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1. Introduction
1.1 Background
Air transport has been significantly expanding for the last decades, with several
implications on the economy, the society and the environment. The economic
impacts of air passenger and freight transport are huge and affect various sectors,
including national and international tourism, import-export and manufacture
activities, resulting in great direct and indirect effects on employment at both local
and global level.
Figure 1 - Global Air Traffic Trends
World Annual Traffic (Trillion passenger Kilometres)
0.4
1.0
2.0
3.0
5.0
8.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
1969 1979 1989 1999 2009 2019
Year
Source ICAO (2000)
The global demand for air travel experienced a dramatic increase, by about 9 per cent
per annum in the past fifty years (Whitelegg and Cambridge, 2004, p.7). The
greatest growth has been in international leisure flights: nowadays there are five
overseas holiday flights to every business flight made overseas by a UK resident
(Civil Aviation Authority, 2006). For the next two decades, further growth is
predicted at a rate between 3 and 7 per cent per annum, whilst the amount of
kilometres flown is expected to triple and the number of aircraft to double
(Whitelegg and Cambridge, 2004).
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The low-cost airlines (from this point forward LCCs) experienced a significant
expansion in Europe, attracting significant traffic volumes (Bieger and Wittmer,
2006, p. 41), the introduction of lower fares stimulated in a few years a significant
growth in the demand, especially for medium-short haul flights between the
European Capitals. The Routes and prices offered result attractive to tourist traveller
and increasingly the business passenger (Whitelegg and Cambridge, 2004, p.9).
Civil Aviation is a main sector for the global and local economy; however, it doesn’t
imply only economic consequences, but also social and environmental issues which
have emerged dramatically in recent years. The extent to which air sector can affect
the global climate changes, along with its local environmental and social impacts, are
becoming increasingly important for public opinion. Whitelegg and Cambridge
(2004, p. 45) argue that climate change risks represent in fact economic risks that
should require a precautionary economic strategy, which is sought by different parts
of society and by environmental groups.
A widening debate about demand management has started being generated due to the
numerous and conspicuous concerns related with the growth of aviation. Whitelegg
and Cambridge (2004, p. 25) see Demand management as “crucial to the delivery of
sustainable development”, as unconstrained expansion of the air transport sector
presents a severe challenge for the sustainability of our economic system.
Fiscal measures are seen as one of the most viable tools for demand management. It
has been argued that “the growth in demand for passenger and freight air travel is
assisted by a generous taxation and fiscal support regime” (Whitelegg and
Cambridge, 2004, p.5). However, the British Government recently doubled the Air
Passenger Duty (APD), with the stated purpose to help reducing the environmental
damage caused by aviation. The increase in Air Passenger Duty (APD) applies to all
flights leaving from UK airports, rising from £5 to £10 per person on short-haul
flights departing from the UK. Similar measures have been adopted by the Dutch
Government in 2007.
The low-cost carriers (LCCs) are responsible for a great and growing number of
short and medium-haul flights, which are considered to produce severe
environmental impacts due to the scarce fuel efficiency of jet commercial aircraft on
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short distances. Moreover, they contributed to a significant extent to the expansion
of demand for air transport and in many cases competing with railways. On the other
hand, LCCs generate considerable benefits for local and national economies in terms
of tourism and employment generation; Ryanair, the largest low-cost airline,
currently employs a team of 4,200 people, comprising over 25 different nationalities
(Ryanar, Website).
According to Mason (2000, p.111), although the principal target market for LCCs is
the price sensitive leisure traveller, there is some evidence that short haul business
travellers are also prepared to use such services. Given the high price sensitiveness
of LCCs users, the effects of fiscal measures are expected significant. It can be
expected that fare increases will deter a great number of travellers to fly.
The aim this research is to explore the complex relationships between the air-
transport, the economy and the environment and potential effects of a tighter fiscal
regime applied to air transport. In particular, this study focuses on the demand for
low-cost airlines and the response to hypothetical fare increases induced by harsher
fiscal regime as sought by part of the public opinion.
