APD: the good news and the bad news

Using words that all but accepted everything the Caribbean had been saying about the illogicality and unfairness of Britain’s Air Passenger Duty (APD), Britain’s Chancellor of the Exchequer, George Osborne, in his budget statement returned the tax to a two band system.

“We will also reform Air Passenger Duty to end the crazy system where you pay less tax travelling to Hawaii than you do travelling to China or India. It hits exports, puts off tourists and creates a great sense of injustice among our Caribbean and South Asian communities here in Britain. From next year, all long haul flights will carry the same, lower, band B tax rate that you now pay to fly to the United States,” he told the House of Commons on March 19.

The changes, which will benefit all destinations presently in Band C (which includes Jamaica and the rest of the Caribbean) and those in Band D, will be introduced from April 2015 on as this is the length of time required by the airlines to alter their fare structures.

The decision is an unusual victory for the Caribbean and a tribute to the patient lobbying efforts of successive tourism ministers in Jamaica and their colleagues across the region who together with the region’s Diaspora in the United Kingdom, demonstrated that by staying on message the Caribbean was capable of mounting a sustained and co-ordinated lobby overseas.

Success also came because the Caribbean, its tourism ministers and the industry recognised that APD struck at the heart of one of the few areas where the Caribbean had competitive advantage and could generate future growth: tourism.

Despite this, British Treasury ministers were not prepared to consider any alternative that was not revenue neutral, and made clear in private exchanges they could find no technical way in which to re-band the Caribbean alone. With this in mind, Caribbean tourism ministers through the Caribbean Tourism Organisation produced in 2010 a detailed proposal on how a return to a two band system could be revenue neutral. Regrettably, this was not taken up at the time.

However, the turning point came late last year at the Commonwealth Heads of Government meeting in Sri Lanka where Caribbean ministers and London-based High Commissioners made clear their intention with other nations whose support they had obtained, to include language critical of the UK in respect of APD in the final communiqué.

There a tense meeting took place, and eventually a political deal was struck between the Caribbean and London, and in the margins the three most senior UK political figures present privately agreed the issue would be addressed.

In the end, the Chancellor took the surprising step of accepting a loss to the British Treasury at a time of austerity of up to US$437 million per annum (£265 million) by 2018.

What will be introduced next year is essentially a tax that divides long haul and short haul. This means that the APD on an economy fare to the Caribbean will fall from US$ 141 (£85) per person to US$ 118 (£71) per person from April 2015. Rates in Premium economy and club/upper class which are charged at a much higher rate will fall by US$ 47 (£28) in 2015 to the same level that applies to the US.

The Caribbean fought for parity with the US and won; but the reality is that even at the new rates the tax remains the highest on travel and tourism in the world and almost four hundred per cent higher than any other similar European airline tax. Moreover, when added to local taxes and the hundreds of dollars in charges airlines and all airports levy, APD makes travel from the UK to the Caribbean a particularly highly taxed commodity, pushing ticket prices to levels that will make the Caribbean ever less competitive.

The tax will also continue to rise each year by the rate of UK inflation, implying that if not reformed, it could one day exceed the price of a basic low season air fare before surcharges are added on. As such it remains a damaging form of extraterritorial tax on the region’s most important industry.

What this suggests is that while the Caribbean should rightly be proud of its achievement, there is a strong case, when the dust has settled and the UK’s May 2015 election is over, for the Caribbean and the community in Britain to join its voice with the broader fair tax on flying campaign that brings together the UK airlines and the industry as a whole.