How will the recent UK terror attacks and the potential for environmental taxes affect traffic demand, asks Chris Tarry of CTAIRA, with analyses from Fabrice Tacoun
Leaving to one side the prospect of an economic slowdown, events in August in the UK highlighted two of the key external threats to the airline industry.
Firstly, the UK Parliamentary Environmental Audit Committee's report, which, in effect, called for management of air travel demand, and secondly the terror alert that produced chaos and travel dislocation at the UK's airports but fortunately nothing worse. Although each event is clearly different, the potential consequences in terms of traffic and extra costs are probably in the same direction.
Exactly how long the new baggage restrictions that have been imposed in the UK as a result of the latest terrorist threat will last remains unclear - it is thought that they are in place for at least the foreseeable future. Almost irrespective of this, airlines and airports will need to change procedures and add resources to ensure that the processing times for passengers and their baggage are restored to those in place before 10 August 2006.
For low-cost carriers there is the issue of the enforced increase in hold baggage at a time when they were seeking to charge for it, thereby moving more baggage into the cabin. This change will increase costs, remove an actual or potential revenue stream and put pressure on turnaround times - all of which have implications for fares if the additional costs are passed on. Although Ryanair has reported a drop in group bookings, the traffic effects resulting directly from the terror scare are likely to be limited.
Moving onto environmental issues, in the UK and Europe - if not elsewhere - aviation is seen as the villain of the piece. The report from the UK committee suggests that while aviation currently accounts for 5% of the UK's carbon emissions, this figure will rise to some 24% by 2050. This is partly due to cuts in emissions achieved by other sectors. As a result aviation is seen as an easy and necessary target to tax, whether to ensure that it "meets its full cost" or as a way of raising revenue.
Setting the tax level is critical - will that level impact demand? For now, from a government perspective, satisfying the environmental objective seems to outweigh concerns over restricting access to air travel.
A reasonable further question is how would the money raised used? Would it go to general funding for emissions reduction research or more directly to the aerospace industry - or would this raise concerns over state aid in aviation?
In December the UK CAA published its Demand for outbound leisure air travel and its key drivers report. A key element was the estimation of travel elasticities associated with both income and price. The main focus of the analysis was on outbound leisure traffic, which now accounts for some 60% of the traffic at UK airports. It has the potential to act as a big swing factor. The CAA's analysis found the influence of income and particularly rising income on this market segment was greater than changes in fares.
In particular, as income rose, air travel rose proportionally more - the range of the values for income elasticity were between 1.5 and 1.8, suggesting that a 10% rise in income resulted in a 15-18% rise in air travel. On the other hand, price changes resulted in a less than proportionate change, with a 10% fall in price leading to a 7-8% rise in travel, and if it is symmetrical, a 10% increase in price resulting in a 7-8% fall in air travel.
Taking this further, travellers were also asked what their reaction would be if the fare they had paid were £10 ($19), £20 or £30 higher against the background of an average fare of £73 return. In response to a £10 increase (equivalent to a 14% increase on the return fare), 83% of respondents said they would still travel. A £20 increase (21%) resulted in 63% saying they would still travel and a £30 increase (42%) resulted in only 31% saying they would travel.
It appears that demand management through taxation would require the additional charge to be significant in percentage terms - assuming that this behaviour is repeated at all fare levels. The CAA's analysis suggests that in order to reduce demand by 15-20%, the tax would have to lift the average fare by some 20%. This may well be considered politically difficult, but not impossible to swallow.
Conversely, if the new passenger and baggage processing environment results in a small additional cost, the impact on demand is likely to be negligible. ■
Source: Airline Business