2. Literature review
2.1Air transport sector and the British Economy
Air transport is an important sector for the British economy. The 2003 Aviation
White Paper asserts that the aviation industry “directly supports around 200,000 jobs,
and indirectly up to three times as many” (DfT, 2003, p. 22).
According to the White Paper, besides the around 200,000 employees in the UK
which are directly connected with the aviation industry, nearly 600,000 more
positions are provided indirectly (DfT, 2003). The Air sector’s contribution to the
gross domestic product was estimated at around £10.2 billion (Oxford Economic
Forecasting, 1999), whilst in 2004, UK airlines worldwide employed 83,572 (DfT,
2005). In terms of air-freight, UK imports are slightly higher (0.79 million tonnes)
than exports (0.73 million tonnes).
According to Cairns and Newson (2006, p.4) passenger traffic at UK airports has
grown at an average annual rate of about 6% since the mid-1970s, with an increase
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of 12.5 million new passenger movements in the last year; UK residents make 67%
of all trips affecting UK airports. The greatest growth has been in international
leisure flights; according to the Civil Aviation Authority (CAA, 2006) there are
nowadays five overseas holiday flights to every business flight made overseas by a
UK resident.
The Department for Transport (DfT, 2003) gives a mid-range scenario prediction that
air traffic at UK airports will grow at an average of 4.25% per annum, assuming an
unconstrained forecasts of demand to 2030. Should no restrictions or limiting
measures be imposed at global, European or national level, British airports are
expected to serve over one billion passengers a year by 2050.
After the terrorist attacks in the USA on 11 September 2001, the growth rate in air
sector dropped below the outstanding scenario maintained till that moment.
Nevertheless the Department for Transport (2002) maintains that air-traffic growth
would return to its long run trend, despite fluctuations induced by exogenous events.
The use of air freight has also grown considerably in the last decade. An average rise
of 8.7% per annum between 1992 and 1998 has been recorded in the tonnage of
freight carried by air, landing or taking off at UK airports (CAA, 2001). Long
distances represent the movement of the majority of air freight. The tonnage of
freight carried between the UK and the other European Union Member States in
2001 amounted 18.7% of the total, while 2.7% “was carried over domestic routes”
(CAA, 2001).
2.2 Drawbacks of Aviation for the UK Economy
Although the air transport sector plays an important role for the British economy in
terms of employment and revenue generation, it has been argued that it generates
negative side-effects at a macroeconomic level, as described below.
It has been argued that aviation generates a substantial deficit in terms of tourism
expenditures, as tourists originating in the UK spend far more abroad than inbound
tourists do (Whitelegg, 2003); hence, a contraction of the sector would be globally
beneficial for the British economy. According to Cairns and Newson (2006, p.46),
the financial resources brought by overseas visitors in UK don’t balance the money
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that UK residents spend abroad: for every £1 an overseas visitor spends in the
Country, a UK resident spends £2.32 abroad, resulting in a £17 billion tourism deficit.
2.3 Air sector and the Environment
Every year, 205 million tonnes of aviation fuel (kerosene) are burnt by world’s
airlines (OECD, 2002), producing over half a billion tonnes of greenhouse gases
(IEA, 2002). International aviation and maritime emissions were left out of the
Kyoto Protocol under Article 2.2. The ICAO, which has no enforcement powers,
was given responsibility for regulating emissions from international aviation. The
cost of global warming attributed to UK aviation in 2000 was 1.4 billions, rising to £
3.6 billions in 2020 assuming unconstrained demand (Banister, 2005).
Figure 2 - Estimates of total burn of all outbound flights in 2004 by route type.
0
5
10
15
20
25
30
35
40
45
50
EU Domestic Intra EU EU to/from non EU EU Airspace Overfly
Millions tonnes
Source: Eurocontrol (2004) - appraisal based on traffic data
Only domestic aviation – which, according to the Royal Commission on
Environmental Pollution, currently accounts for about 0.5% of the UK’s carbon
dioxide emissions – is included in the Kyoto Protocol; nonetheless emissions of
oxides of nitrogen and water vapour are not limited by the Protocol, which places
limits only on carbon dioxide emissions (RCEP, 2002).
