Air departure tax in Scotland: an economic assessment

6. Economic Impacts

Having defined the outcomes in terms of the aviation industry, this chapter considers the wider economic impacts on Scotland as a whole, corresponding with the final step in the Logic Map. The analysis presented below makes use of Scottish Enterprise’s Economic Impact Assessment Guidance ^[31] in determining the net additional impact of introducing ADT on jobs and Gross Value Added ( GVA) at the Scotland level.

The anticipated economic impacts associated with the introduction of ADT stem from an expected increase in passenger numbers, either in direct response to a reduction in fares or indirectly as a result of responses to supply side improvements (or more realistically a combination of the two effects). The impacts of introducing ADT can be defined in terms of three broad areas:

• Operational impacts: the economic activity associated with the changes in the operations of airports and air services in Scotland (including ‘based aircraft’ as a separate entity).
• Tourism / visitor impacts: employment supported by increased inbound tourism.
• Wider business impacts (i.e. productivity): improvements in the long-term productivity level due to increased numbers of business passengers.

It is important to acknowledge that, whilst standard economic impact assessment measures provide an indication of the scale of impacts based on various parameters, they do not necessarily evidentially record causality between an outcome (i.e. additional passengers) and impact (i.e. additional employment). For example, by relating an uplift in passenger numbers to a jobs per additional passenger factor and then to a GVA per job factor, it is possible to develop an estimate of the impact of introducing ADT at a lower rate than that currently charged. However, what this analysis does not reveal is the means by which this happens (i.e. the ‘transmission mechanisms’). The economic impact model estimates contained within this chapter are therefore supplemented by an economic narrative, which sets out the transmission mechanisms as well as any limitations in the modelling approach.

The next section sets out the key principles of Economic Impact Assessment ( EIA), with the subsequent section applying these for each of the above noted impacts.

Economic Impact Assessment

An economic impact assessment is focussed on calculating the net additional impacts of a public sector investment – i.e. what level of benefits arise because of the intervention that would not otherwise have occurred. There are five key determinants of what economists refer to as ‘additionality’:

• Deadweight – benefits that would have occurred without the intervention, so in this case the extent to which passenger numbers would have grown if the current APD regime was maintained:
• Leakage – the proportion of benefits that accrue to those outside of the intervention target area or group;
• Displacement – the proportion of intervention benefits accounted for by reduced benefits elsewhere in the target area; and
• Substitution – arises where a firm substitutes one activity for a similar one to take advantage of public sector assistance.
• Multipliers – multipliers estimate further economic activity (e.g. jobs, expenditure or income) associated with additional local income and local supplier purchases.

The premise of the above is that the net additional impact is calculated by subtracting the deadweight from the ‘gross’ impacts. That is, the additional impact is equal to the total impact minus what would have happened without the intervention (i.e. the deadweight).

For reference the full equation is shown below:

The economic impact in relation to each area of impact was estimated at a Gross level. Though deadweight is taken into account through comparison with the Do Nothing scenario (i.e. the continuation of the current APD regime), there is insufficient data available to quantify the leakage, displacement and substitution effects. These are picked up in a qualitative manner in the supporting narrative.

In the analysis which follows, a five-year period from the introduction of ADT in 2018 is used for reporting purposes. The jobs presented in this analysis are therefore a cumulative figure developed over five years from 2018 to 2022 (inclusive). Note though that a new job is only counted once in the year in which it appears. GVA also accrues on an annual basis in line with the increase in passenger numbers, and this GVA is also cumulative over the five-year period. In this case though, GVA which is generated in e.g. Year 1 is assumed to recur in each year over the five-year period and is therefore accounted for in successive years.

For brevity, the figures reported in this chapter reflect the core assumptions with respect to the underlying growth scenario ( DfT Central (unconstrained) including Low Cost Long Haul adjustment) and UK Aviation Forecasts elasticities. The sensitivity analysis presented previously provides an indication of how these jobs and GVA figures may vary using different underlying assumptions, broadly plus or minus 10% over this five-year period although this range would grow over time. For simplicity, GVA figures are presented in un-discounted ^[32] nominal terms and are not converted to a constant price year. Therefore, they do not account for inflation or that future benefits are valued less at present.

