1. Will anything Curb our Increasing Demand for Flying? To see more of our products visit our website at www.anforme.co.uk Professor Colin Bamford

2. In April the eruption of an Icelandic volcano disrupted travel plans for passengers and caused financial losses for many airlines. British Airways experienced protracted industrial action by some of its workers. The new coalition government announced that there would be no third runway at Heathrow, even though this had widespread support in the City and from business and airlines. The new government has also floated the prospect of additional taxes on flying on top of the 50% increase in Air Passenger Duty which came into force in November 2010. All of these issues were in addition to the problems which airlines have faced due to the global recession.

3. The demand for air transport is a derived demand. It is demanded because it provides passengers and freight users with a means to an end, such as a holiday or business trip. Other determinants of demand include: Real incomes/GDP growth. Ticket prices which depend in part on the price of aircraft fuel traded in $US, and taxation on passengers. Value of the pound sterling compared with the dollar and euro. Airport capacity issues including punctuality of flights. Behavioural factors such as environmental awareness and consumer confidence. Price and availability of substitutes such as Eurostar, ferry services and UK holidays.

4. The state of the economy and its effect on discretionary incomes has a significant short-term effect on the demand for air travel. There was a 1% fall in the number of terminal passengers at UK airports in 2008 as the recession began to take hold. This accelerated in 2009 and persisted into 2010, although at a slower rate. Recession may be the one thing which could curb our increased demand for flying.

5. The value of the pound against the euro and dollar can affect the demand for air travel, especially for leisure purposes. The pound fell against the dollar by over 30% between mid-2008 to March 2009. This puts up the price of holidays in the US, although it is subject to a time lag. Taking Q2 2009 to Q1 2010 and comparing it with the same period of the previous year, shows a 7.3% drop in UK passengers leaving for North America.

6. This is an indirect tax charged on all passengers flying from a UK airport. This tax started in 2004 and was set at £5 for European destinations and £20 for other destinations. From November 2010 it has risen to £12 for up to 2000 miles of travel going up to £85 for travel over 6000 miles. These figures double for classes of travel above economy. There are now four bands of duty. This Duty has been criticised for its anomalies. It works on the distance to the capital of the country flown to, irrespective of which city you travel to. So, Barbados falls into Band C and is more expensive than a longer flight to San Francisco since the US capital Washington is less than 4000 miles away, and thus falls into Band B.

7. It is difficult to isolate its effect as it is only one of a number of factors affecting demand for flying. It is an excise tax with revenue going to the Treasury and not an environmental tax. It gives little incentive for airlines to invest in new aircraft as it must be paid irrespective of the level of carbon dioxide emissions. The government is currently reviewing APD, and may switch from a per passenger to a per plane duty. This gives airlines an incentive to fill their planes and invest in more fuel efficient planes. The chancellor is looking to collect £3.8bn from air travel in 2014-15 compared to £1.9bn in 2009-10. This could have an affect on passenger demand.

8. The pre-November 2009 level of APD compared to real incomes and GDP growth seemed to have only a marginal effect on demand, but research on the issue is thin. A survey of leisure passengers carried out by the Civil Aviation Authority in 2007 found the following results based on an initial, typically average European return fare of £73: A £10 increase, which would by 14% on a fare of £73, would cause a 20% fall in demand. A £28 increase, 28% of the fare, would lead to a 40% reduction in demand. A £30 increase, 42% of the fare, would lead to a 65% fall in demand. However, this was based on estimates and did not include business travel which would be much more inelastic, nor did it include long-haul flights.

9. The Department of Transport has provided a mid forecast from 2010 to 2030 estimating a 70% increase in air transport demand. Effect of GDP change is also important. According to Boeing: “Worldwide economic activity, reflected in the global GDP, is the most powerful driver of growth in commercial air services and the resultant demand for airplanes.” High fuel costs will continue to compel airlines to switch to new fuel efficient planes. Boeing’s new 787 Dreamliner emits less carbon dioxide per passenger than a private car with one occupant.

10. Recession has had a short term effect in curbing the demand for air transport globally and from the UK. As the ‘green shoots’ of recovery emerge, then the market will continue to increase in line with market forecasts. At present, one unknown is the future rates of APD which, if increased, could restrict some of the projected growth. All the evidence points to an ever-increasing demand for air transport, closely aligned to growth in the global economy.

11. Explain why the demand for air transport is a derived demand. (i) Using the information from the CAA’s survey of leisure passengers, calculate the price elasticity of demand for the three increases in prices. (ii) Discuss the business significance of the estimates you have calculated. Discuss the case for and against a switch in APD from being a tax per passenger to a tax per plane. Comment upon the wider economic implications of the projected increase in global air transport demand over the next 20 years.