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ECONOMICS Last modified on July 18, 2017

Taxes, tourism and connectivity

ACI World’s senior manager for economics and statistics, Patrick Lucas, reflects on the global importance of tourism and some of the key challenges facing aviation’s role in its future development.

According to the United Nations World Tourism Organization (UNWTO), tourism accounts for 10% of global Gross Domestic Product (GDP) and one in ten jobs are linked to tourism.

It is hugely important to the social and economic welfare of millions of people across the planet and despite many challenges on the geopolitical front in 2016, demand for international tourism remained relatively strong.

Indeed, international tourist arrivals grew by 3.9% last year to just over 1,235 million, according to the latest UNWTO World Tourism Barometer.

Yet in this new era of inward-looking policies and protectionist rhetoric, particularly from several western countries, it almost feels like we have temporarily forgotten about the vital contribution tourism makes to economies around the globe.

It is therefore important to remind ourselves that aviation – a vital link in tourism’s value chain – is also the lifeblood of tourism in many respects. In short, an attack on the liberalisation of air transport, hurts tourism.

Tourism and liberalisation

The liberalisation of air transport is part and parcel of tourism and economic development. Despite the economic woes, uncertain geopolitical landscape and acts of terror that have permeated many markets in 2016 and 2017, air travel has remained unperturbed over the short run.

This is largely due to increased competition among suppliers of air transport, rising per-capita income in key markets and lower fares faced by passengers, all of which have helped foster an environment of sustained growth in air travel.

Thus, irrespective of the downside risk, there has been an overall positive net gain in traffic growth and the air transport value chain.

Research studies have shown that traffic growth typically averaged between 12% and 35% subsequent to liberalisation of air services agreements between countries. This growth was significantly greater than the years preceding liberalisation.

With as much as 54% of international tourists travelling by air, according to the latest figures from UNWTO, there is a positive relationship between liberalisation, international passenger traffic growth and tourism.

Air transport also continues to play a major role in the shipment of value added goods across the globe. While trade by air encompasses only 0.5% of global volumes, it represents as much as 35% of their value. Thus, there is a general consensus across many stakeholders in the aviation value chain that the liberalisation of air transport generates a number of opportunities with direct and indirect impacts across the economic landscape.

Connectivity, capacity and liberalisation

Airports continuously try to enhance their connectivity through air service development. In an effort to attract new traffic, either as a gateway to tourist destinations in their home countries or as a point of connection for a seamless onward journey, airports have been propelled into an environment where they must compete for new markets and retain existing ones.

At the same time, the necessary infrastructure capacity within the air transport value chain is required. That includes not only airport infrastructure but also intermodal transport and hotel accommodation for leisure and business travellers to name a few. Airports now have to compete with one another to retain and attract the traffic they need.

A fundamental prerequisite for achieving connectivity is formalised market access. This is obtained by ratifying bilateral agreements that remove restrictions on air transport among countries.

The most immediate impact of air transport liberalisation is on the end user; the conventional wisdom suggests that liberalisation leads to innovation and choice, which results in greater traffic growth.

The link implies that traffic growth leads to economic growth by bringing consumers (passengers) from one market to another. Thus, the combined purchasing power of consumers and businesses has a multiplier effect across the value chain and leads to job creation. This, in turn, has a feedback loop over and over again through wealth creation.

Nevertheless, challenges to air transport liberalisation persist in many parts of the world where rigid bilateral air transport agreements and regulations take centre stage and hinder the prospect of economic development.

The wider economic benefit is realised through increased connectivity between cities and the flow of people, which has enabled the proliferation of markets for goods, services, capital and technology.

According to IATA, the number of unique city-pair connections by air has doubled from what it was twenty years ago, reaching more than 17,000 in 2016.

Guangzhou Baiyun Airport

Taxes, trade and tourism

While the risk of retraction in air transport liberalisation lurks on the horizon, aviation stakeholders must also be cognisant of other challenges that hinder industry growth and progress. One of these challenges has to do with excessive taxes in the aviation sector.

‘Taxes are the price of civilisation’. First coined by the American jurist, Oliver Wendell Holmes, Jr, there is considerable truth in this statement since tax revenues are vital to finance social and economic programmes administered by the state.

A tax is a legitimate right by any government since it is a source of financing for schools, hospitals and other types of social infrastructure, irrespective of the jurisdiction and governance model. However, in spite of its necessity, by its very nature, a tax that is levied on individual consumers or firms represents a market distortion.

Market distortions may result in inefficiencies and disincentivise certain forms of economic behaviour. There are jurisdictions where providers and users of aviation infrastructure face a significant tax burden. This, in turn, may lead to a loss in competitiveness and opportunities in air service development aimed at enhancing connectivity and trade.

ICAO defines a tax as “a levy that is designed to raise national or local government revenues which are generally not applied to civil aviation in their entirety or on a cost-specific basis”.

In many parts of the world, users of aviation services face excessive taxation and this hampers the revenue available to those in the aviation value chain, especially air carriers and airport operators.

More importantly, a high tax that is imposed on passengers tends to curb air transport demand, which has an impact not only within the aviation sector but also on the economies that are served in those jurisdictions.

In compliance with ICAO’s Policies on Charges and Taxation, taxes on international air transport should only be levied in a justifiable, equitable and non-discriminatory manner.

ACI Africa/World Annual General Assembly

The United Nations 70th General Assembly has designated 2017 as the International Year of Sustainable Tourism for Development to highlight its contribution to economic and social progress.
In this context, tourism has been identified as having specific role in five key areas:

  • Inclusive and sustainable economic growth
  • Social inclusiveness, employment and poverty reduction
  • Resource efficiency, environmental protection and climate change
  • Cultural values, diversity and heritage
  • Mutual understanding, peace and security.

    It is time to take stock of the role that tourism plays, not only for the economic and social benefits that it extends by the sector, but also to identify innovative strategies and policies to ensure the long-term growth of the industry in tandem with the air transport value chain, especially in emerging markets.

    Join us in Mauritius on October 16-18, 2017, for the ACI Africa/World Annual General Assembly, Conference and Exhibition and participate in the session ‘Taxes, connectivity and sustainable tourism: Barriers and opportunities to grow’.

    This session will present a variety of viewpoints and practices from government, the tourism sector and airports on tourism growth impediments and enablers.

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