Abstract essay

Corporationtax is the charge imposed on revenues that small enterprises,medium-sized companies, or big organizations generate. The researchwas motivated because of the recent high profile publications ofcorporate tax reduction scheme in the United Kingdom. The articlefocuses on ways to fill the substantial gaps in the academicliterature and identify how these transformations will publiclyaffect the London City Airport and the travel market as whole in theUnited Kingdom. Another aim includes investigating how London CityAirport’s corporate behaviour is influenced by the rate ofcorporation tax and the financial sector in the United Kingdom.Additionally, it aims at the analysing corporate performance of LCYand its travel market, identifying the significance of financialsector of LCY, investigating how changes in corporate tax rate mayaffect business travel, and exploring changes in GDP and itsinfluence on leisure travel. The research is comprised of two methodsto ascertain reliability and credibility. The research methodsinclude primary and secondary. The qualitative analysis method hasbeen selected for this process. However, the study was limited byincompetent sources of information, insufficient time, and money.Additionally, it lacked an adequate number of people to offer therequired information. Similarly, the report does not considerexogenous short-term shocks and economic fluctuation.

During theresearch, the article established London City Airport as a wholebusiness airport for the financial year 2015. Additionally, thebusiness growth of LCY is closely tight to Canary Wharf due to thevolume of passengers that are heading to and from financial centre ofLondon. However, the LCY is trying to grow its leisure market toavoid business and recreation people checking-in at the same time.The passengers and profitability number in LCY has increased since2009. Conversely, the changes in corporate tax cause a significantshift for the London City Airport Profitability according to theairport`s overall income, and therefore, a reduction in corporate taxis a great boost.

Keywords:LCY(London City Airport), CT (corporate tax), GDP, air travel, revenues,FDI

Chapter1 – Introduction1.1Background to the Study

Corporationtax is the charge levied on revenues that small firms, medium sizecompanies, or big organisations generate. It is applied on profitsafter expenses are deducted, such as cost of goods sold (COGS),depreciation, administrative and general fees. Usually corporate taxrates are subject to various profit levels, laws, and also differentgovernments around the globe, as different governments setcorporation tax in different ways, with different rates, and in somecases even specifically for individual companies (Scholes et al,2002). Put simply, corporation tax is a cost of every profit-orientedcompany. It plays significant role of every organisation, moreover,it is one of the most important factors for investors, shareholdersand multinational enterprise when considering which business toinvest in and in which country (Hill, 2014).

Corporationtax in the United Kingdom was introduced in 1965. Until that time,profits of firms were subject to income tax, set at income tax rates.However, since 1965 corporation tax rate have varied. For example, in1982 the rate was 52%, which was the highest in the history of theUnited Kingdom. Since then, it has been falling gradually (TradesUnion Congress, 2011). Currently proposed general corporation taxrate in the UK in 2016 is 20%, followed by 18% in 2020. According tohistory, it is less than half compared to early 1980’s (HMRC,2013). Many profit-oriented companies see this change as a prosperityof growth and development.

Mostof the companies around the globe including United Kingdom areprivately owned entities that are responsible for their income,following the laws and regulations in the country of operation. Andas all the airports in the UK are privatised since 1987 (Parker,1998), thus, every airport counts as an individual business that isin stiff competition with other airports on the market, mainlycompeting for the market share, customer loyalty and location. Ascorporation tax (CT) is one of the main drivers that stimulate growthand investment in the United Kingdom, aviation industry is heavilydependent on government’s regulations and also closely linked toeconomic activities of the country. London City Airport (LCY) isparticipating directly and indirectly in economic growth andstability of the United Kingdom, as it yearly pays a decent amount ofcorporation tax, and it is also helping businesses to move around bytransporting foreign investors and business-focused individuals.

1.2Purpose of the Research

Theinspiration for this research came from the recent high profilepublications of corporate tax reduction scheme in the United Kingdom.In fact, there is a number of papers saying that all companiesoperating in England are involved in this change, and as proposed,for various companies, London will be a new destination for business.As it is an important change for every profit-oriented firm, it hasbeen identified that there are substantial gaps in academicliterature and publicity of how these changes will potentially affectLondon City Airport and the travel market as whole in the UnitedKingdom, the filling of which this paper is aimed to be able tocontribute.

1.3Aims and Objectives of the Study

Thegoal of this dissertation is therefore to investigate how London CityAirport’s corporate behavior is affected by the rate of corporationtax and the financial sector in the United Kingdom. The followingobjectives are set within this research to identify the predeterminedaims:

• Analyse corporate behaviour of LCY and its travel market

• Identify the importance of financial sector for LCY

• Investigate how changes in corporate tax rate may affect business travel

• Explore changes in GDP and its affect on leisure travel

1.4Proposed Method Of Study

Thispaper is comprised of two methods of research to ensure reliabilityand thoroughness. Two research methods namely, primary and secondaryare applied in this paper. Primary research is a new individualinvestigation that is conducted by the writer with the objective ofanswering certain questions that are providing personal opinionsbased on knowledge and experience of the responders. As this researchis aimed to identify specific objectives, therefore, only a certainsize of population was selected, that is able to provide a particularbackground for the research. Three professionals that havecontributed in this study are experienced specialists that areworking in the industry and aware of trends in their particularsphere of business. Their answers to the topic were found to beslightly different from each other, as they are all are skilled indifferent fields of business. These responses will be discussed andanalysed carefully in Findings and Analysis section of this paper.Face-to-face interview is the only way in which new information andfuture plans about non-public companies can be obtained. Therefore,qualitative research method has been selected for this document.Secondary research was conducted to identify future trends, andopinions of economists that are based on the history and futurepredictions. Secondary research of this paper is comprised of thesummary, collation and synthesis of the existing and widelyaccessible information that has been previously published by theauthorities and experts in this field.

1.5Constraints and Limitations

Thereis a number of constraints and limitations that this study wasaffected by. As the research criteria is related to London CityAirport, sources of information are very limited. Moreover, LondonCity Airport is a privately owned company that does not publish someinformation due to legal and ethical constraints (The Data ProtectionAct, 1998). This could be a result of the company’s policy ofconfidentiality as well as protection of the personnel employed. Thispaper aims to avoid any issues of data protection or confidentialityin company’s policy, no private information will be used ordocumented.

Asthe study was also restricted in scope both by money and time, it wasessential to ascertain a robust sample of the population that takes asubgroup of individuals who are representatives of the particularpopulation that is needed for the study. It was essential to ensurethat responders fitted the desired criteria before the facts werenoted. Therefore, this paper is supported by opinions of only threeindividuals, as more suitable people could not be found. There areseveral aspects of the future that are difficult to forecastaccurately. In some cases, crucial factors may negatively affect andeven undermine businesses and the economy. In addition, this reportdoes not take into consideration exogenous short-term shocks andeconomic fluctuation. Therefore, in order for this research to bestatistically accurate and more reliable, sufficiently larger sampleof the population would be required. Due to this fact, a furtherresearch is advised.

