4. ADT Scenarios
The manifesto commitment of the current Scottish Government was to reduce the overall tax burden associated with APD by 50% by the end of the current session of the Scottish Parliament. There are theoretically a large number of means by which this can be done and modelling all of them would be both time-consuming and potentially confusing. This section sets out a necessarily limited number of scenarios which the Scottish Government specified for testing in this research.
The following scenarios are modelled in the subsequent analysis:
- Scenario 1: 100% reduction in Band A rates only, i.e. 100% reduction of the short-haul tax rate with Band B tax rate (long haul) remaining at current levels.
- Scenario 2: 100% reduction in Band B rates only, i.e. 1 00% reduction of the long haul tax rate with Band A tax rates (short haul) remaining at current levels.
- Scenario 3: 50% tax reductions in both Band A and Band B rates.
Given the uncertainty surrounding the degree to which the reduction in tax will be passed on in the form of cheaper fares, for each of the scenarios outlined above, three different levels of ‘pass-through’ are also modelled (resulting in 9 scenarios in total), as follows:
- Variant A: Full pass-through – i.e. the full tax reduction is passed on to the end passenger in the form of reduced fares – this is assumed to minimise supply side response;
- Variant B: Partial pass-through (assumed to be 50%) – i.e. half of the tax reduction is passed on to the end passenger in the form of reduced fares, whilst the other half is retained by the airlines/or absorbed by airport operators and / or used to increase supply.
- Variant C: Zero pass-through – i.e. the full tax reduction is retained by the airlines and/or absorbed by airport operators – assumed to maximize supply side response.
It is important to note that the above pass-through scenarios are deliberately illustrative and simplistic in nature. Airlines, particularly low cost carriers, are unlikely to manage their pricing decisions on such a simplistic basis, whilst it is possible (as mentioned above) that airports would extract some of the value of the tax reduction in additional fees. Nonetheless, the variants are both appropriate and proportionate in terms of picking up the key issues of pass-through and supply side response, the effects of which have not generally been explicitly considered in previous research.
The next section considers the anticipated demand and supply side assumptions associated with each of the above scenarios.