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    August 15

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ON THE RIGHT: Aviation taxation needs clarity

GEORGE NICHOLSON,

Added 02 November 2016

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THE REGIONAL AIRLINE industry has been characterised by a high degree of commercial difficulties. The last three decades has seen the Caribbean airspace littered with the remains of more than 30 carriers – some of these departures have been through acquisition, some through restructuring and others insolvency.

Notwithstanding these changes and periodic injection of investments by regional governments and, in some cases, investors, the region’s airlines continue to face major financial challenges.

It is against this backdrop that there appears to be fundamental structural problems with the regional airlines, centred on poor capitalisation, and lack of economies of scale and non-competitive aircraft and operating costs.

These problems are compounded by high airfares further reducing regional demand for travel and starving airlines of revenue needed to become successful.

The Greater Caribbean is the most tourism-dependent region in the world, four times more dependent on tourism revenue than any other area and although it only accounts for less than five per cent of international tourism arrivals, it contributes over 15 per cent to Caribbean GDP.

Notwithstanding this importance, travel around the region has become disjointed, prohibitively expensive and subject to multiple layers of taxation.

As a consequence of this, and the cost and hassle of travelling regionally, intra-Caribbean travel has largely become non-discretionary. Despite the region seeing an increase in tourist arrivals, with an expected increase of 5.5 per cent in 2016, only a small percentage of intra-regional travellers are on holiday.

While there is much debate in the international arena about the impact of taxation on air travel, a growing body of independent economic researchers considers that taxes and charges do have a suppressing effect on air connectivity and reduce the economic benefits of aviation. The Chicago Convention contains several provisions regarding aviation taxation. 

While there is the understanding that the Caribbean region has high airport charges as a consequence of lack of economies of scale, much discussion has taken place on mechanisms to improve intra-regional travel.

These have ranged from general initiatives which are expected to make travel more efficient such as promoting regional open skies agreements, harmonisation of standards, implementing regional promotion strategies, to financial initiatives such as reducing the various miscellaneous taxes and implementing a differential tax structure.

Surprisingly, the impediments to facilitating easier intra-regional travel have not been addressed in a systematic way, despite clear evidence that such an approach has worked in other parts of the world. The “public interest” in air travel is, however, evinced in the continued recognition that an efficient and effective air transportation system is essential to the region’s economic wellbeing. In a region driven by mainly by tourist traffic, it is a product for which there is no perfect substitute.

There, however, appears to be a fundamental inconsistency between the policy positions of regional governments, the posture of airlines and the business they are in, and the resultant implications for economic development of our different societies. But given that air connectivity is a proven enabler of economic development, overtaxing flying will have a negative effect on national economies and government revenues.

George Nicholson is the Association of Caribbean States’ former director of disaster risk reduction.

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