1.6Structure of the Dissertation

Table1: Timeframe of Study

Chapter2 – Literature Review2.1Corporate Tax in the United Kingdom

Figure 1: UK CT rate 1973-2020

Corporationtax in the United Kingdom was introduced by the Finance Act in 1965.Since then it has separated the tax liabilities of organisations andshareholders. The first introduced system was a “classical system”,however, in 1973 it was modified to the imputation system, which ismore complex and the companies are charged to a corporation tax onall profits, distributed and undistributed In addition, income tax isnot deducted at the source from dividends that are paid to theshareholders. Corporation tax system in the UK has gone through manyreforms, and since 1973 has been progressively decreasing (TradesUnion Congress, 2010). Figure1 shows the past and proposedreductions of CT in the UK from 1973-2020.

In1973, the corporation tax rate in the UK was set to 52% (seeFigure 1), it was the highest everrate in history. Since then, the rate has been constantly decreasingin order to help businesses to grow and therefore, improve the UKeconomic stability and increase the GDP. The CT reductions in 2011were introduced against very difficult and unstable economicconditions, with business and household confidence at an extreme low.Between 2010 and 2015 the main rate of CT decreased from 28% to 20%(see Figure 2),thus giving the UK one of the lowest rates in the G20 (HMRC, 2010).

Figure 2: G20 CT rate in 2015

Source: KPMG Tax Rates Online

Since United Kingdom has joined the groupof the lowest corporate tax rates in the G20, it became morecompetitive among others countries, therefore more attractive forforeign businesses. In addition, Chancellor of the Exchequer GeorgeOsborne has announced further reductions of corporation tax to 19% in2017 and 18% by 2020, stating that Britain is open for business. Healso explained that giving businesses the lower tax rates willenhance confidence in growth, foreign investment and will also createmore jobs (Financial Times, 2016).

2.1.1 View of Economists

Stephen Williams, founding and senior partner atthe Newport-based accounting firm Kilsby &amp Williams added, areduction in corporation tax to 18% by 20202, is the most welcomesurprise in the history of CT. This will benefit local business andwill also make the UK a highly attractive location for FDI (WalesOnline, 2015).

According to Stella Amiss, international taxpartner at PwC, businesses were not requiring a further corporaterate reduction, however, it did send a clear message that theGovernment in the UK is pro tax competition, therefore will help inattracting overseas businesses into the UK shores (Wales Online,2015).

Howard Sears, managing director of the venturecapital firm Astuta stated, that confidence among UK businesses isalready at a very high level, however further reductions incorporation tax will supercharge it and will give a boost to theeconomy. UK business owners will have a strong competitive edge aswell as opportunity for growth. This will also make UK verycompetitive over the other G20 countries and attractive as a globalbusiness hub (Wales Online, 2015).

CBI director John Cirdland said, that the furtherreduction in corporation tax to 18% in 2020 is a welcome surprisethat delivers a doubled edged budget for businesses (Wales Online,2015).

2.1.2View of Tax Foundation

Economic Changes Resulting from a Reduction of Corporation Tax

According to the Tax Foundation’s Taxes andGrowth (TAG), reducing rate of corporation tax improves UKcompetitiveness as well as boosts economic growth and benefitsemployees in the country. It has been proven that lower corporationtax rate lowers the cost of capital, which boosts the level ofinvestment in the economy. The increased investment raises theproductivity and therefore increases wages of employees, which alsoleads to higher living standard and an increase in GDP. Table4 compares the economic results oftwo simulated corporate tax rates, namely average CT rate of OECDcountries and United Kingdom. The top line results show that thereduction in CT to the current rate of 20% in the UK produces thebiggest boost to long-term GDP, lifting the level by 3.3% incomparison with previous rate of 21.5%.

	To OECD Average rate of 25%	To Current UK Rate of 20%
GDP	2.3%	3.3%
GDP ($ billions)	$404	$588
Capital Stock	6.7%	9.8%
Wage rate	1.9%	2.8%
Full-time Equivalent Jobs (000)	425	613
Corporate Service Price of Capital	-5.8%	-8.3%

Source: Tax Foundation, 2015

Table2: Economic Change from CT reduction

Change in Net AGI from Corporate Tax Rate Cut

The larger driver of this new growth is thereduction in the service price of capital. These costs associatedwith investment, such as taxes, depreciation, risk, and foregoneconsumption opportunities. Current CT rate lowers these costs by8.3%, however, if the CT rate will be further reduced to 18% it willbring more positive changes as well making the UK an attractivebusiness hub. In addition, the UK current CT rate lifts the capitalstock by nearly 10%. Furthermore, increased investment and highereconomic growth affecting higher after-tax incomes for households.Table 5illustrates the distributional impact of two corporate tax ratereductions on net incomes as a result of increased economic growth.

AGI Class	To OECD Average of 25%	To Current UK rate of 20%
&lt0	2.4%	3.5%
0 – 5,000	2.3%	3.3%
5,000 – 10,000	2.1%	3.1%
10,000 – 20,000	2.1%	3.0%
20,000 – 30,000	2.2%	3.2%
30,000 – 40,000	2.3%	3.4%
40,000 – 50,000	2.2%	3.2%
50,000 – 75,000	2.2%	3.1%
75,000 – 1000,000	2.1%	3.1%
100,000 – 150,000	2.1%	3.0%
150,000 – 200,000	2.1%	3.1%
200,000 – 250,000	2.0%	3.0%
250,000 – 500,000	2.0%	3.0%
500,000- 1,000,000	2.1%	3.1%
&gt1,000,000	2.2%	3.3%
Total for all	2.1%	3.1%

Source: Tax Foundation, 2015

Table5: Change in net AGI from CT reduction

Table 5shows the economic benefits of two corporate tax cuts are fairly evenacross all income groups. However, even a small increase in wagestends to increase living standards and, therefore boost consumerspending (Hodge, 2015).

2.2FDI and its Benefits

Accordingto Mody (2007), Foreign Direct Investment occupies a special place inthe connection between economic development and globalisation. Thereare a number of factors playing an important role for foreigninvestors to consider when choosing which business to invest in, whenand in which part of the globe. OECD (2008), stated that corporatetax is one of the most important factors for foreign investors,however, not the only one worth consideration. Decisions of businesslocation stand along with well-developed infrastructure, publicservices, market size, attractive environment, strong investmentconditions and other taxes namely, payroll taxes and non-relatedbusiness taxes.

Bondet al, (1993) and Wallis (2012) defined that any changes in corporatetax significantly affects investment choices. It is widely known thattax competition for the Foreign Direct Investment is a reality inglobal market. Investors carefully compare tax rates in differentcountries with similar size of the market and geographical location.Studies have shown, that FDI is becoming increasingly sensitive totaxation, as it has been defined that on average FDI decreases by3.7% on each 1% of increase in tax (OECD, 2008). Accordingto HMRC (2010), FDI is approximately 15% of total UK investment andthe total investment is around 8.6% of GDP. Itis widely recognised that, economic development and globalisation isdriven by Foreign Direct Investment, however, it would not beefficient without a good transportation link. According to IATA(2008), the availability of air transportation services effectivelyincreases the scope and cycle time of economic activity. Business airpassengers and GDP have been increasing in all areas around the worldin the last 30 years therefore, there is a significant variabilityin the growth rates. This reflects the variability in the nature ofinteraction between air transportation and economic activity.

2.3FDI and Air Connectivity

Foreign Direct Investment and Air Connectivity

Source: IATA, 2008

Thechart shows the total value of FDI built-up in different countries inrelation to GDP against the index of connectivity. The chart explainsthat the countries with higher air connectivity, which is measured tothe GDP, are generally more successful at attracting FDI (IATA,2008). In 2008 United Kingdom was on the line of best fit. However,proposed future changes in corporation tax will more attract FDI andtherefore increase the GDP, giving the UK even better position(Financial Times, 2016).