Operational Impacts

There are two discrete impacts within this overall criterion:

• The impact associated with additional passengers on airlines, airports and their supply chain.
• The impact associated with additional based aircraft at Scottish airports.

Additional Passengers

There will be a direct economic impact associated with a change in passenger numbers, in terms of:

• additional airport and airline staff required to handle additional passenger numbers (additional based aircraft are considered in the next section);
• increased density of aviation operation, creating the potential for spin-off employment in terms of e.g. maintenance, ground-handling services; and
• Increased demand for e.g. parking, airport public transport connections, retail etc.

The direct economic impact of the estimated increase in passenger numbers was calculated based on the most recent research commissioned by ACI Europe in 2015 ^[33] . In overview, this research established that every 1,000 passengers through an airport generates one additional job. However, this varies by:

• the size of the airport: the presence of economies of scale suggests that larger airports employ fewer staff per 1,000 passengers; and
• traffic / airline type: passengers flying on low cost carriers have a smaller direct employment impact than other types of traffic, generating 20% fewer jobs per 1,000 passengers.

Therefore, a set of assumptions about additional direct employment as a result of the estimated increase in passenger numbers was applied to Aberdeen, Edinburgh, Glasgow and Prestwick airports based on their size and type of traffic ^[34] . Direct GVA was then calculated based on the Scottish Annual Business Survey ^[35] statistics for the transport sector.

Indirect economic impacts (i.e. employment and GVA generated by the aviation industry supply chain) and induced economic impacts (i.e. employment and GVA generated by the income expenditure of the direct and indirect employment) were calculated using Scottish Input-Output Tables ^[36] Type I and Type II ^[37] multipliers for the air transport sector.

The job impact figures have been calculated as follows:

• calculating the additional passengers per annum across the listed airports for each of the forecast years;
• applying the additional passengers by airport to the ratio of jobs per additional passenger;
• applying the Type II employment multiplier to the direct job numbers to calculate the indirect and induced jobs; and
• the additional jobs accrue on an annual basis, aligning with the annual increase in passenger numbers.

The GVA figures have been calculated by:

• applying the additional direct jobs generated to a ‘ GVA per job’ figure; and
• applying the Type II GVA multiplier to the direct GVA to calculate the indirect and induced GVA.

Based on the above calculations, the table below sets out the anticipated gross and net additional jobs and GVA associated with the increase in passenger numbers through the above listed airports.

Table 6.1: Economic Impact of Additional Airport Passengers, 2018-2022

		100% Reduction in Band A			100% Reduction in Band B			50% Reduction in Bands A & B
Cumulative 2018-2022	Do Nothing	S1a: Full Pass-through	S1b: Partial Pass-through	S1c: Zero Pass-through	S2a: Full Pass-through	S2b: Partial Pass-through	S2c: Zero Pass-through	S3a: Full Pass-through	S3b: Partial Pass-through	S3c: Zero Pass-through
Gross Additional Jobs	3,340	5,780	7,200	8,840	3,670	4,260	4,910	4,720	6,000	7,380
Gross Additional GVA	£321m	£787m	£886m	£1,006m	£384m	£447m	£516m	£585m	£702m	£827m
Net Additional Jobs		2,440	3,860	5,500	330	920	1,570	1,380	2,660	4,040
Net Additional GVA		£466m	£566m	£685m	£63m	£126m	£195m	£265m	£381m	£506m

Note:

• Jobs are rounded to the nearest 10
• GVA is rounded to the nearest £million

The table above highlights that the net additional jobs and GVA associated with direct operational impacts tend to be largest:

• where pass-through is lowest – in each scenario, the largest impact accrues in the zero pass-through scenario, i.e., where the maximum supply side response variant is assumed; and
• where the reduction in Band A is largest (i.e. Scenario 1, which provides for a 100% reduction in short-haul APD therefore records the largest impact).

