With the pandemic, the curious question as to what will become of the duty-free sales at airports has become sufficiently important to be discussed in learned journals.
by Dr. Ruwantissa Abeyratne in Montreal
In “l’enfer”, a recent novel by the French philosopher Gaspard Koenig, a university professor dies only to discover that hell is an eternity spent traipsing around airport duty-free shops. ~ The Economist February 27th, 2021
The story goes that duty free sales at airports began in Shannon Airport in Ireland in 1947 when an innovative mind sought to solve the problem of preventing passengers travelling between Europe and North America from going through the monotonous regularity of being holed up in the aircraft while the aircraft was being re-fueled on its way to its destination. On the one hand, while establishing duty free shops at Shannon airport gave the passengers’ bottoms a welcome respite from the narrow confines of the seat in the aircraft they were occupying, on the other hand it turned out to be a brilliant piece of disruptive innovation aimed at exploiting a market segment “in enforced captivity” with nothing else to do but go shopping while they were idling in transit. The rest is history.
Arguably, duty free shopping is the foremost example of tapping the opportunistic mindset of the human psyche. As Michel Faber said: “The crowds that queued for snacks and knick-knacks, the constant stream of passengers recorded by the closed-circuit TVs, were wondrous proof of the sheer variety of human specimens, except that they were presumed to be identically faithless inside, duty-free in every sense of that word.” On this basis presumably duty-free sales at airports flourished until stymied by a virus - 0.125 micron in size - in early 2020. For now, at least, the shops ate closed until another creative mind thinks of a “brand-new” disruptive innovation to revive the industry.
Speaking of brands, one might say that much of the success of duty-free sales at airports was due to branding and exclusivity offered designer products. The experience of international travel and the ego boost it offered to most as a marker of superiority in one’s community was doubled and tripled by the duty-free baubles one purchased at the airports. As Investopedia correctly states :” Duty-free stores are an enticing perk of international travel”.
With the pandemic, the curious question as to what will become of the duty-free sales at airports has become sufficiently important to be discussed in learned journals.
The Economist, which records that travel retail had an output of $86 billion prior to the advent of the pandemic, states that this figure was reduced by two thirds in 2020: “The premise underpinning duty-free is that the mere act of crossing an international border should exempt travellers from some taxes that non-travellers are subject to. This was a questionable wheeze even when European airports lobbied for it in the 1950s. Now it is untenable. Modern tax codes typically seek to dampen inequality, but duty-free shopping hands most benefits to the well-heeled who frequently travel abroad”. These tax rebates, The Economist says, benefit those who “fly and pollute” suggesting a green solution is now called for.
Duty-and tax-free shops are arguably the most attractive to airports in terms of non-aeronautical revenue. These shops are ready to pay competitive rents since consumers find them more attractive than city centre shops as the prices in the former are substantially low. An added attraction for concessionaires to pay high rents is that since the profit margins earned by the concessionaires are considerably high, airports can negotiate a contract that is advantageous in obtaining for the airport a large share of the profits earned by such shops
Airports also recognize the need to provide duty and tax free shopping in the landside areas of the passenger terminal since duty-free shopping is only accessible to passengers who have entered the departure or transit lounges. A wide range of duty-and tax-paid shopping needs to be provided in the public landside areas of terminals. Such shops are usually of three kinds. These shops could sell goods such as travel goods, tobacco, books sweets, drugs and toiletries
Of course, there need not be shops at airports peddling their duty-free inventory. Travellers can order their entitlement of the goods on the web and collect them on their way out; or even get them delivered at home. In that context, a demise of the industry may be unlikely. The more relevant issue is grounded in the justification of the dutyfree concept. In a non-aeronautical context, airports rake in 40% of the takings of the duty-free shopping complexes as rent and this revenue stream is indeed a significant contributor to profits made by airports. Over the years, airlines have complained in various international fora, particularly convened by the International Civil Aviation Organization (ICAO), that in view of the duty-free cash cow bestowed on the airports, where the main source of revenue is the passenger traffic generated by the airlines, charges imposed on airlines by airports should be reduced.
ICAO policy leaves it wide open for airports to optimize their revenue to exceed all direct and indirect operating costs, including general administration etc., and so provide for a reasonable return on assets (before tax and cost of capital) to contribute toward necessary capital improvements. This policy statement encourages commercial autonomy of airports and the practice of deviating from being instrumentalities of the State. A fortiori, it urges airports to optimize revenues in order to boost capital investment toward improvement, which would not necessarily mean such revenues should subsidize airport and air navigation service charges. The Airport Economics Manual, which was first produced and issued by ICAO in 1991 states: “”It should be noted that revenues from non-aeronautical activities are in fact the principal means by which a growing number of airports are able to recover their total costs because their profits from these activities more than cover the losses most of them incur on their air side operations .... and in so far as ICAO cost recovery policies are concerned, not subject to the same limitations that it is recommended apply to charges on air traffic”.
This still leaves the moral issue brought to bear by the duty-free concept in international travel: should a person, ipso facto (by the mere fact) by crossing a border from one country to another, be entitled to buy tax free goods to which a non-traveller is not entitled? Should what started in 1947 as a “gimmick” and a “perk” of international travel be allowed to continue even though it is perceived as a stain on equality?
One argument that has been adduced in support of duty-free sales when linked with international travel is that local value-added and other taxes that apply in a country should not be applied in this case because the purchase is made in “no man’s land”. The absurdity of this fallacy is self explanatory because airports are in the territory of a country. Duty free stores are not in “no man’s land”. Even if duty free goods are purchased in flight where the aircraft is flying over international waters, the State of registration serves as the country if something were to happen in flight.
The above notwithstanding, it is by no means suggested that what has prevailed has to be scrapped altogether. However, a new business model might be worth considering, particularly in a world riven by inequality where half of the population of the world own nothing; the poorest 50 % own less than 10 % of national wealth and generally less than 5 %. The richest 10 % of the world command 62 % of the total wealth while the poorest 50 % own only 4 %.that 50 % of the world is poor, 40 % belongs to the middle class and 10 % is wealthy, of which 1 % is super rich. In this scenario, could one argue that, based on the assumption that the rich travel more than the poor, the former benefits from unjust or wrongful enrichment? Should this issue be revisited this time from the position of the consumer as well?
Dr. Abeyratne was one time Coordinator, Air Transport Programmes at the International Civil Aviation Organization after which he served as the Organization’s Senior Legal Officer. He teaches aviation law and policy at McGill University.
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