Accordingto CAA (2011) FDI has an impact on business travel in two differentways. The flow of FDI is related to new investments, such as UKcapital invested in overseas markets or vice versa. Thus, FDIgenerates a certain number of business air travel between thecountries that is related to these investments. Business air travelmay be incurred in relation to all foreign investments, the level ofwhich can be measured by the annual stock of FDI. However, therelationships between FDI flows or FDI stock, and air business travelis more complex in comparison to trade and GDP. Figure3 and Figure 4 shows the existenceof the relationships between UK FDI and business air travel, as wellas indicating the most popular business routes to and from UnitedKingdom.

Source: Travelpac and FDI and Statistical Bulletin, ONS

Number of visits by business passengers to and from the UK and total flow of FDI in 2008

Figure3: Business Air Travel &amp flow of FDI

Number of visits by business passengers to and from the UK and total stock of FDI in 2008

Source: Travelpac and FDI and Statistical Bulletin, ONS

Figure4: Business Air Travel &amp Stock of FDI

2.4Summary

Reductionin corporation tax to 18% by 2020 in the UK will result on economicactivity as it will attract FDI into the country, increase capitalinvestment, GDP and will also increase wages. Higher earnings enhancelarger spending, part of which is usually distributed to the airtravel. There is also a strong link between the FDI and business airtravel in the UK, specifically to and from London City Airport.However, there is a substantial gap in the literature that identifieshow the reduction of corporation tax in the United Kingdom directlyand indirectly, through various sources such as FDI, financial sectorand GDP can potentially affect travel market at London City Airport,the filling of which this dissertation isaimed to be able to contribute and suggest the possible change.

Chapter3 – Research Methodology3.1Methodology to be used

Thischapter introduces the research methodology of the dissertation. Itis comprised of the research design, population sample and datacollection instrument. It also concentrates on the analysis ofdifferent research methods, as well as evaluating them and selectingcorrect methodologies in order to achieve the set goals and aims thatare listed in introduction section of this paper. According to Politand Hungler (1999), research design is a blueprint that is conductingthe study in the way that the full control will be implemented overfactors, which may interfere with the validity of the researchfindings. The design of the research is an overall plan to findanswers (see Appendix A, Appendix B and Appendix C) to the questions,which guide this paper. Burns and Grove (2001) argue that designing aresearch helps the writer to plan, organise and implement the studyin a way that will be useful to gain expected results. According tothis, the chances of gathering information that is associated withthe real situation are increasing. This research uses a qualitativedesign to analyse and identify changes in corporate taxation that areaffecting economic activity in the United Kingdom and thereforeaffecting directly and indirectly corporate behaviour of London CityAirport.

3.2Research Instrument

Theprimary research instrument used within the study was a face-to-faceinterview with experienced professionals. The type of interview thatwas used to obtain valuable information, is the unstructuredinterview also known as open-ended or unrestricted type, which gaverespondents a chance to express their personal opinions based ontheir knowledge and experience. It has the advantage of identifyingthe latent trends as well as generating ideas for potentialqualitative research, and also unveils important issues that canguide future analyses (Klenke, 2008). On the other hand, qualitativeresearch is generally time consuming as well as conducted from arelatively small sample of respondents in addition, sectors ofparticipants’ are limited. Furthermore, this research would be morereliable if the sample size was larger, and also included differentsectors (Brink and Wood, 1998).

3.3Participants in the Research

Inthis study, selected participants had to be experienced individualsthat are knowledgeable in aviation sector as well as corporatetaxation. Suitability criteria specify important characteristics thatpeople must possess in order to be participants of the study (Babbieand Rubin, 2010). Unfortunately only three professionals havecontributed in the study, thus the information that was gathered willbe used as a reliable data for this particular paper.

3.4Research Design

Thisresearch was exploratory because it explored how corporate tax ratein the UK can potentially affect economic activity, privatebusinesses, GDP and volume of flights particularly from and intoLondon City Airport. Exploratory research is the research that hasnot been previously investigated and attempts to identify newknowledge, insights, meanings and new understandings, in order toexplore factors related to the topic (Brink and Wood,1998). Results of exploratory researchusually are not generalizable to a larger population however, theresults provide a better understanding of the sample population thatis being examined (Burns and Grove, 1999). Current research deemedthis approach to be appropriate for obtaining a better understandingof how corporate tax rate can potentially affect corporate behaviourof London City Airport.

3.5Data Collection and Analysis

Qualitativetype of the research is primarily exploratory research that is usedin order to gather and understanding of underlying reasons andopinions so as to develop ideas for the study. Primary data is newfacts that has never been collected before and interpreted in theoriginal way (Kothari, 2008). The objectives of qualitative analysisare described as it understand and explain information in-depth thatwas previously gathered (Willing, 2008). This particular type of theresearch helps the writer to identify respondents’ experiences byusing distinctive research methods. The use of qualitative analysiswas essential for this paper as it has explained and unveiled answersto particular questions (Bailey et al, 2011). Moreover, qualitativeresearch has provided this document with important information thatcould not otherwise be obtained. According to Klenke (2008),face-to-face interview is the best possible option of collectingprimary data for the qualitative research, as during the interviewimportant issues may be uncovered that can guide future inquiries.Thus, three professionals were selected for the person-to-personinterview. The unstructured questions (see Appendix A) were designedto gather valuable information and guidance for the study. Number ofthe same questions was asked three individuals to ensure reliabilityand validity of the investigation (see Appendix A, B and C). Inaddition, a set of specific questions was asked a particular personin order to gain an overall understanding of a business and currentfinancial figures (see Appendix A). Facts and opinions of individualsthat participated in this study are discussed in Findings andAnalysis chapter of this dissertation.

Chapter4 – Findings and Analysis4.1Corporate Behaviour of LCY and its Travel Market

LondonCity Airport is the leading business airport in the United Kingdomthat serves over 40 destinations across the UK, Europe and the USA.The airport’s location is on the doorstep of the Canary Wharf, andthe airport is considered vital to financial businesses and plays animportant role in the growth of London (London City Airport, 2012).Sexton (2016) has described London City Airport as a purely businessairport, because at the end of the financial year 2015, the numberswere revealed as 65% of a total number of passengers was flying forbusiness purposes and only 35% were leisure travellers (seeFigure 3).

Source: Sexton, 2016

Figure5: Passenger Classification at LCY

Figure5 illustratesnumber of passengers flying for business and leisure purposes to andfrom London City Airport.

Researchhas also defined that business growth of LCY is very much tight toCanary Wharf due to volume of passengers that are heading to and fromfinancial centre of London. It has been estimated that approximately70% of the airport’s business market are passengers who eitherworking or having business meetings in Canary Wharf (Sexton, 2016).It is widely recognised that time plays an integral part in thebusiness environment. Therefore, part of the success of London CityAirport is its location, that is three miles away from Canary Wharfand about six miles from the City of London (London City Airport,2012). Passenger can get to the airport in relatively short time, butexpensive. Nevertheless, the averagesalary of any traveller who is coming through the airport is over£90,000 per annum, and that is excluding private jet centre (Sexton,2016).