By extension of the above, Scenario 1c (100% reduction in Band A with zero pass-through) records the largest benefit followed by Scenario 1b and 3c. Whilst the development of the long-haul network may potentially be more advantageous in terms of the wider Scottish economy, the biggest impact under this category will be realised in the short-haul sector, given that the market is much larger (and thus will generate more additional passengers). As noted above, the jobs and GVA highlighted in the table represent the cumulative growth over a five-year period. Purely as an example, the illustrative charts below highlight the build-up of the net jobs and GVA impacts for Scenario 1b (S1b).

Figure 6.1: Annual and Cumulative Jobs Growth Under S1b (Net)

Figure 6.2: Annual and Cumulative GVA Growth Under S1b (Net)

Leakage

There is unlikely to be any leakage in the context of this impact, as passenger numbers through Scottish airports as whole are likely to increase. More generally though, additional passengers and flights will also generate additional economic activity out-with Scotland, and non- UK airports and airlines will benefit if the policy leads to greater profitability.

Displacement

A proportion of the estimated additional airport passengers from increased demand for domestic flights may comprise passengers that have switched mode from rail. Although internal Transport Scotland analysis has indicated that there could be a marginal loss of cross border rail passenger journeys if air fares decrease, particularly for the Scotland – London market, the overall impact on Scotland’s rail industry of a 50% cut to ADT is expected to be relatively small. Taking this into account and the uncertainties surrounding potential offsetting effects ie. future improvements to rail services, reductions in rail fares etc., calculating this impact was considered beyond the scope of this work.

Displacement among Scotland’s airports is also likely to be minimal. At the margins, there is a possibility that passenger numbers through Inverness Airport could decline if there is a reduction in Band A rates (i.e. Scenarios 1 and 3). At present, passengers departing from Inverness Airport are not liable for APD and it is assumed that this will continue to be the case when ADT is introduced. However, the comparative position of this airport will worsen as other Scottish airports benefit from a reduction in fares and / or expansion of the route network. Given the distances and travel costs from Inverness to other airports, it is likely that any such impact will be minimal. Inverness Airport’s relatively small passenger numbers (783,000 per annum or 3% of the Scottish total) would also suggest the impact at Scottish level even of a more substantial displacement effect is relatively minor in Scottish terms.

There is likely to be a more notable displacement from airports in the north of England, irrespective of which tax reduction scenario is pursued. However, it should be noted that this study is reporting at the Scotland-level only and thus displacement from elsewhere in the UK is not recorded as a negative factor. A UK-wide study would count this impact however.

Substitution

There is unlikely to be any substitution effects in the context of this impact.

Based Aircraft

Previous research and our consultation with industry undertaken as part of this study suggests that a ‘based’ aircraft will generate a higher level of employment and GVA than a non-based aircraft. As well as additional crew, the aircraft is likely to require a range of support services to ensure its safe and efficient operation. It is important to note here that a based aircraft is not simply one which overnights at an airport, but is the home base of that plane, with support (e.g. crew, ground handling, aircraft cleaning, catering suppliers, fuel providers etc.) provided from there.

The literature and airline pronouncements identifies various jobs figures associated with based aircraft including:

• 60 jobs for an additional easyJet aircraft based at Edinburgh ^[38] ;
• 130 jobs for two Norwegian Airlines aircraft based at Edinburgh ^[39] ;
• 50 jobs with an additional Jet2 aircraft at Glasgow ^[40] ; and
• 150 jobs associated with an additional aircraft and expanded operations by Jet2 at Edinburgh ^[41] .

However, consultation undertaken with one low cost carrier explained that there are 43 jobs associated with each of their based aircraft. Given that the Scottish market, particularly in terms of based aircraft, is currently dominated by Low Cost Carriers, and the likelihood that any additional based aircraft will be predominantly concentrated in the Low Cost or Charter sectors, the above figure is used as the basis of the subsequent analysis in this section. Note that the figure used here is therefore conservative compared to those quoted in the media, and new primary research with the airlines would be required to derive definitive figures.

