By Thomas Reynaert, IATA Senior Vice President, External Affairs
There’s much speculation at present over the upcoming UK budget, which will set UK government spending and taxation for the coming year. In common with most Western governments, the UK is running a persistent budget deficit, and for airlines that are already subject to a significant tax burden, the concern is that the government will again target the sector as it seeks additional tax revenues.
The Treasury appears unconcerned with the increasing tax burden on UK air transport, and seems content to benchmark the UK’s declining air transport growth against France and Germany, two of the poorest-performing aviation markets in Europe. Below we suggest five ideas for UK Chancellor Rachael Reeves to reform tax and spending to help boost UK aviation competitiveness and thus the long-term strength of the UK economy and its public finances.
IATA members have a choice of where to focus their route investment and the use of the latest, quietest, least CO2-emitting aircraft. The UK is missing out on this investment thanks to taxes like Air Passenger Duty (APD) – already the world’s largest air passenger tax – which is forecast to raise GBP4.2 billion in 2025-26, with individual rates scheduled to rise again next April. APD is a drag on UK connectivity and competitiveness. It is our firm belief that reducing the tax would encourage more travel to the UK and growth in connectivity to the regions, bringing in tourists and business travelers that will spend money and invest in the UK economy. The benefits of cutting APD have already been confirmed by the reduction in APD for domestic travel, which has helped support regional air connectivity.
Airlines would prefer to see passenger taxes cut completely, as in the Republic of Ireland and more recently in Sweden. But we recognize this would be challenging in the current climate, with the Treasury preferring short-term revenues at the expense of medium-long term advantages. Nevertheless, we urge the Treasury to consider some reforms to APD which could offer partial alleviation to airlines and air passengers. These will have a modest impact on revenue but would help make the UK a more attractive place for airlines to grow and encourage travelers and investors. We believe these reforms would more than pay for themselves, and reinforce the case for wider reform and reductions to APD.
The first would be to reform Premium Economy APD taxation. No other country differentiates its passenger tax by cabin, so this is a competitive disadvantage for UK aviation. It also matters because Premium Economy is an important revenue source for airlines to support long-haul route viability.
Premium Economy seat density is much closer to economy than to Business Class, yet it is taxed the same as Business and First Class. This means a family of four travelling long-haul Premium Economy can be paying over GBP1,000 just in tax. We propose a distinct Premium Economy APD band or alignment with the reduced Economy rate to reflect evolving travel patterns and support long-haul route viability and the government’s inbound visitor target.
Secondly, extend the child APD exemption to Premium Economy. This would ensure fairness for families and promote the UK as a family-friendly destination.
In addition to APD, there are some wider fiscal reforms the government should consider, such as the reform of airport business rates, and the reintroduction of tax-free shopping for international visitors which would boost UK competitiveness, retail, tourism spending, and regional growth.
Sustainability is one of aviation’s top priorities, and we need a fiscal and policy framework to encourage the fuel industry to invest in Sustainable Aviation Fuels (SAF). Unfortunately, the UK’s solution – a revenue certainty mechanism – gives fuel producers a guaranteed income but pushes up the cost of SAF compared to traditional jet fuel. A way of counteracting this would be to use the additional revenues (we estimate more than GBP250 million annually) from the ending of free allowances in the UK Emissions Trading scheme to fund the Revenue Certainty Mechanism. We would also like to see complete transparency in the implementation of all related SAF policies as we have noted the excessive compliance fees imposed by fuel suppliers for meeting the SAF mandate in Europe, including in the UK.
In short, the Chancellor needs to rethink her strategy of pricing people out of aviation, and our proposals offer a practical step towards reversing years of competitive decline. Introducing a Premium Economy rate and extending the child APD exemption to Premium Economy; reforming airport business rates and reintroducing the VAT shopping exemption; and using ETS revenues to fund SAF, are five modest but useful steps Reeves could take. On 26 November, we will discover if the Chancellor is serious about improving UK competitiveness and encouraging international travel.
> Read our UK Aviation Policy Brief
