End of duty-free in EU no plain-sailing for ferry operators

European holidays will never be the same again. Somehow, among all the talk of Kosovo and job-creation pacts, European Union leaders managed to find time at their Cologne summit to abolish duty-free allowances on journeys between member states - and wipe out up to 140,000 jobs at a stroke. Travellers to Hong Kong or elsewhere in Asia will still be able to buy duty-free cognac and cigarettes. But from July 1, tourists will no longer enjoy the wicked thrill of stocking up on duty and health-warning free cigarettes between European countries. Despite British and German-led pleas to postpone abolition for five years, Denmark, Holland and Belgium won the day with the argument that the 7 billion euro (about HK$56 billion) a year duty-free trade distorted the market. The European Commission joined in with a claim that tax-free sales were an unfair, anti-competitive state-subsidy, and cost national governments up to US$2 billion a year. It failed to point out that duty-free was the symptom not the disease. It is Europe's wide range of excise duties, especially Denmark's punitively high rates, which distort the market, not the restricted quantities sold to travellers. At first sight the decision seems disastrous. Already, ferry companies on some routes have given hundreds of workers notice to quit and are trying to sell off their vessels. Sweden's Stena Line, the world's largest ferry operator, will cut 600 jobs. In the north-German state of Schleswig-Holstein, the economics ministry forecasts a slump of 20 to 30 per cent in hotel nights. BAA, Britain's privatised airports authority, estimates abolition will cost GBP30 million (about HK$370.50 million) to GBP40 million in the first year, but about GBP20 million in the second year after prices have risen. Across Europe airports will raise prices and some may resort to higher landing charges to compensate. Overall, the industry Campaign to save Duty Free claimed abolition would cost 50,000 jobs directly involved in the business and a further 90,000 either in industries dependent on duty-free contracts or because of the knock-on effect on the economy, higher fares and weaker demand for travel. The Commission dismissed those figures, with the laughably simplistic claim that the loss of jobs in duty free shops would be 'compensated by a corresponding increase in jobs in ordinary shops'. Even while admitting ferry operators would be affected, it claimed 'the abolition of duty-free sales would not produce micro or macroeconomic effects'. But despite the ideological silliness, the Commission does have a point. Some ferry companies may be in trouble, but the bigger operators and the airports have an alternative in mind: if they cannot sell duty-free, why not try duty-paid sales instead? Eurotunnel which operates the Channel Tunnel rail-link plans a vast new shopping complex and hypermarket on the French side to attract British shoppers with discount and factory outlet prices. And Hoverspeed, which operates fast ferries from Dover to France and Belgium and makes about one third of its revenues from duty-free, expects to do a roaring duty-paid trade. The secret, says Hoverspeed spokesman Kevin Charles, lies in the difference between British duties on tobacco and alcohol and the French and Belgian rates. On a bottle of wine, for instance, the British duty is GBP1.05. In France, the duty is the equivalent of two pence. And although the gap on cigarettes is not that big, it is enough to make French and Belgian prices attractive. And instead of the tiny duty-free allowance of a couple of bottles, travellers can return to the UK with up to 90 litres stuffed into their cars, provided they can prove it is for personal use. 'The Campaign to save Duty Free was obviously based on doom and gloom, and we're still not out of the woods yet. The problem for us is that the margins are not as high as on duty-free, so we will have to sell more,' said Mr Charles. On the cross-Channel routes, the UK Customs and Excise has agreed to allow Hoverspeed to charge French or Belgian duties once a ferry is outside the UK's 12-mile zone. But for other operators it is more complicated. Scandinavian Seaways, which operates ferries between Denmark, Britain and Germany, complains there is still no legal framework to decide how goods should be taxed. A draft German law, rejected by the ferry operators, suggested taxing goods at the rate applied in the port of embarkation. That, according to Finance Director Heiko Hellmer would mean holding three separate sets of stock on each vessel and be an administrative nightmare. With ten days to go and no arrangement in place, the new era will start with a little chaos, higher prices, hefty fare increases and a shake-out in the ferry business.