The following steps have been undertaken in calculating the jobs associated with an additional based aircraft:

• Industry estimates, obtained through the consultation, suggest that each additional 500,000 passengers per annum will support one additional based aircraft ^[42] .
• This aircraft will in turn support 43 direct jobs.
• Applying the Type II employment multiplier to the direct job numbers to calculate the indirect and induced jobs.
• As with the direct operational impacts, the additional jobs accrue on an annual basis, aligning with the annual increase in passenger numbers. The jobs presented in the subsequent analysis are therefore cumulative figures developed over 10 years.

The method of calculating GVA is equivalent to that used in calculating the GVA associated with operational impacts.

It is uncertain from the literature whether the economic impact of based aircraft is captured within the direct operational impacts (and the associated multipliers) or otherwise. Whilst we have presented below what we assume to be the additional jobs and GVA impact of based aircraft, there is a possibility that there may be a small element of double counting of the operational impacts identified in the previous section.

Table 6.2: Economic Impact of Based Aircraft, 2018-2022

		100% Reduction in Band A			100% Reduction in Band B			50% Reduction in Bands A & B
Cumulative 2018-2022	Do Nothing	S1a: Full Pass-through	S1b: Partial Pass-through	S1c: Zero Pass-through	S2a: Full Pass-through	S2b: Partial Pass-through	S2c: Zero Pass-through	S3a: Full Pass-through	S3b: Partial Pass-through	S3c: Zero Pass-through
Gross Additional Jobs	360	620	770	940	400	460	520	510	640	780
Gross Additional GVA	£35m	£84m	£95m	£107m	£42m	£48m	£55m	£63m	£75m	£88m
Net Additional Jobs		260	410	580	40	100	160	150	280	420
Net Additional GVA		£49m	£59m	£72m	£6m	£13m	£20m	£28m	£40m	£53m

Note:

• Jobs are rounded to the nearest 10
• GVA is rounded to the nearest £million

As with the impacts associated with additional passengers, the largest net benefit in terms of additional based aircraft accrues in Scenario 1c, the 100% reduction in Band A rates with zero pass-through. This is an intuitively sensible finding as:

• Given the route-network in Scotland, short-haul carriers, particularly in the low cost carrier sector, are more likely to base an aircraft in Scotland than network carriers, which will tend to be based around larger hub airports where they benefit from economies of scale (e.g. British Airways at Heathrow and Emirates in Dubai).
• The supply side impact is assumed to be largest in the zero pass-through scenario.

Leakage

There are unlikely to be any leakage effects associated with additional based aircraft.

Displacement

There are unlikely to be any displacement effects associated with additional based aircraft.

Substitution

There are unlikely to be any substitution effects associated with additional based aircraft.

Tourism Impact

It is anticipated that a combination of lower fares, increased frequencies on existing routes and entirely new routes will lead to an increase in inbound tourism to Scotland. The literature review suggests that the ‘tourism effect’ will be a combination of direct additional trips to Scotland and enticing those on holiday in England (particularly in London and the South-East) to visit Scotland as part of that holiday.

Analysis of the CAA passenger survey suggests that there is a larger proportion of foreign tourists on a long-haul flight (37%) than a short-haul flight (16%). Therefore, from an economic impact perspective, the largest marginal gains will be associated with the addition of long-haul connections, although these numbers are much smaller in an absolute sense.

The additional inbound tourism expenditure was calculated by:

• Using the estimated increase in inbound foreign tourist passengers and the average spend per visit ^[43] .
• Based on the Scottish Annual Business Survey, an estimate of the GVA factor for the tourism industry ^[44] (0.56) was calculated, i.e. for every £100 spent in the tourism sector, £56 is added to GVA.
• This GVA factor was applied to the additional inbound tourism expenditure to calculate additional direct employment and GVA for the Scottish tourism industry.
• Indirect and induced impacts were then calculated using relevant multipliers from the Scottish Input-Output tables.
• It should be noted that the employment and GVA figures associated with increased tourism will materialise in year 1 (2018) and grow over time in line with passenger numbers.

