Airlines require stable tax conditions to survive 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 the only 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.