airport[21].
36. In June 2017, the Welsh Government published a report[22] setting out the results of analysis, which modelled the potential commercial and economic impacts arising from the devolution of APD to Wales. This included detailed catchment analysis. For domestic services and short-haul international services, which are typically associated with travel time contours of 45 minutes and one hour, respectively, Cardiff Airport and Bristol Airport serve two separate catchments. This is consistent with the UK Government’s criteria for accessing the Regional Air Connectivity Fund and EU state aid guidance. These catchments are shown in the maps overleaf (Figure 1).
37. The first map shows the catchment in off-peak conditions. The second map shows it in peak period traffic conditions where 10 minutes is added to the average travel time. Given the potential for congestion at most times of the working week on the roads shown in the maps, it is likely most airport users are more likely to behave according to the peak period catchment (right-hand map). The use of public transport is likely to involve at least a similar travel time duration, depending on transfer times, given the current access options to each airport.
Figure 1: 60-minute drive-time catchment areas in off-peak (left) and peak period (right) traffic conditions
Source: Northpoint (2017)[23]
38. In addition to the lack of overlap between the two airports, it is also important to consider which areas of the UK – and in particular Wales – Cardiff Airport serves as the nearest and in some instances only airport option. Figure 2 shows Cardiff’s Airport’s catchment includes areas further west, helping to minimise any potential overlap with Bristol Airport. In addition, Carmarthenshire, Pembrokeshire, Ceredigion[24] and south Powys (Brecon and Radnorshire has a population of 65,000), are within Cardiff Airport’s extended catchment. These areas form a large rural area with a collective population of close to 450,000.
Figure 2: Cardiff Airport Core and Extended Catchment Areas
Source: Provided by Northpoint to the Welsh Government
39. It is estimated that if APD is reduced in Wales, Cardiff Airport may gain between 200,000 to 650,000 domestic and short haul passengers from Bristol Airport, which in 2017 recorded more than 8m passengers. These figures exclude potential passengers who live in England and long-haul passengers who might use Cardiff Airport if APD was reduced. Even if these were another 100,000 passengers at Cardiff, the overall increase is estimated to be less than 1m passengers.
40. Overall, the reduction of APD in Wales is estimated to create a net increase in passengers, rather than a substitution from one airport to another. This would also result in a net increase to economic output for the UK as a whole, not just for Wales.
41. Long-haul services are likely to have larger passenger catchment areas. This is likely to increase the overlap between Bristol and Cardiff Airport catchments for these services.
42. As long-haul catchments are likely to be larger, people living in Bristol and to its east are more likely to use Heathrow and other London airports for long haul. Heathrow offers a wider range of long-haul services, which means there is a degree of choice about destination, operator and time of day, which regional airports are unable to offer. Using a two-hour travel time for the Heathrow catchment area would include the middle of Bristol city, Bath and most of the areas of highest traffic demand in Somerset and South Gloucestershire. This catchment area would not reach Wales, although some passengers use Heathrow from Wales due to the unique range of services it can provide. Long-haul airlines are more likely to see South Wales and the South West as one catchment served by at least two airports. Given this, it is unlikely a long-haul airline will operate the same route from both South Wales and the South West region at the same time.
43. Given the very limited long-haul services both airports currently offer, any potential overlap in airport catchment between Cardiff and Bristol is more hypothetical than reflecting a genuine market. Cardiff Airport has already demonstrated it has the potential to offer more long-haul services, as it already provides a daily service to Doha.
7. Benefits to businesses and consumers across Wales and the West of England
44. Citizens value ready access to airports that offer choice and reasonable travel times to access routes. Transport links are therefore an important factor in determining the attractiveness of an area, particularly to mobile and highly-skilled workers.
45. It is important to recognise the benefits of a thriving airport in Cardiff would benefit businesses and consumers in Wales and across a large portion of the West and South West of England. There are 11 million people living within a two-hour drive time of Cardiff Airport; of those around nine million are in England. Given the current limited offer of long-haul services from Wales, the West or the South West of England, Heathrow is the most plausible option for long-haul flights. However, for up to four million potential customers of Heathrow, Cardiff Airport could be a more convenient option in the future[25]. Significant benefits to residents and businesses in Wales and neighbouring English regions could be achieved if it was possible to secure direct routes to key business destinations or major airport hubs. This reflects the relative importance for Wales of being able to implement a different APD regime than that set by the UK Government.
8. The impact devolution would have on North Wales and airports used by people in North Wales
46. For residents in North Wales and parts of Mid Wales, it is likely they will use airports in Manchester or Liverpool given their relative proximity and associated travel times. As APD is calculated from where passengers depart, passengers using these airports would be unaffected by the direct effect of APD devolution to Wales.
47. It is possible there could be some indirect effects on these airports, and therefore for residents in North Wales, if Cardiff Airport was to gain services at their expense. However, the airport catchment analysis[26] suggests any impacts on other English airports would be minimal, and this is likely to be especially so the further airports are from Cardiff Airport. Therefore, any potential indirect effects are not expected to adversely affect residents in North Wales.
9. Lessons learned from the devolution of Air Passenger Duty to Scotland
48. The devolution of APD to Scotland has been delayed due to complications around the current Highlands and Islands APD exemption, it is not therefore possible to observe the effects of devolution to Scotland. This particular issue would not apply in Wales, as there are currently no blanket APD exemptions for areas in Wales.
49. In addition, the aviation market in Scotland is different to that in Wales. Scotland has a number of commercial airports, two of which are significantly larger than Cardiff Airport – Edinburgh and Glasgow have 13.4 million and 9.9 million passengers annually[27].
50. One key similarity between Wales and Scotland is the potential impact from devolving APD on regional airports in England. For Scotland, the risk relates to airports in the North East of England[28]. Despite considerable protest from those airports – particularly Newcastle – the UK Government decided to proceed with APD devolution to Scotland. By contrast, the same issue appears to have prevented APD devolution in Wales.
51. Analysis has been published by the Scottish Government on the economic impact of APD devolution[29]. This finds the effect of reducing APD following devolution to Scotland depends on the extent to which the tax reduction is passed to customers through reduced fares.
52. Over the first five years of the policy, the analysis shows the largest increase in estimated passenger numbers occurs from reductions to the short-haul rate. The largest economic impact is forecast when the short-haul rate is completely removed but there is no reduction to fares, which increases the supply of air links as these become financially viable through the reduction in tax.
53. If the tax reduction in Scotland only applied to long-haul routes, the economic benefits would be lower and may not offset the reduction of tax revenue. However, it is difficult to infer the same for Wales as Scotland has a larger aviation market with more established long-haul routes. Given the relatively higher tax rate for long-haul routes, reducing tax on these routes requires a much larger supply response in order for the economic benefits to outweigh the tax reduction in Scotland. In Wales, as there are far fewer long-haul routes available, a smaller supply response would be required for the economic impact to be larger than the reduction in tax revenue.
24 October 2018