Table 6.3: Economic Impact of Additional Tourism, 2018-2022

		100% Reduction in Band A			100% Reduction in Band B			50% Reduction in Bands A & B
Cumulative 2018-2022	Do Nothing	S1a: Full Pass-through	S1b: Partial Pass-through	S1c: Zero Pass-through	S2a: Full Pass-through	S2b: Partial Pass-through	S2c: Zero Pass-through	S3a: Full Pass-through	S3b: Partial Pass-through	S3c: Zero Pass-through
Gross Additional Jobs	45,240	47,970	49,190	50,620	45,700	46,800	48,030	46,840	48,310	49,910
Gross Additional GVA	£5,327m	£5,629m	£5,631m	£5,658m	£5,366m	£5,426m	£5,492m	£5,490m	£5,549m	£5,614m
Net Additional Jobs		2,730	3,950	5,380	460	1,560	2,790	1,600	3,070	4,670
Net Additional GVA		£301m	£304m	£331m	£38m	£98m	£165m	£163m	£222m	£287m

Note:

• Jobs are rounded to the nearest 10
• GVA is rounded to the nearest £million

From a foreign tourism perspective, the scenario which records the biggest impact in terms of jobs and GVA is again S1c (i.e. 100% reduction in Band A with zero pass-through and maximum supply side response). The differential between Scenario 1 and Scenario 2 is narrower on this occasion as the long haul market has a higher proportion of foreign leisure.

For clarity, the forecast impact of the different scenarios in generating additional inbound tourists by ADT band is shown in the figure below.

Figure 6.3: Estimated Additional Inbound Tourists by ADT Scenario, 2022

The balance between Band A and Band B reflects both the higher assumed supply side response in Band B, given the relative scale of the tax reductions, and the fact that Band B has a slightly higher proportion of inbound foreign leisure than Band A.

It should be noted that an assumed spend of £675 per foreign tourist is used to generate the employment and GVA estimates. It is however likely that foreign tourists on long-haul trips are likely to have a higher spending profile and visit for a longer period than those in the short-haul market. The employment and GVA estimates in Scenarios 2 and 3 may therefore be something of an underestimate.

Leakage

The objectives for the introduction of ADT set by the Scottish Government explicitly recognise the potential of the tax reduction to increase tourism in Scotland. The logic applied is that the reduction in tax will (i) result in lower prices which will stimulate visitor demand on existing routes and/or (ii) create viable new connections, as is evidenced in the previous section.

Whilst this is likely to be true, it is important to understand that any transport improvement is effectively a ‘two-way street’ – the impact of improving connectivity on the balance of tourism and subsequent economic impact therefore has to be considered. In this context, a brief review of tourism statistics suggests the following:

• There are roughly twice as many trips abroad by UK visitors as trips to the UK by foreign visitors.
• The spend per visit to the UK by foreign citizens is approximately equal to spend per trip overseas by UK citizens.
• Therefore, overall there must be a degree of net outflow of money from the UK economy as a result of all tourism as a whole.
• In terms of Scotland, analysis of the 2013 CAA Passenger Survey suggests that the ratio of outbound to inbound tourist trips through Scotland’s airports is around 2.2:1, i.e. there are 2.2 outbound tourist trips per inbound trip. If this ratio holds for new trips which result from cuts in ADT, then there would be expected to be a net outflow of tourism as a result of the policy.

Therefore, in economic terms, any inbound tourism stemming from lower fares / greater connectivity creates benefits which are 100% additional to Scotland. However, additional outbound tourism stemming from lower fares / greater connectivity creates a much more complex set of economic impacts.

We are assuming here that had ADT not been introduced at a lower rate than APD, these new outbound tourism trips would not have been made. In this case, the counterfactual situations for those concerned would include:

• Leave the money in the bank: spending this money instead on an overseas trip will therefore generate leakage;
• Holidayed in Scotland: spending this money instead on an overseas trip will therefore generate leakage; or
• Spent the money domestically on goods or services: the degree of leakage in this case would depend on the balance of spend between domestic and imported goods and services.

In terms of the leakage associated with overseas travel, there are studies that suggest that domestic spending prior to travelling overseas offsets to some extent the economic leakage associated with leaving the country, i.e. not all of the spend associated with an overseas leisure trip by a UK resident is ‘leaked’ out of the country. The most recent of these studies was the research carried out for ABTA on The Economic Value for Outbound Travel (2015) ^[45] . The research found that, in 2015, spend abroad by UK residents was almost exactly the same as their spend in the UK prior to their holidays. It is therefore suggested that, in the context of this transaction alone, only half of the spend associated the trip is ‘leaked’ abroad.

