Home' Trinidad and Tobago Guardian : May 5th 2016 Contents BG22 COMMENTARY
BUSINESS GUARDIAN www.guardian.co.tt MAY 5 • 2016
The regional airline industry has
been characterised by a high
degree of commercial difficul-
ties. 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 government
and, in some cases, investors, the region s air-
lines 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 capital-
isation, and lack of economies of scale and
non-competitive aircraft and operating costs.
These problems are compounded by high air-
fares 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, pro-
hibitively expensive and subject to multiple
layers of taxation.
Tourism products are generally outward fac-
ing, focusing on leisure travellers from the
USA, and Europe and Canada, among others
while the market for travellers originating within
the region is considered small and thin char-
acterised by low disposable personal income
and limited options for travel.
As a consequence of this, and the cost and
hassle of traveling 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 expected in 2016, only a small percentage
of intra-regional travellers are on holiday. It is
therefore not surprising that intra-Caribbean
travel has been declining. For instance, regional
carrier LIAT, has seen passenger numbers shrink
from 1.1 million in 2008 to 850,000 in 2013.
Despite intra-regional travel peaking in 2015,
with 1.7 million trips, analysis of the trend over
the longer term indicate that intra-regional
travel is falling and the markets have experi-
enced a continuous seat capacity reduction
averaging 2.9 per cent annually.
Given the seasonal nature of the global
tourism market, increasing intra-regional travel
could serve to bolster the performance of
regional carriers; in essence smoothing out the
declines in fortunes seen during the shoulder
season for international tourist market, and
improving the economic fortunes of member
Studies by the Caribbean Tourism Organ-
isation (CTO) have shown that on average the
per-day spend of the regional visitor is on par
with his better-heeled international counterpart,
and the impact of his spend on the economy
A review of regional fares indicated that on
average taxes and fees are approximately 80
per cent of the base airfare charges, thus com-
prising over 40 per cent of total ticket cost.
High airport charges and taxes for outbound
traffic represent a large proportion of ticket
prices with US$48 being the average charge
levied on a departing passenger.
Further studies by IATA indicate that the
tax component on regional travel is among the
highest worldwide, surpassed only by the Pacific
region. The correlation between the increase
in intra-regional air fares, in part due to high
taxes, and the decline in intra-regional travellers
is not to be missed.
A key opportunity now available for regional
governments is to reduce taxes on tickets, thus
stimulating regional demand for travel. This
naturally raises the question of whether the
overall economic impact of the increased num-
ber of visitors would be greater than the reduc-
tion in ticket taxes.
While there is much debate in the interna-
tional arena about the impact of taxation on
air travel, a growing body of independent eco-
nomic researchers consider that taxes and
charges do have a suppressing effect on air
connectivity and reduce the economic benefits
The Chicago Convention contains a number
of provisions regarding aviation taxation. The
convention states that tax cannot be levied on
fuel used for international air transport and
the International Civil Aviation Organisation
(ICAO) also recommends that value-added
taxes (VAT) and other sales taxes should sim-
ilarly not apply to international air tickets.
These recommendations however are ignored
by many governments.
An examination of global ticket prices indi-
cate that while there are many factors which
can influence per mile costs including type of
aircraft flown, routes flown, local salary and
fuel costs, ancillary revenue, and airport landing
fees, there is a clear linear relationship between
distance travelled and airfares; the longer the
flight, the more expensive it should be.
Consequently, it is reasonable to expect that,
despite the fact that short haul carriers using
mainly turboprops exhibit a higher operating
cost per mile, fares around the Caribbean should
be lower than fares to fly extra-regionally.
Counterintuitively however, the cost to travel
around the region is most times on par with
the cost to travel to global points such as Lon-
don and New York. This reflects the fact that
many of the taxes and charges levied are a flat
amount rather than a rate, thus having a dis-
proportionate and distortionary impact on
what should be shorter and cheaper flights.
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 mecha-
nisms 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 ini-
tiatives such as reducing the various miscel-
laneous taxes that are levied and implementing
a differential tax structure.
Despite advocacy at different levels, regional
discussion and initiatives have had minimal
impact to date. Regional institutions are not
the final decision takers, or shareholders, nor
do they have implementation authority.
Governments have signed open skies agree-
ments with external trade blocks such as the
European Union and the USA, while regional
initiatives such as the Caricom s Multilateral
Air Services Agreement (MASA) and the Asso-
ciation of Caribbean States Air Services Agree-
ment (ASA) have not advanced the process of
liberalisation leaving this to bilateral negotiation
Accordingly, these agreements have not been
effective in making a significant difference to
the number of points connected or to the
reduction in cost of air travel.
Surprisingly the impediments to facilitating
easier intra-regional travel have not been
addressed in a systemic way, despite clear evi-
dence 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 fun-
damental inconsistency between the policy
positions of regional governments, the posture
of airlines and the business they are in, and
the resultant implications for economic devel-
opment 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 director of trans-
port and disaster risk reduction of the Asso-
ciation of Caribbean States. Any comments
or feedback should be submitted to feed-
Taxation and the regional airline industry
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