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Higher APD will deepen the tourism deficit

29 December 2006

The Chancellor's plans to increase Air Passenger Duty (APD) to lessen the impact of aviation emissions on the world's climate will only worsen the UK's tourism trade deficit and create new local environmental problems, argues Kurt Janson, policy director at the Tourism Alliance.

The Chancellor's pre-budget announcement that APD would be doubled to £10 for economy fares within the European Economic Area and to £40 for economy fares to other destinations is a piece of crude political opportunism rather than a genuine attempt to seriously tackle the problem of climate change.

Worse, it demonstrates that the Government has very little understanding of the UK tourism industry or of the impacts of increasing APD.

One argument for increasing the cost of travel is that it will benefit both the environment and the UK tourism industry. As the UK currently runs an annual tourism deficit of £18b, the thinking is that any move that raises the cost of air travel and reduces the number UK residents' overseas holidays must be good for the UK tourism industry.

There are two main problems with this argument. The first is that it assumes that UK residents and overseas visitors are equally sensitive to changes in the cost of air travel.

However, a price elasticity modelling study by VisitBritain shows that UK outbound travellers are much less sensitive to increases in the cost of air travel than overseas visitors to the UK.

For every 1% increase in the cost of travel, expenditure by UK residents on overseas travel only decreases by 0.75%. By contrast, a 1% increase in the cost of travel to the UK results in a 1.3% decrease in the UK's tourism receipts.

The main reason for this difference is that UK residents have little choice other than to fly if they want to take a holiday overseas. As ferry and rail are only viable for a small range of destinations, British travellers must pay the additional cost if they want to go to most countries.

However, if the cost of travelling to the UK increases, overseas visitors simply switch to a cheaper destination.

The net result of raising the cost of travel is that a greater percentage of the people on flights will be British outbound travellers. As a result, Britain's tourism trade deficit will worsen if the cost of air travel increases.

The increase in APD will also deter the most lucrative visitors as short-haul travellers (who only spend an average of £355 per trip) are less sensitive to price changes than long-haul travellers who spend an average of £785 per head.

The second problem with the argument is its assumption that overseas visitors and domestic visitors are direct substitutes within the UK market. However, this is not the case.

The majority of overseas travellers visit urban locations when they come to the UK - . indeed, approximately half of their expenditure is limited to London. Also, overseas visitors come to the UK throughout the year and show only a small degree of seasonality. Finally, when they travel outside London, around 80% of them do so using public transport.

By contrast, domestic tourists in the UK are much more seasonal, travel to rural and seaside locations rather than cities, and around 80% of them use private vehicles to undertake their journey.

So, while rural and seaside destinations could well benefit from an increase in the cost of air travel, it would be detrimental to urban destinations such as London and Edinburgh. And it will certainly increase the emissions from vehicles within the UK, not to mention congestion problems.

What this reflects is that tourism is not one homogenous industry but a collection of different sectors and niches. This means that the Government needs to have a much more sophisticated approach to tackling climate change than simply increasing a crude fiscal instrument such as APD.

Following the recommendations in the Stern Report on Climate Change and introducing a Emissions Trading Scheme would be a good start.

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