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Between 1990 and 2004, overall UK carbon emissions have been reduced by 5.6%,
from 161.5MtC to 152.5MtC; nevertheless, emissions from transport within the UK
increased by 10%, from 39.2MtC to 43.1MtC (Environmental Audit Committee,
2006). Emissions from road transport rose by 10%, whereas CO
2
from international
flights departing the UK increased by 111%, from 4.3MtC to 9.1MtC. Altogether
1
,
transport accounted for 33% of UK carbon emissions in 2004, up from 27% in 1990
(Environmental Audit Committee, 2006).
Between 1990 and 2000, carbon dioxide emissions from UK aviation have doubled
(Cairns and Newson, 2006, p.90). Without substantial action taken, the continued
growth in global and European air traffic is expected to result in further growth of
aircraft emissions. Available projections suggest continued sustained growth in fuel
use and pollutant emissions, which would undo the benefits of technological progress
in emission reduction (Whitelegg, 2003).
Amongst the numerous environmental impacts, noise is one of the main problems at
local scale connected with air sector. The number of people exposed to noise levels
over 55 Ldn
2
dB around some important European airports is shown in Table 1. It is
clearly visible how London-Heathrow airport affects a number of people far higher
than other facilities.
Table 1 - Number of residents within the 55 LDN dB at selected European Airports
Airport Number of people
Heathrow, London 440 000
Fuhlsbüttel, Hamburg 123 000
Charles de Gaulle, France 120 000
Schiphol, Amsterdam 69 000
Kastrup, Copenhagen 54 000
Barajas, Madrid 33 000
Source: M+P Raadgevende ingenieurs, 1999
1
Considering transport within the UK together with international air and shipping departures.
2
Day-Night Average Sound Level. It is the average noise level over a 24 hour period. This rating
system factors in a 10 dBA "penalty" in the night time hours (10 p.m. to 7 a.m.) to account for the fact
that people typically find noise more disturbing at night while they are trying to sleep.
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2.4 The UK Government approach to the issue
According to various authors (e.g. Withelegg, 2004, Cairns and Newson, 2006), the
policy adopted by UK Government and expressed in the 2003 White Paper is not
likely to bring the air sector into the limits required by the principles of sustainability.
According to Cairns and Newson (2006), the current approach does not impose the
internalization of external costs, does not consider the environmental and economic
implications of a further expansion in the air transport and shows all the limit of
“predict and provide” policies as well as it has been for road transport in the past.
As suggested by Withelegg, (2004), more sustainable approaches should deal with
forms of taxations which abolish the privileged position of Aviation and cut the
redundant demand in order to limit the diseconomies produced by the sector.
According to the 2003 Whitepaper, air-transport would contribute 26% of UK CO2
emissions in 2020 and perhaps 36% in 2030. According to the Energy White Paper’s
60% emission reduction target, aviation would be consuming nearly 60% of the
UK’s 2050 CO
2
target (SERA, 2005). Upham et al. (2003) comment that such a
significant allocation to a single sector is not self-evidently justifiable, additionally
mentioning the role of pollutants other than CO
2
(e.g. NOx and SO
2
) and the noise
nuisance imposed on the communities settled in the proximity of airports.
It is extensively documented that Aviation is a highly polluting industry, which
affects in local, regional and the global level. Evidence has been provided that the
negative externalities of the sector (i.e. the social cost of Aviation) are not fully
internalized by the operators and the passengers. As claimed by Whitelegg (2004),
the application of the “polluter pays” principle – which is one of the pillars of
Sustainability – on air-transport, has been sought after by members of the scientific
community, local groups and Environmentalists in the past decades. It is claimed
that externalities of the aviation that have not been included in the air ticket price so
far should be highly evaluated, in order to internalize the external costs imposed by
aviation on the environment and the society (Cairns and Newson, 2006).
The low-cost carriers represent one of the most recent and noteworthy phenomenon
in the European aviation; they feature peculiar characteristics and proved extremely
successful in generating new demand for air-transport. This research therefore
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