Accordingto sexton (2016), at the beginning of the day and at the end of theday the airport is operating with full capacity because of the timeconvenience for the business passengers. Therefore, London CityAirport cannot grow business market any more. However, at lunch timethe airport is not as busy as in the evenings and mornings,consequently, there is a room for the leisure market. Currently LCYis trying to grow leisure market organically, avoiding business andleisure passengers checking-in at the same time. The prediction ofproportion of passengers for the 2017 is 60% business and 40% leisuretravellers (see Appendix A).

+7.7%

+12%

Source: Sexton, 2016 CAPA, 2015 Lon

Figure6: LCY annual passenger number

Aeronauticalrevenue is the main source of income of London City Airport. Thus,passengers play an important role of the airport’s profitability.Figure 6shows annual numbers of passengers for the financial years of 2009 to2015.

Accordingto CAPA (2015), LCY has an increase in passenger numbers since 2009.In 2013 there was an increase of 12% in comparison with 2012.Moreover, in 2014 LCY reported growth of 7.7% in passenger numbers to3.65 million. According to Sexton (2016), an increase in passengernumbers reached 4.2 million in 2015, which is approximately 14% andthat, is the highest ever number (seeFigure 6).

Since2009, airport’s profitability was constantly increasing, due togrowing number of travellers. Commercial income will continue tobuild up on 2016 largely driven by a forecasted growth of passengers.Furthermore, LCY is focusing on mitigating cost of inflation anddelivering improved productivity, in order to keep shareholderspleased. (LCY, 2015). Despite on the high costs of operations andexpenditure, airport has another high cost that is contribution tothe national economy such as corporation tax. According to Sexton(2016), reductions of corporation tax make a significant differenceon airport’s profitability. Therefore, the “effect” ofdecreased corporate tax can be reinvested into capitaland productivity improvements that are most important for growth ofthe airport. Table2, represents changes in corporatetax rate during the last 5 years, from 2011 to 2015, and the effectof corporate behaviour of LCY due to this changes.

Source: Sexton, 2016 Keynote, 2015

Corporate behaviour of LCY due to change in CT

Table6: Effect of Decreased CT

Financial year (Tax year) inthe United Kingdom runs yearly from April to March (Smith et al,2014). However, accounting period for corporation tax return coveredby the company’s annual accounts, it is varied due to set upcompany’s time (Genders, 2015). Accounting period of London CityAirport starts in January and ends 31 December of every year. Table6 brieflydescribes financial position of LCY during the previous 5 years from2011 to 2015. It is clearly seen from the table, that minorreductions in CT have greatly affected the airport’s profitabilityin a positive way. Due to CT reduction from 28% to 26.5% in 2011,London City Airport has paid to HMRC amount of £4.5m includingsavings of £152k (Keynote, 2015).

The research has defined,that EBITDA of LCY in 2015 was £72 million, therefore, estimatedcorporate tax amount to be paid to the government departmentresponsible for collecting taxes is approximately £28.8million. Ifthe corporation tax rate has remained at 21.5% as in previous year2014, then the airport would pay approximately £29.8 million to theHMRC. Savings of £1m has been estimated by the change in CTconsidering that changes have been made in financial year. Therefore,reductions are only applied from the beginning of the financial year,not from the airport’s accounting period. Thus, only a certain partof the year is being affected from year to year (Sexton, 2016).

Sexton (2016), has describedchanges in CT as an important change for the London City Airport’sprofitability according to airport’s overall income. Therefore, afurther proposed reduction of CT to 18% will be a significant change,because the reduction of 2% willmake the difference of approximately £1.4m to £1.5m. He has alsomentioned that the airport is owned by the private equity company,therefore, is responsible to maximize shareholders’ wealth. Thus,reduction of corporate tax is a great support (see appendix A).

4.2Importance of Financial Sector for LCY

Accordingto Z/Yen(2016) London is the world’sleading financial centre since September 2015. That means London isan intense concentration of many multinational financialinstitutions, businesses and transactions in one single location. Itmakes the capital of England very competitive and attractive forforeign investors among other cities around the globe. Financialoperations and business meetings are mainly happening in CanaryWharf, City of London and Westminster. Canary Wharf has been definedas one of the 20 largest concentrations of employment in the UnitedKingdom (Allen, 2013). In addition, The City of London has beendescribed as a world leader in financial services, which has ledLondon to become a hub where organisations and investors from aroundthe globe meet and do business. (The CityUK and City of London,2016). According to this, any business meetings would seem to beimpossible without good air connectivity. Because aviation plays animportant role in every multinational business and not only, as ithas made the world smaller through the ease of international traveland London City Airport is one of the biggest players in providingthe connectivity infrastructure between the UK and overseas financialmarkets. From the interview with Mr. Sexton, has been defined theimportance of Canary Wharf for London City Airport (LCY). He believesthat London City Airport is very much tight to Canary Wharf, becauseapproximately 70% of the business market is coming from and to CanaryWharf. And if Canary Wharf did not exist, the airport would notpossibly be that successful in terms of the business travellers thattake 65% of LCY travel market. The current traffic volume for thefinancial year 2015 is 4.2 million passengers, and it is mainlyfinancial and business sector. Moreover, Canary wharf is the sellingpoint of LCY, as the passengers can come and get on the aircraft justunder 15 minutes including check in, as it well known businesstravellers are flying without the luggage and it only takes 10minutes by DLR to get to the airport from Canary Wharf. Thepassengers are able to get to Westminster and the City of London justunder 22 minutes, which makes LCY closer to financial sectors(Sexton, 2016).

TheFigure 3illustrates areas from and to passengers are heading, that fly fromLCY in 2015.

Source: Sexton, 2016

Figure7: Passenger Areas Flying to/from LCY

Figure7 shows 45.5% of all travellers arecoming from Canary Wharf or heading to Canary Wharf that use servicesof LCY. It identifies importance of financial sector, such as CanaryWharf for London City Airport.

In1996, London City Airport was bought for just under £24 million. Mr.Sexton explained the price as very little due to Canary Wharf beingin recession at that time. In 2006 the airport was sold for £750million and 10 years later, in February 2016 new owners that also ownBristol, Birmingham, Brussels and Copenhagen airports, purchased theairport for £2 billion. The increase in price is explained by thelocation that is near Canary Wharf, where almost all passengers arecoming from and heading to. Most of the companies that are operatingin Canary Wharf are American subsidiaries. Therefore, London CityAirport is pretty much tight to American financial market too. Inaddition, when the recession hit in 2007, business of LCY went downdue to Canary Wharf. Thus, that time not many business flights werecarried out, to what the airport is mainly dependent on. Job loses atthe airport were mainly during the recession. However, since 2010financial markets start recovering, consequently the airport has beenrecovering too. As Canary Wharf recovers – LCY recovers. Therefore,there is a strong correlation between the Canary Wharf and LondonCity Airport (Sexton, 2016).

TheFigure 8 illustratesmarket price of London City Airport from 1996 – 2016.

Source: Sexton, 2016

Figure8: Market Price of LCY

Figure8shows an increase in market price of London City Airport in 20 yearstime. It has happened due to construction of financial centre CanaryWharf that is situated near by the airport. Over the years CanaryWharf has been expanding, thus, the airport has been serving morebusiness passengers. Consequently, the actual value of the LCY hasbeen increased.

