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Airlines require stable tax conditions to survive COVID-19
In an interview with Airlines for Europe (A4E), it says the aviation sector needs a stable tax environment and incentives to emerge stronger and greener from COVID-19.

Travel restrictions worldwide have caused an unprecedented
crash for airlines. COVID-19
has presented the biggest obstacle in the history of the aviation sector. Many
are struggling as stringent consumer rights and tax obligations restrict
cash-flow.
ITR’s Mattias Cruz
spoke with Laurent Donceel, senior policy director at A4E, an industry body
that includes 16 airlines and represents more than 70% of European air traffic.
Donceel discusses the state of aviation sector, the tax obligations the industry
struggles with, and the necessary steps to support the recovery of aviation.
Mattias Cruz: What
state is the airline industry in today?
Laurent Donceel: The situation is bad. Traffic in July among
A4E carriers was down by an average of -75%. 2020 will be annus horribilis for the sector. We’ve seen a 50% decline in
passenger volumes and load factors will likely remain below the average
breakeven level of 75-80% in the foreseeable future. In Europe there will be
around €20 billion ($23.6 billion) of losses this year. And as we are hitting a
second wave of COVID-19 infections, the situation doesn't appear to be
improving before the end of the year, or even in 2021.
The second wave of infections in many countries, mixed with
uncertainties with regards to travel restrictions and safety measures at
destinations, such as quarantine policies, dampen all prospects of a swift
return of traffic to pre-crisis levels. Consumer confidence also remains low
amid efforts to expand the precautionary measures taken on board.
Some airlines are doing better than others, notably on the
intra-European market. However, transcontinental routes remain extremely badly
affected.
To be clear, we are experiencing the worst crisis in the
last century and we can’t see European airlines returning to profit by next
year.
Mattias: What have
been some key tax obstacles the sector has faced?
Laurent: There
are various different challenging cost obstacles, whether we’re talking about
taxes on tickets, corporate taxes, CO2 taxes, costs of regulations or
airport and air traffic charges. These all present significant cost burdens
that require careful considerations under the current situation. At the moment
the most significant financial challenge we are facing is not a tax per se, but
is related to the European regulation on air passenger rights.
There are some stringent rules in Europe on passenger rights
in case your flight is cancelled or delayed. Under Regulation EU261, passengers
can be offered a change of flight, a voucher or seek a reimbursement or a
refund in case of cancellation. The biggest pressure on liquidity therefore comes
from the reimbursement of tickets linked to cancellations.
The full refund obligation to passengers within seven days
is putting pressure on airline finances at a time when the value of un-flown
tickets sold in the EU for flights booked ahead of the summer months reached
€9.2 billion and whilst it was estimated that 4.5 million flights would have
been cancelled globally by June 30. Considering the very large number of
flights cancelled due to collapsing demand or travel restrictions, the high
number of requests for refunds is putting unprecedented pressure on the
liquidity of carriers. The cash liquidity and airlines’ capacity to pay those
taxes are therefore very closely linked to bookings, travel confidence and
restrictions.
We are therefore strongly urging governments to refrain from
introducing aviation ticket and cargo taxes. Unfortunately, we are already
witnessing many strong European carriers being forced to restructure their
organisations and let their people go, leading to more unemployment and
economic hardship in Europe. Any additional financial burden is pushing
airlines close to the brink of bankruptcy.
Mattias: With
companies being distressed and close to collapse, would you expect any
consolidation and restructurings? And would that have any further tax
implications?
Laurent: Every
type of financial crisis, economic crisis, has a stress test effect. The
current one is no different, speeding up underlying trends when it comes to the
financial health of some operators.
However, while one could expect an acceleration of the restructuring
process, until now, bankruptcies have been limited thanks to ad hoc financial
help made available to a number of companies.
The competition between carriers within the European
aviation market remains extremely high, notably in comparison to the US market,
and this is positive for passengers and the EU economy at large.
Mattias: How
successful have countries been in supporting the aviation industry?
Laurent: State-backed
airlines have been grateful with the support received. But in the very
competitive European aviation market, other players have not either turned to
governments for financial support or received the same level of backing. Carriers
who have not benefited from state support are concerned about uncompetitive practices
and fear they may undermine the functioning of the market.
A4E’s position is that such policies should not affect the otherwise
healthy competitiveness of the market. It would be detrimental to the
continent’s connectivity and to passengers’ interests. Carriers should compete
on a level playing field.
Mattias: And this
starts to touch on state aid, which the EU has relaxed during the crisis. Will
there be any issues there?
Laurent: As per
European competition law, the assessment of state support needs to include an analysis
of the companies’ respective financial standing and identify pre-existing
structural weaknesses, which would make any state aid more questionable.
Mattias: Do you have
any recommendations for what governments could do next with tax as a tool in
order to support the aviation industry?
Laurent: Airlines
are a facilitator of economic activity, key for investment, services, the
trading of goods, cargo, the development of tourism, in particular vis-a-vis
regions most hit by the crisis.
The taxation of aviation is a short-sighted measure because
it's the economy as a whole that you dampen. The taxing of tickets directly
impacts prices. The cost is borne by the end consumer.
Today, the political argument for aviation taxation is an
environmental one. Yet, a flat tax on e.g. tickets, regardless of how efficient
an airline’s operations are, or how new its fleet is, etc. does not incentivise
efficiency or CO2 reduction efforts, it is merely a revenue-raising
policy.An efficient environmental tax system would incentivise efficiency and
price CO2 emissions accordingly. This is why market-based measures
are preferred to a blunt tax that does not consider the underlying efforts or carriers’
commercial strategies.
I take this opportunity to point out that the financial burden on
the sector is already high – and increasing – with airlines paying their fair
share, including for the environment. Airlines will start offsetting their
emissions through the global UN system, CORSIA, from 2021. It is the first
global CO2 offsetting scheme in the world. Already, aviation is theonly transport mode subject to the EU’s
emissions trading system (ETS), which is likely to be strengthened in the
upcoming revision in 2021. With the European Green Deal we expect more
regulation, which often leads to additional costs for the airlines.
So, avoiding putting in place new taxes or putting on hold plans for a whole set of taxes would allow airlines to reopen more routes, increase their frequency and continue to invest in their environmental transition.
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