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Saving Italy but killing business aviation

Richard Koe On June 28th the Italian tax on private jet passengers got the official green light. The implementation and payment process have been clarified by the authorities, and private jet operators in Italy will be expected to collect and convey their passengers’ payment to the authorities from the end of this month. The passenger tax, introduced formally on 29th April, comes on the back of the Italian government’s introduction of private jet taxes in February which specifically imposed punitive parking fees on aircraft residing in Italian airports. The context for these emergency ‘luxury’ taxes is the ‘save Italy’ budget passed by Mario Monti’s new government in December 2011. The Italian government is by no means alone among its European counterparts in singling out certain business activities with ‘luxury taxes’, in an increasingly urgent effort to counter sovereign debt crises. The private jet sector is an obvious candidate, an easy target for politicians seeking to cut back on symbols of financial excess. Both European and North American business aviation associations have long contested the profligate image with which their industries are tainted. Studies consistently demonstrate that private jets are used primarily as business tools, not personal indulgence. Price Waterhouse Coopers’ 2008 study on the impact of business aviation in Europe concluded the sector contributes almost $20m in economic value. The business productivity argument for private jets has little weight, however, since the Euro crisis reignited in mid 2011. In the face of potential bankruptcy and at the mercy of financial markets, a number of EU members need every income source available. Italy’s post Berlusconi government was especially under pressure to demonstrate rigorous financial discipline. The February private jet parking fee was nothing short of draconian. Applicable to any jet, Italian or foreign registered, parked for more than 48 hours in Italian territory, it calibrated fees on a sliding scale to weight of aircraft. For non Italian-registered large corporate aircraft, tax liabilities could have escalated to over EUR 300,000. It made it risky even to transit Italy; a technical problem, bad weather, or an ATC strike would saddle the aircraft owner or lessee with a bill for thousands of euros. The Italian Aircraft Owners and Pilots Association (AOPA) calculated that more than 10% of private aircraft in Italy were de-registered in the month following the introduction of the parking legislation. Whilst the government claimed it could raise EUR 85m through the tax, AOPA’s calculation was that effective collection might not exceed EUR 5m, less the widespread direct and indirect costs of imposition. The potential burden of the parking fee brought protests and appeals from national, European and international pro business aviation lobbies. With compelling evidence that the tax would have catastrophic effects on high end tourism and business travel, the diplomatic pressure fortunately obliged the government to modify the parking tax in April. Amendments included an extension of the parking window from 48 hours to 45 days. However, no sooner was one threat seen off than another one materialised; the parking tax amendments introduced a further explicit private jet passenger tax, directing operators to collect fees from their clients of EU 100 to EU 200 per passenger, depending on flight distance. The publication of the implementation directive seems to indicate that this time the authorities will not be persuaded to reconsider. The Italian government’s determination to press ahead with private jet taxes is a big problem for the EBA A and the European industry it represents. First and foremost, private jets in Italy are big business. The country is Europe’s 4th largest market for private jet activity. There are annually over 50,000 departures, and the map of all European business jet routes shows Italy to be a central corridor of activity. Rome and Milan are both among Europe’s five busiest private jet airports. Italy’s private jet activity highlights some well known exclusive leisure destinations such as Olbia. But it also exposes the use of business aviation as a critical alternative to scheduled airlines. More than 70% of flights are taken by business people looking to save time or make direct point to point connections. Across Europe, business aviation connects three times the number of city pairs linked by the commercial network. The induced economic value of this connectivity is significant. Not only does the industry generate substantial fees through providing over 1m flights a year across the European area. But it employs thousands of personnel in operators and across the complete supply chain which service their fleet. Most importantly, business aviation has a multiplier effect on facilitating investment and trade. Market studies show that Italy is a major beneficiary of these economic contributions from business aviation. The 2008 PWC study, for example, indicates that in Italy business aviation generates more than EUR 900m in economic value (‘gross value added’). With a business aviation linked wage bill of EUR 0.5bn, Italy contributes over 7% of the total employment value of the sector in Europe. No doubt the general public perception is that private jet travellers can