Given these complexities, it is not possible to quantify the counterfactual balance of spend between domestic and imported goods and services from forecast additional overseas travel by Scottish residents.

Although it is highly likely that additional overseas leisure travel by Scotland’s residents will offset to a greater or lesser degree the additional economic activity generated by increased inbound tourism, it is also important to note that whilst not

an economic benefit, Scotland’s residents clearly gain a range of ‘ social welfare’ benefits ^[46] from foreign travel.

It was therefore agreed by the authors that due to the intricate nature of these interactions and the uncertainties surrounding them, a robust estimate of the potential outbound tourism leakage impacts that could arise from each of the ADT reduction scenarios was not feasible in the context of this work.

Displacement

Any cut in ADT would affect all major Scottish airports except Inverness. As Inverness has limited international connectivity, it is reasonable to assume that any displacement of inbound tourism from Inverness to Edinburgh / Glasgow would be outweighed by the overall increase in tourist visits to Scotland, many of whom would travel to the Scottish Highlands as part of their visit.

Substitution

There are unlikely to be any substitution effects associated with this impact.

Wider Business Impacts

The final impact likely to emerge from the introduction of ADT is an increase in business productivity associated with enhanced and new domestic and international connections.

In calculating the potential improvements in the long-term productivity level, the relationship between the number of business passengers and labour productivity was explored. A report by PwC ^[47] found that a 10% increase in business passenger numbers would result in a 0.2% increase in productivity and our literature review noted that this relationship has been widely used in similar studies. This relationship was therefore applied to the estimated number of business passengers in order to calculate changes in productivity level, which were then used to calculate employment supported by these improvements in productivity.

The Table sets out the anticipated productivity benefits, expressed in terms of employment and GVA, associated with the introduction of ADT.

Table 6.4: Economic Impact of Improved Business Productivity, 2018-2022

		100% Reduction in Band A			100% Reduction in Band B			50% Reduction in Bands A & B
Cumulative 2018-2022	Do Nothing	S1a: Full Pass-through	S1b: Partial Pass-through	S1c: Zero Pass-through	S2a: Full Pass-through	S2b: Partial Pass-through	S2c: Zero Pass-through	S3a: Full Pass-through	S3b: Partial Pass-through	S3c: Zero Pass-through
Gross Additional Jobs	2,490	3,240	4,070	4,990	2,500	2,800	3,130	2,880	3,560	4,280
Gross Additional GVA	£273m	£445m	£538m	£642m	£275m	£319m	£366m	£360m	£448m	£540m
Net Additional Jobs		750	1,580	2,500	10	310	640	390	1,070	1,790
Net Additional GVA		£172m	£266m	£370m	£3m	£47m	£94m	£88m	£175m	£267m

Note:

• Jobs are rounded to the nearest 10
• GVA is rounded to the nearest £million

In arithmetic terms, the impact of a reduction on short-haul ADT will have a larger impact than an equivalent reduction in long-haul because of the larger proportion of business passengers. This is particularly the case in Scotland, where a number of the short-haul routes are to prominent business destinations such as London, Amsterdam and Paris.

The most significant impact in terms of business productivity again occurs in terms of Scenario 1c, the 100% reduction in Band A with zero pass-through. This is because this scenario maximises the number of business passengers.

Leakage

There is unlikely to be any significant leakage effect in terms of business productivity.

Displacement

The most pertinent issue here is competition with rail and this is discussed further under ‘Wider Issues’ below.

Substitution

There is unlikely to be any significant substitution effect in terms of business productivity.

Combined Impacts

The table below set out the combined net jobs and GVA generated by all the impacts. A sub-line is included which excludes the ‘based aircraft’ impact which, as previously noted, may represent a double-count on the operational impacts associated with additional passengers.