Theresearch has also identified that the LCY is close to the Americanfinancial market due to subsidiaries in Canary Wharf. That means allsubsidiaries including American, that operating in Canary Wharf andin other business concentrations of London depend on Government’sregulations. Accordingto Barber (2007), Tax is one of the most important factors whenconsidering international operations such as FDI, although severalothers should be seriously considered as well. London takes a winningposition over other financial cities around the world and especiallyin Europe, due to diverse and educated workforce as well as low ratesof corporation tax.

“Englishis the global language of finance and this gives London a hugeadvantage in Europe. Another advantage is that so many foreignlanguages are spoken there too – I’ve heard it is easier to getexperienced back office staff who speaks French in London than inParis.” –Head of Operations – New York-based Investment Bank, (Corporationof London, 2005).

“Becauseof family commitments I’d love to set up as an independentconsultant in Frankfurt. Unfortunately the tax situation makes thistotally impossible. I have to stay registered in London and justvisit Frankfurt on business.” –London-based Consultant, (Corporation of London, 2005).

Accordingto the interview with Mr. Nash, (2016), the physical connectionbetween leaders of the companies is very important in order to startevery sort of business at a high level (Nash, 2016). Nischwitz (2007)stated that face-to-face meetings are the important bridges where therelationships are built between the organisations, and also give achance to discover what the other member’s business is all about.Mr. Nash has also added, that Britain has been good at exportingservices and skills overseas for the last few decades. And the wayBritain does that historically is by meeting people on boats or onaircraft and start doing business from the mode of transport (Nash,2016).

Geographically,United Kingdom is an island located in Western Europe, which isbordered by the English Channel, Irish Sea, North Sea and AtlanticOcean. These water borders separate the United Kingdom from the restof the Europe and also the rest of the world (Ross, 1999). Forbusiness oriented people in the UK there is no other way to dobusiness overseas without flying abroad. The starting point of everyflight is an airport that is very crucial for the UK as a whole, andalso an important contributor to the economy. Summarizing all, thereis a strong correlation between London City Airport, Canary Wharf andcorporate tax rate.

BorisJohnson (mayor of London) has said that London is sifting to theeast, and as Canary Wharf is still expanding there are predictionsthat LCY will benefit even more in the future. Responders that havecontributed in the research do see positive predictions for LCY.However, despite on growth of Canary Wharf it is unlikely that theairport will also expand, therefore, the growth of businesstravellers will not that great as the airport can only serve alimited number of passengers.

4.3Changes in CT and its Affects on FDI and Business Travel

Morphetand Bottini (2014) defined air connectivity as a linchpin ofcountry’s economic growth. As it potentially enables to attractbusiness investment and human capital into the country (PwC, 2014).In addition, improved air connectivity allows UK based companiesgreater access to foreign markets as well as gives foreign companiesgreater access into the UK. Air connectivity also enhances economicperformance by making it easier for businesses to invest abroad inform of FDI. The correlation between air connectivity and FDI maycome across because foreign investment requires movement of staff inform of business meetings (Oxford Economics, 2014). There is a strongrelationship between economic growth, trade and internationalbusiness travel. Worldwide economic recession along with the fall inconsumer financial confidence and business investments have asignificant impact on business air travel around the globe (CAA,2011).

Englandis an attractive location for new businesses, as it has goodgeographical location, diverse as well as educated workforce, stronginvestment conditions, well-developed infrastructure, politicalstability and many other positive factors. It is recognised widely,that international tax competition is constantly increasing. UnitedKingdom has lost tax competitiveness, as the reduction of rate wasminimal compare to other countries since 1980’s (Devereux et al,2002). Nevertheless, since 2005 corporation tax in the UK isrelatively low compare to other G20 countries. Moreover, Governmenthas planned to make it even more attractive for foreign investors by2020, by reducing corporation tax to 18%. The motivation for suchreduction is to enhance international competitiveness, thereforeattract businesses into the UK and increase GDP (OECD, 2007).

Businessair travel is an important link between international trade andeconomic development. With an increasingly globalised and financiallyintegrated world economy, air transportation is necessary for movingbusiness oriented people swiftly because in the business world timeis what the most counts (CAA, 2011). Air transportation is crucialfor the United Kingdom due to its geographical location, as businesstravellers have few viable alternatives to air travel. In addition,airtransport in the UK creates three valuable types of economic benefit.Economic support of the industry is normally measured by itscontribution to GDP, created jobs within the industry and Taxrevenues generated by the sector and its supply chain (PwC, 2014).

Figure9 illustrates inbound business tripsin 2014.

Source: Keynote, 2014

Figure9: Inbound Business Travel 2014

Airtravel remained the most common mode of transport for inboundbusiness trips into the United Kingdom, with a market share of 70.4%(see Figure 9).Meanwhile, market share of trips by the sea was 18.1%, while businessvisits via Channel Tunnel was only 11.9% (Keynote, 2014).

Between1996 and 2014, the number of business passengers travelling to andfrom London increased by 5.5 million. (CAA, 2011 and CAA, 2014).Table 7,illustrates volume and growth of scheduled business passengersbetween 1996 and 2014 at London based airports.

Source: CAA, 2011 CAA, 2014

Table7: Business Passengers 1996-2014

Table7 shows the change in share ofbusiness travellers among London airports between 1996 and 2014. Thegain in business passengers by Gatwick, Luton, Stansted and LondonCity airports reflects the capacity at Heathrow as well as locationof the airports. Growing success of LCY can be explained by its closeproximity to the financial centre (CAA, 2011).

Accordingto Sexton (2016), a reduction of CT to 18% is a small changenevertheless England is heading in the right direction. Changes in CTwill attract FDI into the UK, especially American companies, becausethe tax rate in the US is very high. Normally investors firstly lookat educated workforce in the country where they were planning tooperate and then at the corporate tax rate in that country (seeAppendix A). Nash (2016) stated that corporation tax will definitelyattract foreign investors into the UK even at a level of 18%. Incomparison with the main competitor of Britain – Ireland, wherecorporation tax is only 12,5%. Ireland does not have that many highlyskilled people as Britain has, the difference of 5,5% will not be asubject of matter. In addition, there are non-financialconsiderations that investors often face when considering the countryof doing business, those often include: language barriers, culture,stable financial system and many more, in which Britain is definitelya winner among other G20 countries. CT is really important inattracting investment into the UK and also keeping it here.Furthermore, the corporation tax has also an impact that is beyondwhat companies just pay on their profits, as that also creates jobsin the UK, and of course people who live here and work here payincome tax and buy goods on which VAT applies. Thus, it is actuallyincreases the amount of taxes people pay in in the country andincreases UK economy. Businesses will definitely be coming into theUK, to operate here, work for the companies as well as visiting thecompanies, therefore airlines will definitely have more businessclients’ (see Appendix B). According to Sexton (2016), LCY willdefinitely serve more business passengers, as the CT will enhanceFDI. From his words, London City Airport has 2.5% of the overalltravel market in the UK. It is fairly small, however, Heathrowairport has capacity problem, therefore cannot grow any more. Despiteon, Heathrow is the biggest airport in the UK and will always be thebiggest, however, LCY has a privilege of a private jet centre andproportion of business people heading to Canary Wharf landing byprivate jets (see appendix A). Nash (2016), argue that LCY is adifferent type of an airport, that does not have many internationalflights. Looking at the correlation between the tax system andtraffic at the airports, will have to identify where the investorsmainly coming from. If foreign investors are coming from Europe, thenthey probably do not need to come to Heathrow, however, if fromJapan, China, South America and US and the reality is, that those arethe actual places where most of investors are from, thus, they willhave to land at Heathrow. Hence, LCY will benefit very little,compare to Heathrow (see Appendix B).