easily afford to pay a little extra tax. But the trade argues that most business aviation customers choose to fly privately on the basis of clear cut economic advantage. They are highly price sensitive, and accordingly the private jet charter operators compete intensely. The evidence seems to demonstrate this price sensitivity. More than most other sectors, and far more than airlines, business aviation has suffered from the economic crisis, as its business customers can no longer afford or justify flying privately. In a country as badly set back by recession as Italy, additional fees for chartering a private jet are therefore coming at a very bad time. Neither are private jet operators in any position to swallow the extra fees themselves. After several years’ recession, their aircraft are flying well below historic utilisation, and over capacity across the industry is driving ever greater competition. Italy has more than 50 operators, most of which manage a small handful of aircraft. Without any economies of scale, their price bargaining position is very weak. Private jet operators in Italy have already got the European wide emissions trading scheme (ETS) to worry about, which officially launches in 2013. The most burdensome aspect of ETS is the administration and reporting. Adding private passenger tax collection and payments will be a thankless task for many small operators already distracted from the primary operational tasks. The approval of private jet taxes in Italy came at the end of 2011, and the trends in business aviation flight activity since then in Italy appear to prove out the taxes’ negative impact on demand. Since January 2012, business aviation departures in Italy has consistently fallen 10% on 2011 activity, with June data indicating a 19% reduction. In Europe as a whole, flight activity in 2012 is between 2% and 3% off 2011 levels. The biggest slumps in business aviation activity in the Italian market are in the light jet (and turbo prop) categories. These represent the majority of flights and correspond to the most sensitive customers. These are precisely the businesses which tend to use business aviation to increase their productivity on short haul European flights. As an example of the fall off in demand for these aircraft, flight departures for aircraft in the super light category (such as Lear 45) fell a staggering 30% February and 25% in May (compared with 2011 months). From Italy’s busiest private jet hub, Roma Ciampino, there were 273 departures for Napole in 2011. In the first 6 months of 2012 (including peak periods) there have been just 70. Certainly the Italian economy has not prospered in any of those months, with the financial markets consistently challenging Monti’s new government budgets. But it is difficult not to see a direct link between this collapse in flying and the introduction of Monti’s private jet taxes. Assuming average charter flights, a 20% fall in charter flights could represent EUR 20m directly lost revenues. It is difficult to see how passenger tax collection could offset the balance. But at least for the time being, business jet taxes in Italy are going ahead, notwithstanding the obvious economic damage they will continue to do to the sector and its value to doing business. And if that is worrying, the greater threat is that other cash-strapped European governments will now follow Italy’s lead and introduce similarly discriminating levies on the use of private jets. The EBAA has fought a number of regulatory ‘fires’ threatening business aviation in the last 12 months (no fewer than 9 EU states now levy, or plan to levy, special taxes on aviation). Ostensibly similar to the Italian passenger tax, for example, the UK’s airport passenger tax (APD) has been one such bone of contention. But the difference is that APD, like ETS, is a regulatory directive on commercial aviation which is extending its reach to private aviation, rather than singling it out for specific tax treatment. It is the singularity of Italy’s private jet tax which is the most worrying but also challengeable aspect of the Monti government’s legislation. It is unprecedented that the business aviation sector should be meted out with such specific and unfavourable treatment. The European Commission’s Directorate General on Taxation has recognised this and may oppose its imposition. The problem for the business aviation industry is that the Commission is not well known for acting quickly to provide any material opposition to EU member tax policy. Better prospects come from the EBAA, whose new DG Fabio Gamba has vigorously challenged the constitutional legitimacy of the private jet tax and is now considering legal options to challenge the Italian government in the European courts. If the EBAA were to succeed in blocking the tax, or even simply in generating the publicity to expose its shortcomings, it would be heartening for a sector which is down in the dumps not just in Italy but throughout Europe. But the sector’s main concern will continue to be the European economic and political backdrop. If Germany concedes it needs to guarantee the shakiest EU economies, of which Italy is certainly one, there will be a reciprocal expectation of even greater fiscal discipline. In this context, the arguments against taxing private jets will struggle to prevail. Especially without Berlusconi in power.

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