Table 6.5: Overall Economic Impact – Jobs (Net), 2018-2022

	100% Reduction in Band A			100% Reduction in Band B			50% Reduction in Bands A & B
Cumulative 2018-2022	S1a: Full Pass-through	S1b: Partial Pass-through	S1c: Zero Pass-through	S2a: Full Pass-through	S2b: Partial Pass-through	S2c: Zero Pass-through	S3a: Full Pass-through	S3b: Partial Pass-through	S3c: Zero Pass-through
Additional Airport Passengers	2,440	3,860	5,500	330	920	1,570	1,380	2,660	4,040
Based Aircraft	260	410	580	40	100	160	150	280	420
Additional Tourism	2,730	3,950	5,380	460	1,560	2,790	1,600	3,070	4,670
Business Productivity	750	1,580	2,500	10	310	640	390	1,070	1,790
Total	6,180	9,800	13,960	840	2,890	5,160	3,520	7,080	10,920
Total excluding based aircraft	5,920	9,390	13,380	800	2,790	5,000	3,370	6,800	10,500

Note:

• Jobs are rounded to the nearest 10

The relativities between these values are very much a reflection of the forecast passenger numbers. Scenarios 1b, 1c and 3c are forecast to produce the greatest uplift in passenger numbers and this feeds through to the economic impacts. The scale of impact varies widely with the lowest figures generally associated with scenarios abolishing Band B payments.

Key points from the above table are:

• The zero pass-through / maximum supply side response variant in each scenario generates the largest net impact within that scenario.
• Summing across all of the impacts, Scenario 1c (the 100% reduction in Band A with zero pass-through) generates the largest number of net jobs, which is dominated by the additional tourism and airport passenger effects.
• The key sensitivity in relation to the above is the potential leakage associated with Scottish residents making more outbound trips, which would significantly reduce the overall tourism impact.

Table 6.6: Overall Economic Impact – GVA (Net), 2018-2022

	100% Reduction in Band A			100% Reduction in Band B			50% Reduction in Bands A & B
Cumulative 2018-2022	S1a: Full Pass-through	S1b: Partial Pass-through	S1c: Zero Pass-through	S2a: Full Pass-through	S2b: Partial Pass-through	S2c: Zero Pass-through	S3a: Full Pass-through	S3b: Partial Pass-through	S3c: Zero Pass-through
Additional Airport Passengers (£m)	£466	£566	£685	£63	£126	£195	£265	£381	£506
Based Aircraft (£m)	£49	£59	£72	£6	£13	£20	£28	£40	£53
Additional Tourism (£m)	£301	£304	£331	£38	£98	£165	£163	£222	£287
Business Productivity (£m)	£172	£266	£370	£3	£47	£94	£88	£175	£267
Total (£m)	£988	£1,194	£1,457	£111	£284	£473	£542	£818	£1,113
Total excluding based aircraft (£m)	£939	£1,135	£1,386	£104	£271	£453	£515	£778	£1,061

Note:

• GVA is rounded to the nearest £million

The GVA impacts are generally drawn from a measure of ‘ GVA per job’ and thus the comparative impacts are equivalent to those reported in the employment context.

The greatest economic impacts are associated with Scenario 1c – a 100% cut in Band A, which assumes no reduction in fares and a substantial supply side response.

Wider Issues

The development and quantification of the above impacts is based on industry-standard approaches to calculating economic additionality. However, the use of an arithmetic approach only is unlikely to fully capture the depth and scale of the potential outcomes associated with introducing ADT. This section therefore sets out a wider economic narrative on the potential economic implications of the reduction in duty.

Rail Competition

A reduction in tax associated with the introduction of ADT could have two primary impacts on the rail sector: (i) impacts on volumes travelling between Scotland and airports in the north of England, and (ii) impacts on longer distance routes, primarily Edinburgh / Glasgow and London.

Lower fares and greater connectivity from Scotland’s airports could lead to:

• Scottish residents who currently travel to e.g. Manchester or Newcastle Airports may use Scottish Airports instead – reducing rail travel on these routes; and
• Residents of the north of England may switch from their local airports travelling instead by rail to Edinburgh or Glasgow – increasing travel by rail on these routes.