4.4Changes in CT and its Affects on GDP and Leisure Travel

Accordingto the Organisation for Economic Co-operation and Development (OECD,2010), Corporation Tax (CT) is one of the most distortive taxes amongothers. Because CT discourages the activities of profit-orientedcompanies such as investment in capital and productivityimprovements, that are most important for growth.

Thereduction of corporation tax rate reduces the cost of capital fororganisations. That means, that marginal investment projects will bemore profitable, therefore, more likely to go ahead as sufficientfinancing will be available. Increased investment opportunities andhigher returns will increase domestic investment and also foreigndirect investment. It has been proven that investment is a componentof GDP, therefore, will positively result on GDP. Higher investmentaffecting GDP through the short-term effect on the level of demand inthe economy as well through the long-term effect that is how muchoutput the economy is able to supply. According to this, moreinvestment leads to a higher demand in the economy. In addition,higher demand further raises GDP through second-round increments,because spending circulates through the economy. The proposedreduction of corporate tax will also affect the economy throughhigher wages and employment. This means labour is less mobile thancapital, therefore, raises the demand for labour and in returnincreasing wages. An increased reward to labour raises theconsumption as well savings that increases the level of GDP (HMRC,2010). The Figure 10on the following page illustrates three possible ways of increase inGDP through reduction of corporate tax rate in the United Kingdom.

Source: HMRC, 2010

Channels through which a reduction in CT affects GDP

Figure10: Channels affecting GDP

The graph produced by HMRC shows three possibleways, that were discussed earlier, of how GDP will be affected by thereduction of corporate tax rate. The first version is through thereturn to investors, the second way that will increase GDP is throughhigher wages and employment and the third type is through lowerprices charged to consumers. These three possible ways of increaseGDP in the UK.

According to PwC (2014), global growth is a keydriver to air travel. The increase in GDP is leading to disposableincome and welfare of consumers, therefore spending is increasing andthus, part of the expenditure will be distributed to aviation sector,specifically to leisure travel. Departmentfor Transport (2013) constitutes that demand for leisure travel isdriven by consumer spending, and to some extent affected by airfares.There is a strong link between fluctuations in income and demand forleisure travel, because leisure travellers are sensitive to airfares.

OECD (2011) stated, that GDP per capita is themost commonly used indicator of income or welfare to measuredisposable income. According to Graham et al. (2008), the demand forleisure travel is driven by the consumers’ disposable income,therefore, increased income and financial stability leading to agrowth of demand for leisure travel.

Global Growth in Passenger Traffic and GDP

BostonConsulting Group (2006) established that there is a robust andpredictable correlation between the number of leisure flights and thelevel of income per capita.

GDP RPK

Source: IATA, 2008

Figure11: Price of LCY

The Figure11 produced by IATA, shows howstrongly air traffic (RPKs) depend on world’s GDP. By analysing thechart, can identify drops in revenue passenger kilometers. In 1991due to global recession, in 2001 due to the 9/11 terrorist attack ontop of global economic slowdown and in 2008 due to credit crunch. Inthese three cases economic uncertainty is leading to decrease of GDP,therefore, decrease in air traffic.

Allinterviewed professionals that participated in the research see thereduction of corporate tax rate as a positive change for the GDP.Therefore, growth of GDP will positively affect leisure travel in allUK based airports including London City Airport. Business Developerat LCY stated that the airport is heavily dependent on economicactivity of the United Kingdom, and anypositive changes in the economy and therefore in the GDP. It willpositively affect traffic volume at LCY. Because if the economy doeswell in the UK, it means many people are working. And if more peopleare employed, this means a lot of businesses in Canary Wharf arehiring. Therefore, working individuals have more disposable income tospend on holidays. And as every traveller starts its journey from theairport, LCY will definitely benefit from growth in GDP (See AppendixA) (Sexton, 2016). Mr. Nash sees the prosperity in GDP due toreduction of corporate tax rate (See Appendix B). So as air travel isrelated to the GDP according to the past trends that are illustratingthat the demand for passenger travel is linked to rises and declinesin GDP. Despite that, LCY may not benefit as much due to financialconfidence of individuals and choices of expenditure. As some peoplewould prefer to spend disposable income on goods, car or a housemortgage instead of flying abroad. He believes in a positive changeof leisure travel at LCY, however, his concerns are to what extent aswell as how soon the impact would actually be noticeable (Nash,2016).

Chapter5 – Conclusion

The LondonCity Airport has ranked as the leading business airport in the UnitedKingdom that it used by over forty destinations across the UK, Europeand the USA for their operation. Hence, it is crucial to acknowledgethat London City Airport is purely for business purposes however, asection of leisure market is being set apart to avoid business andrecreation people checking-in at the same time. Most of theindividuals hiring the services of London City Airport are highprofile and they are charged expensively despite the distance.Additionally, the peak hours of the London City Airport are duringthe morning and the evening due to time convenience for the businesspassengers. However, the leisure passengers can travel duringlunchtime because it is not busy. Moreover, it is crucial toappreciate the passenger of London City Airport because they are animportant factor in generating revenue the Aeronautical revenue isthe primary source of income. Since 2009, the increases in passengersand profits have increased significantly because of the high numbersof the travellers. Furthermore, for London City Airport to please itsshareholders, it is focusing on mitigating the cost of inflation anddelivering improved productivity. Additionally, reduction incorporate tax influences a positive difference in the airport`sprofitability.

The foreigndirect investors are highly attracted to the London City Airportbecause of its strong multinational financial institutions, business,and transaction in a single location. London has created a conduciveenvironment for FDI because of its diverse and educated workforcealong with low rates of corporation tax. Moreover, commercial airtravel is an important connector between international trade andeconomic development. Changes in the corporate tax tend to attractthe FDI in the United Kingdom because the tax rate in the AmericanCompanies in the USA is taxed highly.

The corporatetax influences the Gross Domestic Product hence, the reduction ofthe corporation tax will reduce the cost of capital for entities. Themarginal investments will be highly profitable hence leading toincreased investment opportunities and high returns on the domesticinvestment and foreign direct investment. Therefore, the positiveeffect on GDP will lead to more leisure travel to LCY since it ismore dependent on the economic activity in the United Kingdom.Therefore, the working individuals will have extra income to spend onholidays there is prosperity in GDP due to the reduction ofcorporate tax. In other words, depending on the GDP performance, thetravelling demand will either rise or decline in the air travel.

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AppendixA

InterviewTranscript –26 February 2016

Responder:FinanceBusiness Partner, Business Developer at

LondonCity Airport – Mr.Micheal Sexton.

1. Q: What percentage of travellers at LCY was flying for the business purposes in 2010-2015?

A: Atthe end of 2015 we had 65% business and 35% leisure travellers. Weare currently trying to grow our leisure market. As at the begging ofthe day and at the end of the day we are operating with fullcapacity, because business passengers fly only in the mornings or inthe evenings, and we cannot grow our business market much more. However, at lunchtime we are not very busy, therefore there is a roomfor the leisure market to grow. We are currently growing our leisuredestinations, therefore, next year we will have 60% of passengersflying for business purposes and 40% will be leisure travellers.

