The introduction of the German air passenger duty: a large-scale experiment with an uncertain outcome

Airneth column
January 2011
by Wolfgang Grimme

In November 2010, the German parliament voted for the introduction of an air passenger duty (APD) - a law with potentially far reaching consequences for air transport. The APD is applicable for each departing passenger from 1st January 2011 and ranges from € 8 for domestic and intra-European flights to € 45 for long-haul flights.

This policy is remarkable for several reasons. Firstly, the introduction was initially justified with environmental concerns, as air transport - in contrast to other modes - allegedly causes external costs, which have not yet been internalised. However, the APD as it is now introduced does not create any incentives for a more environmentally friendly behaviour by passengers or airlines. The APD is a lump-sum per passenger, levied independently from noise category or fuel efficiency of the aircraft used. Cargo remains exempted from the duty, although in this sector on average older and so far noisier and less fuel efficient aircraft are used than in passenger transport.

Secondly, the introduction of the APD in Germany seems to be remarkable, against the background of the rather negative experiences made in the Netherlands with a very similar instrument. The Dutch “ecotax”, introduced in July 2008 was abolished only 12 months later, when it became apparent that a rather large number of Dutch passengers decided to fly from airports in Belgium and Germany. Comparable effects can now be expected for Germany. Apparently, Germany tries very hard not only to be world leader in the export of goods, but also of air passengers. In the spirit of European unity and good neighbourhood, Germany does not only pour vast amounts of money into countries like Greece and Ireland troubled by the financial crisis, but also very generously allows its immediate neighbours to participate in German air transport demand.

Thirdly, legislators assume that the APD does not influence the competitive situation on air transport markets. Nevertheless, analyses by SEO and DLR came to the conclusion that low cost carriers will be more strongly affected by the APD than network carriers. Low cost carriers usually have a more price-sensitive customer base, which will be reduced more strongly in case of a partial or full pass-through of the APD. Moreover, only network carriers can substitute reduced OD demand with international transfer passengers, which are exempted from the APD. These effects could also be observed during the ecotax in the Netherlands.

Despite the doom and gloom scenarios propagated by some aviation stakeholders, one silver lining on the horizon could spark some optimism for the affected airlines, airports and tour operators: While in the Netherlands the taxation was introduced at the beginning of the economic downturn, contributing further to deteriorating demand, the taxation in Germany is being introduced during a relatively strong economic upturn. With increasing incomes, rising employment figures and a generally optimistic economic climate, rather positive growth forecasts for 2011 are now given by airlines and tour operators, despite the new tax burden.

It will be interesting to see, which results this large scale experiment will have on air travellers’ airport choice and airline supply decisions and how the policymakers in neighbouring countries will react. Austria has followed suit already with the introduction of an APD. For policymakers in the Netherlands it is an interesting challenge to find out which policy will be more beneficial: Doing nothing and hoping for an influx of German air passengers or (re-)introducing a similar APD with less leakage effects than those observed in 2008/09.

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