"How many trees is Chancellor Merkel going to plant with that money?"

Antonio López de Ávila. Director Executive Master in Tourism Management. IE Business School.

5 October 2010

The German government’s decision to levy a new local flight tax when the rest of Europe is an open sky zone is not one of its better ideas, and they will probably pay for it.

This fall in activity could mean the loss of thousands of jobs and, above all, the loss of millions of euros in revenue for the country´s economy, perhaps more than expected. The Dutch government, which applied a similar tax, cancelled it after only one year owing to the associated economic losses and the negative effect the measure had on the airport of Schipol.

The countries of southern Europe, such as Spain, Italy and Greece, will suffer from the loss of thousands of German tourists who already fly with very tight budgets and German travel agencies and tour operators will see their income fall drastically.

In Latin America, the tax will be €45 per ticket. That is a considerable figure, perhaps not so much for the business traveller, but for the tourist. In this region, LAN will be the company most affected, since it operates open routes to Germany. It will have to analyse its customers´ response when they start to apply the tax and see if they are willing to pay to fly to Europe with a stopover or final destination in Germany when they can choose nearby airports in France, Austria and Switzerland. The other Latin American companies will have to coordinate the information from their customers with allied air companies on flights to Germany in order to give a response in keeping with the demands of the local market.

But if the environmental tax disappears in two years’ time, as the German government has declared, binding it to the start-up of the European Union´s Emission Trading System (ETS), why launch the tax now without coordinating with its European partners when it has such a negative effect on its industry? Have the necessary studies on the impact of the tax on the country´s economy been done? The impression is that the decision has been very short-term and somewhat improvised.

The effects of the growing weakness of the euro (which increases the oil bill), the slow recovery of European economies and the closure of airspace due to the volcanic cloud will keep the European air sector in the red until (at least) the end of 2011 (e.g. the Lufthansa Group has filed operating losses of €171 million for the first half of the year).

However, the German Minister of Finance, Wolfgang Schaeuble, has said that he does not believe that air companies will suffer from the application of this tax, which demonstrates his ignorance of the sector and how it works.

It is well-known that the air sector has to adapt to the new environment that has been created over the last 10 years. Managing the uncertainty ("nothing is the same as it was") is turning out to be the subject the professionals in the sector across the world have yet to pass and their companies´ futures depend on them doing so successfully. Businesses need to be flexible and adapt quickly to changes in passengers´ habits. They need to learn how to optimise every sale channel to ensure maximum profitability and they must invest in human resources (training and motivation).

In a highly competitive and changing environment, it is difficult for a company to keep hold of its competitive advantage. The German government´s idea of applying a "local" tax in a Europe with open skies is not the best one they have ever had. Indeed, now is when innovation and creativity are really necessary.

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