CAA figures from the 2013 passenger survey suggest that there is far larger southbound passenger movement (555,000) than northbound movement (101,000) to airports in e.g. Newcastle / Manchester and Scotland respectively. Whilst there is a significant potential market amongst Scotland’s residents to be displaced back to airports in Scotland, there is obviously a large market in the north of England which could be attracted to airports in Scotland.

Manchester Airport (at 25.6m passengers in 2016) handles more than double Edinburgh Airport’s passengers. Its scale means that it provides competitively priced travel to a wide range of long haul and short haul destinations, which perhaps makes it difficult for Scottish airports to compete. The more likely competition would be between the Scottish airports and Newcastle at 4.8m passengers ^[48] . Overall the impact of this displacement is likely to be small, but on balance a small reduction in rail travel between Scotland and airports in the north of England may be expected.

A significant proportion of Scottish business travel is with the rest of the UK. In terms of flights for business purposes, London is the main destination for business flights given:

• The dominance of London as the primary business destination within the UK.
• Distance – For travel between Scotland and cities in the North of England, rail journey times compete more closely with air travel than travel between Scotland and London.

Virgin Trains, which operates the East and West Coast Mainline franchises estimate that it currently has a 33% market share for journeys to London (37% from Edinburgh, 27% from Glasgow). There is the potential for a degree of displacement from rail to air as a result of the introduction of ADT at a lower rate than APD. However, it is generally accepted that business travel is less sensitive to price than leisure travel and we do not foresee a significant supply side response between Edinburgh / Glasgow and London given the current frequency of connections. Therefore, a significant impact on the balance of the rail / air market would not be expected, particularly amongst business travellers where demand is less elastic.

In addition, the forthcoming introduction of the new Azuma trains on the East Coast Main Line ^[49] , and their associated faster journey times could provide a counterweight to any change in the market share brought about by ADT. In the light of this, Virgin Trains anticipates growing the Edinburgh market share to 50% by 2023.

The introduction of ADT may therefore result in the displacement of some trips from rail to air, particularly for London but also for other destinations such as Birmingham, Bristol, Cardiff, Southampton etc. This is likely to be a small effect in the context of what is a very competitive market between rail and air, and any ADT effect may be offset by continuing improvements in rail services in the medium term. Overall we do not foresee this as being a significant issue.

Short-Haul versus Long-Haul

The economic impact calculations contained within this chapter are driven by the forecast changes in passenger numbers associated with each scenario. Given that the Scottish aviation market is dominated by short-haul flights, it is unsurprising that the largest prospective impacts are generally observed in scenarios which offer the largest reduction in fares or increases in supply in this area.

The numbers presented perhaps do not however capture the softer impacts of the quality of the connections being developed. It can be argued that increased connectivity to hub airports, key business destinations and new long-haul destinations are of greater value than point-to-point connections to small / regional airports. With this in mind, it can be argued that, whilst in numerical terms the 100% short-haul reduction seems more appealing, the wider catalytic effects of developing a more extensive long-haul network may be larger, particularly in terms of promoting internationalisation.

Long Haul Hub Potential

A reduction in the long-haul element of APD may potentially create a scenario where one Scottish airport (likely Edinburgh) could become a hub for passengers travelling from north-west Europe to the United States and Canada. If the tax differential with the rest of the UK was sufficient to attract transatlantic carriers to Scotland, a hub equivalent to Dublin or Keflavik could perhaps be developed, with knock-on benefits for the Scottish tourism industry. This is something of a potential longer-term impact which cannot be fully developed at this stage. In this scenario, there would also be significant scope to attract passengers from north of England airports, as there could also be a substantial tax saving for non-Scottish passengers as well as increased connectivity benefits for these passengers and also Scottish passengers depending on the tax scenario implemented.

In addition to direct benefits to the airport (such as increased direct revenue, increased retail spending etc.), a hub of this nature could provide an uplift in tourism through transit passengers breaking their journey and potentially spending one or more days in Edinburgh / Scotland (with further potential for repeat visitation). There would of course be environmental implications of this type of initiative although these are beyond the scope of this study.