&nbsp

2. Q: How do you think this number will be changed in 2020, what are the predictions?

A: Thenumber we are predicting in 2020 will be 60% business and 40%leisure. It will not change drastically as we do not want to havebusiness and leisure clients checking in at the same time in themornings or in the evenings.

3. Q: Which areas of London business travellers are mainly coming from?

A: Weare very much tight to Canary Wharf. Approximately 70% of ourbusiness market is coming from Canary Wharf.

4. Q: How would you classify London City Airport?

A: Weare purely business airport.

5. Q: Which sector current traffic volumes at LCY mainly depending on?

A: Thecurrent traffic volume for this year (2015) is 4.2 millionpassengers, and it is mainly financial and business sector.

6. Q: If corporation tax rate is reduced to 18% as per proposals, would you invest more into the airport development, customer satisfaction and surrounding area?

A: Wecould possibly say yes, however, it is very much up to the owners. Atthe moment we have EBITDA at £72 million, if the corporation taxwill be reduced from 20% to 18%, that means the reduction of 2% willmake the difference of £1.4million, therefore we will pay less toHMRC. I would say the owners will increase our profits. We do havethe potential to do stuff around the area, like the last year we gaveto charity around £10,000 and earlier we donated £55,000.

Beingowned by private equity company we are responsible to theshareholders’, therefore, our responsibility is to maximizeshareholders wealth. Thus, we will not invest in surrounding area,unless we have pure interest of doing that.

7. Q: Does the difference in corporation tax rate make significant difference on LCY profitability? Can you quantify it?

A: Yes,it definitely does. EBITDA this year (2015) was £72,5million, 2% ofthat is roughly £1.4 to £1.5 million of savings.

&nbsp

8. Q: UK Passenger Service Charge is the charge imposed by airlines to cover costs they pay to airports passenger to use the airport’s facilities. If the Corporate Tax is reduced, would the airport charge be reduced as well? Do you think this will affect avio-ticket prices?

No,the airport will not make any reductions in this area.

9. Q: The government announced reduction of corporation tax in 2020 at the rate of 18% in the UK. Do you think it will attract foreign investors?

A: Itprobably will, especially American companies because the potentialowners will have bigger profit. Normally investors firstly look ateducated workforce in the country where they are planning to operateand then at the corporate tax rate in that country.

Ifwe take an example of Ireland where corporate tax rate set at 12,5%,we can see that most of the biggest companies such as Google, Appleand Facebook operate from Ireland because they are paying less tax,thus, based on that I would say yes. It is a small reduction at themoment, however, we are heading in the right direction. I assume itshould be reduced even further to attract investors. I also think ifit went the opposite way it would discourage investors.

&nbsp

&nbsp

10. Q: UK’s corporation tax regime is now one of the most attractive in G20 and Government is planning to make it even more attractive by 2020. What do you think is going to be the impact of this change on business travel into the UK?

A: Ifit will be reduced I believe more companies will set up in the UK.There is enough fund in the UK, therefore people would fly more forbusiness purposes.

&nbsp

11. Q: Government has taken to improve competitiveness of the UK corporate tax regime and to ensure the UK is an attractive place for foreign investment. Heathrow is a major hub and it is more likely going to benefit from the potential increase in business travel. Do you see London City Airport benefiting as well and why?

A: Wedefinitely do see London City Airport benefiting from it, because inLondon market, London City Airport has 2,5% of the overall travelmarket. We are fairly small, however, Heathrow has capacity problem.It is already benefiting us, and we think it will benefit a lot more.Because if we have a company near the airport, this airport will beattractive to those travellers and if we are reducing the tax rate,then more people travel for business and more companies are settingup and the result is obvious. Heathrow will always be the biggest,however, if we think of London City Airport we have a jet center,which is a big plus. Hence, we have private airfield a lot ofbusiness people that go to Canary Wharf land by private jets. Theanswer is yes, because if more people set up subsidiaries in the UK,as here are better tax rates, then more people will be flying, and ifpeople need to get to Canary Wharf more likely will pick London CityAirport.

12. Q: According to OECD, corporation Tax is one of the most distortive taxes. Therefore, reducing it should have a greater positive effect on overall economic activity rather than reducing other taxes. That also means that GDP will be increasing. And as GDP will be increasing, do you think people will fly more for their personal needs, such as leisure?

A: Whenthere is more prosperity in the economy and GDP is doing well, peopleare normally spending more money. That is why our business is tightvery much to economic activity. If economy does well in the UK, meansmany people are working. And if many people are working, means a lotof businesses in Canary Wharf employing people. If people are working- they have more money, if people have more money – they go onholidays. Means we are benefiting from both, business clients peopleas well as leisure travellers, as every traveller starts its journeyfrom the airport.

13. Q: Recently Mayor of London Boris Johnson said that London is shifting to the east. Do you think foreign shareholders would invest in east London (possibly Canary Wharf), if yes would this affect London City Airport’s travel market?

A: Fora few years now the mayor of London has said there would be a bigshift to the east in terms of investment and a mini Silicon Valleywould be great. As of yet this has not happened. Personally I thinkit is unlikely this investment will happen in the short to mediumterm such is the political red tape in this country. &nbspIf it everdid it would be of great benefit to LCY as it would increase ofattractiveness as we could promote our proximity to this new area ofbusiness.

AppendixB

InterviewTranscript –09 March 2016

Responder:GlobalHead of Asset Finance &amp Leasing at PricewaterhouseCoopers – Mr.Paul Nash.

1. Q: The government announced reduction of corporation tax in 2020 at the rate of 18% in the UK. Do you think it will attract foreign investors?

A: Thecorporation tax will definitely attract foreign investors into the UKeven at a level of 18% in CT in comparison with the main competitorof Britain – Ireland, where corporation tax is only 12,5%. As Irelanddoes not have that many highly skilled people as Britain has, thedifference of 5,5% will not be a subject of matter. Companies thatwere considering moving elsewhere will stay in the UK only becausethe CT rate that will come down to 18%. It is really important inattracting investment into the UK and also keeping it here. Thecorporation tax has also an impact that is beyond what companies justpay on their profits, as that also creates jobs in the UK, and ofcourse people who live here and work here pay income tax and buygoods on which VAT applies. Thus, it is actually increases the amountof taxes people pay in in the country and increases UK economy.However, despite on the low CT, foreign investors will also look atthe political issues that are currently discussed, such as leavingEU. I believe that the majority of investors would prefer to stay inthe EU and pay 20% CT, rather than leave EU and pay as little as 18%.In addition, there are non-financial considerations that investorsoften face when considering the country of doing business, thoseoften include: language barriers, culture, stable financial systemand many more, in which Britain is definitely a winner among other EUcountries.

&nbsp

2. Q: UK’s corporation tax regime is now one of the most attractive in G20 and Government is planning to make it even more attractive by 2020. What do you think is going to be the impact of this change on business travel into the UK?

A: Itis a very important change that makes the UK an attractive place fromoverseas particularly. We will definitely have businesses coming intothe UK to work for the companies and visiting the companies,therefore airlines will definitely have more business clients. The UKgovernment by this move bringing changes to reduce tax avoidance,however, there are other factors that needs to be considered such ascomplexity of our tax system.

&nbsp

3. Q: Government has taken to improve competitiveness of the UK corporate tax regime and to ensure the UK is an attractive place for foreign investment. Heathrow is a major hub and it is more likely going to benefit from the potential increase in business travel. Do you see London City Airport benefiting as well and why?

