IEA - Transport subsidies no longer sustainable argues new report

From: Think Tanks
Published: Tue Feb 22 2022

A new report from the Institute of Economic Affairs, edited by Dr Richard Wellings, with contributions from Dr Andrew Lilico and David E. Tyrrall, analyses the implications of the Covid-19 pandemic on the transport sector, specifically aviation, rail and motoring.

  • The disruption to travel during the Coronavirus pandemic is unlikely to be temporary.
  • Long-term changes in work and travel habits, constraints on government spending, and concerns about future outbreaks, mean many subsidies are hard to justify.
  • Rail now faces a long-term financial crisis, with commuter levels unlikely to return to pre-Covid levels.
  • The case for government spending on long-term infrastructure projects, such as HS2, has weakened further.
  • Costs could be contained by reducing fragmentation in rail and re-privatising the sector with a more efficient structure.
  • While aviation and rail travel have dropped, car use may unexpectedly increase as other modes of transports become less convenient due to changing working habits, Covid concerns and continued restrictions.

Planes, trains and automobiles: The future of transport after Covid-19 sets out the impact that changes in consumer and working habits - including working from home, online shopping, the use of virtual meetings - have had, and will continue to have, on transport.

The report argues that a fall in demand - or even a decline in rates of growth - for aviation and rail mean that expected revenues will not materialise. Projects like HS2 were poor value before the pandemic: now, the case for government spending has been weakened further.

On planes

Covid's impact on aviation is likely long-term, after a 97 per cent drop in passenger flights to and from UK airports in April 2020 compared with the year before.

Dr Richard Wellings argues that vast taxpayer-funded bailouts of the sector have moved the sector further away from a level playing field, favouring state-backed national airlines.

Allowing airlines to collapse may have led to a reallocation of resources to leaner and more efficient operators, including new entrants post-pandemic.

Further, the threat of future pandemics could encourage policymakers to adopt a more hostile stance towards air travel and long-distance connectivity more generally.

On trains

The rail sector could be hit particularly hard by changes in travel habits, as many rail users - concentrated in high-income groups and white-collar jobs - have been able to shift to working from home and virtual meetings with ease.

The level of rail subsidies is out of any reasonable alignment with ridership and passenger income - with the additional cost to the government of supporting the railway industry from 2020-2022 estimated at 11bn.

Even if rail companies hike fares, they may still receive less revenue than pre-pandemic, as a high proportion of what were compulsory commuter trips with a low elasticity of demand are likely to become discretionary with a higher elasticity of demand.

For example, an elasticity of 0.5 would still allow the railway to generate more total revenue from a ticket price rise, but elasticities of 1 and higher lead to an absolute loss of revenue.

Costs could be contained by reducing fragmentation in the industry and re-privatising the sector with a more efficient structure.

On automobiles

While aviation and rail may experience a prolonged fall in the volume of passengers, car travel may be an unexpected beneficiary of the crisis.

With the rise of working from home, travelling by car to work may become quicker than before and parking availability more guaranteed. Therefore, at the margin, more people are likely to shift to using cars. Less congestion in some areas may also favour the use of road freight over other transport modes.

For those living in commuter towns who are now able to work from home, congestion may increase in local town centres, and with foreign leisure travel down, we may see increased car use in certain regions that are attractive for domestic tourism.

Further, improvements in communications infrastructure, spurred in part by the pandemic, could also facilitate more rapid adoption of autonomous vehicles. This may create a dilemma for policymakers who are committed to Net Zero targets.

Dr Richard Wellings, report editor and former Deputy Research Director at the Institute of Economic Affairs, said:

The pandemic has accelerated the shift towards virtual meetings and working from home. This is having a devastating impact on public transport and the rail industry in particular, which now faces a long-term financial crisis.

Lower than expected passenger numbers make the high level of rail subsidies even more difficult to justify, especially in the context of harmful tax increases and pressure on the public finances. Ministers' claims that new rail capacity is desperately needed are no longer credible, raising serious questions about the wisdom of proceeding with hugely expensive projects like HS2.

Dr Andrew Lilico, report contributor and IEA fellow, said:

The Covid pandemic has had profound impacts on transport, and some of these may be enduring or permanent. In this paper we explore what some of these are, how they vary by transport mode and region of the country, and what the post-pandemic future may hold.

Notes to editors

Contact: Emily Carver, Head of Media, 07715 942 731,

IEA spokespeople are available for interview and further comment.

Planes, trains & automobiles: The future of transport after Covid-19' can be found here:

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.

Company: Think Tanks

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