Air Transport Policy in Germany/Europe and Environmental Sustainability

Author: Prof. Dr. Frank Fichert – Vice Dean – Department of Tourism and Travel Management -  HS Worms

Competence Center Aviation Management (CCAM), Worms University of Applied Sciences, Erenburgerstr. 19, 67549 Worms, Germany

This article provides an overview of selected elements of air transport policy in Germany and in the European Union (EU). Specific attention is given to environmental sustainability, a topic of growing importance not only for the aviation industry.

Overall air transport policy framework

For about 25 years, air transport markets in the European Union have been almost completely liberalized, and nowadays this liberalization is even extended to some neighboring countries outside the EU. Within the common aviation market, any airline with a European operating license might in principle serve any market within the EU, and there are hardly any restrictions on pricing. In particular low-cost carriers use these opportunities, for example Ryanair (an Irish airline) provides services between many member states as well as domestic services in some countries (cabotage). However, ownership rules apply, prescribing that European airlines have to be owned (more than 50%) and effectively controlled by Europeans. In air service agreements with third countries, the typical nationality clause has in many cases been replaced by a ‘community clause’. As a consequence, a German airline has the right to offer direct flights between France and the US and a French airline might carry passengers directly from Germany to the US.

In order to prevent anti-competitive behavior, the general provisions of European competition policy are also enforced on air transport markets. Cartels are prohibited and airlines mergers are subject to merger control, preventing mergers that would lead to market dominance or other substantial impediments on effective competition. Several airline mergers have been subject to specific remedies, aiming at a reduction of barriers to market entry.

Although liberalization was complemented by the privatization of many traditional European ‘flag carriers’, several states are still holding shares of a domestic airline, in some cases they are even the majority shareholder. Therefore, also the general restrictions on state aid apply, preventing states from subsidizing loss-making airlines and thereby distorting competition. In some cases, e.g. the Hungarian Malev, airlines had to pay back illegal state aid and went bankrupt shortly after. For several years, also subsidies to loss making (regional) airports have received a growing level of attention from European policy makers, resulting in a directive that limits state aid to regional airports, thereby trying to prevent (‘indirect’) competitive distortions on air transport markets that might follow from these subsidies.

Taxation and sustainability

The European Union has defined some rather ambitious targets with respect to greenhouse gas emissions, aiming at carbon neutrality by 2050. Against this background, the air transport industry is often criticized, pointing at its rather high growth rates (pre-COVID) and some relevant tax exemptions that are considered to distort intermodal competition. In particular, all international flights are exempted from the Value Added Tax that is levied by all EU member states on private consumption. Moreover, commercial aviation is also exempted from fuel taxation, whereas for all other fuel uses the EU has set minimum tax rates.

Since 2011, Intra-European flights are covered by the EU’s emissions trading scheme (ETS) for CO2-emissions. As a consequence, in a growing market airline have to purchase allowances from other sectors, increasing the fuel costs for operating Intra-European services. However, the airlines used to receive a large share of these allowances for free and for many years the carbon price within the ETS was rather low. More recently, the price for carbon allowances has been increasing due to the more ambitious reduction targets, and the share of free allowances will be reduced in the future. As long as only Intra-European flights are covered by the ETS, this leads to a growing concern about competitive distortions. This is of particular relevance for transfer flights if a European hub carrier competes with an airline that operates its hub outside the EU, e.g. in Turkey or the United Arab Emirates, since the foreign carrier does not have to purchase allowance for feeding into its hub.

Whereas international flights (including Intra-EU flights) are exempted from the VAT, several European states have introduced a specific ticket tax (sometimes also referred to as ‘passenger tax’). There are several design options: In Germany there are three ‘distance classes’ (since April 2020 the tax rate is 12.90 Euro for each departing passenger on Intra-European flights, and 32.67 (58.82) Euro for a departing passenger on a medium-haul (long-haul) flight), whereas France only distinguishes between two distance classes but has a significantly higher tax for passengers travelling on business or first class. Although these taxes are based on the final destination of a passenger, which prevents competitive distortions between domestic and foreign hubs, passengers in border regions might evade the tax by departing from an airport located in the neighboring country.

Outlook

Whereas air transport liberalization has been high on the political agenda of European policy makers in the 1980s and 1990s and has contributed to a significant growth in passenger numbers as well as a reduction of real airfares, sustainability dominates the current political debate, leading to a much more critical perspective on aviation. There is a long list of potential measures, reaching from rather symbolic ‘command and control’ instruments (e.g. the ban on some domestic short-haul flights in France and the Austrian proposal to introduce minimum airfares) to comprehensive European approaches like the introduction of an aviation fuel tax and/or a mandate for using a minimum share of sustainable aviation fuel. However, as the political priorities of EU member states differ (e.g. some member states with limited or even lacking ground transport accessibility highly depend on incoming tourism) and European decisions in the field of taxation have to be taken unanimously, it remains to be seen to what degree the manifold options for limiting aviation’s greenhouse gas emissions will actually be implemented.