A: Heathrowis the largest international traffic airport in the world. Chicago isthe largest airport in the world, because it has many internalflights within America. Big airports maintaining network well. Thereare two sort of travellers coming into Heathrow: one type oftravellers that is coming into Heathrow is to come to London forwhatever reason it is, another type of travellers coming to catch aconnection flight. Connection flights are increasingly leadingHeathrow in terms of passengers, as there are many internationalflights compare to other airports. LCY is a different type of aairport. That does not have many international flights. If we look atcorrelation between the tax system and traffic at the airports, wewill look at where the investors mainly coming from. If they arecoming from Europe they probably do not need to come to Heathrow,however, if they are coming from Japan, China, South America andAmerica and the reality is, that those are the actual places wheremost of investors are coming from, thus, they will have to land atHeathrow. Hence, LCY will benefit very little, compare to Heathrow.

Asmost of investors are still coming from America, they are all flyingto Heathrow. Because LCY has only one flight a day to NY (JFK)airport, which is indirect. When the aircraft takes off at LCY on theway out it stops at Shannon to refuel and then heading to NY. Andthat is because the runway at LCY is not long enough for the aircraftto be fully refueled as it will be too heavy and will need a longerrunway. On the way back it goes straight back from JFK to LCY as itburns a fuel, therefore, becomes lighter and able to land safely. Asthe runway at LCY is a certain size, they can not operate B747. IfLCY was operating flights to China or America, it would definitelybenefit but unfortunately it will not to certain extent.

4. Q: According to OECD, Corporation Tax is one of the most distortive taxes. Therefore, reducing it should have a greater positive effect on overall economic activity rather than reducing other taxes. That also means that GDP will be increasing. And as GDP will be increasing, do you think people will fly more for their personal needs, such as leisure?

A: Iwould say that stamp duty free on properties is the most distortivein the UK, and as far as I know that stops the decisions to gofurther. OECD is a very clever organisation, and I certainly see thelink there, that GDP will be affected, however, the question is towhat extent. If the companies have more money it is uncertain thatpeople who work for the companies will have more money too, itdepends on wider economy, as we will not experience wage inflation.If corporation tax would be increased to 50%, I am sure I would getphone calls saying that companies are leaving the UK, but if the CTwould be reduced to 10% I would get a phone calls asking how do weget into the UK. If companies will be leaving it means people willloose jobs and they will not go on holidays, but if people have moreincome I agree that will fly more for the personal needs. Even thoughthe choices could be different such as house mortgage, car purchaseetc., I still can say that number of leisure travellers willincrease. The logic and experience says yes. Overall it is right, butwill it be a significant impact or not, as it is not only about theflight fare. It may be not as quick to see that as well. As it is notonly about the wage it also linked to the stability of the economy,as people must feel confident about the economy in order to spend.

5. Q: Recently Boris Johnson (Mayor of London) said that London is shifting to the east. Do you think foreign shareholders would invest in east London (possibly Canary Wharf), if yes would this affect London City Airport’s travel market?

A: Aswe all know it is all about the space that we have in London. Chinesewere very clear saying that they are going to invest in East London.Canary Wharf has dramatically transformed in over a few years. Ifmore people will live in Canary Wharf that actually work there, I candefinitely see that LCY will be benefiting, however, Heathrow will bebenefiting more, as Heathrow will be having 3^rdrunway that will increase to 50% more capacity. LCY will always be aprivate jet airport.

AppendixC

InterviewTranscript –11 March 2016

Responder:Aviation Consultant (Anonymous).

1. Q: The government announced reduction of corporation tax in 2020 at the rate of 18% in the UK. Do you think it will attract foreign investors?

A: TheUK is seen as a robust country to do business.&nbsp Of course, thelevel of tax levies on corporation is an important factor in ForeignDirect Investment (FDI) but it is just one factor of many (location,transport links, skills, surrounding businesses/heritage ofindustries i.e. London as a financial capital of the world). The UKTax structure has loopholes in the system and as every companies willalways find ways to exploit such loopholes. Through accountingtreatments, companies will always find ways to be ‘tax efficient’and pay the lowest possible legal amount of tax.

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2. Q: UK’s corporation tax regime is now one of the most attractive in G20 and Government is planning to make it even more attractive by 2020. What do you think is going to be the impact of this change on business travel into the UK?

A: Asstated before, tax regimes and the level of taxes is an importantfactor for businesses and therefore business demand thus businesstravel. The UK is often seen as a gateway to Europe, though notactually in the EZ, and businesses choose the UK as their hub forEuropean operations (such as Google). In terms of the impact ofbusiness travel, it’s unlikely to have a major quantifiable impactas the current status of the UK witnesses strong inbound and outboundbusiness traffic.

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3. Q: Government has taken to improve competitiveness of the UK corporate tax regime and to ensure the UK is an attractive place for foreign investment. Heathrow is a major hub and it is more likely going to benefit from the potential increase in business travel. Do you see London City Airport benefiting as well and why?

A: LondonCity and Heathrow are separate business models with LCY focusing onEuropean Business travel (bar the BA flight to JFK) with some leisuretraffic to fill in the off-peak times. Heathrow is a major hubairport for London and European Transfer Pax. &nbspLondon Cityrelies heavily on the business in Canary Wharf and the square mile.Taxes have caused a stir in the city with financial firms warningabout relocating HQ’s (HSBC as an example) but that was a specificbank sector tax, if I am correct. There is a lot of FDI in the regionwith the Qataris owning Canary Wharf and Chinese consortium buyingland in the docks. No doubt a competitive tax strategy will benefitLondon City. Also, business travellers from the continent wouldrather not fly to Heathrow, which is far away from the city, a bigairport to navigate (for a small European trips myself and mycolleagues try to avoid it as best we can), a prone to delays. LCY istailored to the needs of business travellers who are time sensitiveand less price elastic who are happy to pay a premium for LCYservices but save time and benefit from convenience.

4. Q: According to OECD, Corporation Tax is one of the most distortive taxes. Therefore, reducing it should have a greater positive effect on overall economic activity rather than reducing other taxes. That also means that GDP will be increasing. And as GDP will be increasing, do you think people will fly more for their personal needs, such as leisure?

A: AirTravel is often pegged to GDP with past trends showing that demandfor passenger travel is linked to rises and declines in GDP. HigherGDP often comes with higher disposable income for the population whomay well spend this on additional holidays. The continuing success ofthe LCC’s make flying even more affordable and opens up air travelto latent demand. GDP is also a sign of good health in the economywith business confidence high and output growing – these are allthe right signs for higher air travel.

5. Q: Recently Boris Johnson (Mayor of London) said that London is shifting to the east. Do you think foreign shareholders would invest in east London (possibly Canary Wharf), if yes would this affect London City Airport’s travel market?

A: TheEast of London has gone through a transformation and this is seen inthe Qatari investment in Canary Wharf and Chinese money invested inthe docklands. London City itself was the interest of foreigninvestors during the recent sale with the Chinese, Middle East andthe Canadians with the latter successful in their bid. No doubt asthe area continues to receive high levels of investment, LCY willcontinue to benefit. Though it should be considered it will alwaysonly serve a handful of selected services based on runwayrestrictions and land available for future development.

AppendixDAppendixE