Published on : Wednesday, March 9, 2016
As the U.S. Federal Aviation Administration (FAA) reauthorization process is underway in the U.S. Congress, airlines continue to push the storyline that they are “brutally regulated and brutally overtaxed” and are treated differently than other industries.(1) Airlines fight hammer and tongs an increase in passenger facility charges (PFCs) with grossly misleading claims while the competitive gap between U.S. airports and modern foreign airports widens and U.S. airlines offer no coherent alternative with respect to financing FAA operations and investment programs.
To reach the U.S. government stated goal of 100 million annual tourists by 2021 we not only need new entry and expansion by foreign airlines to bring visitors here, but we need modern, customer service oriented and efficient airports. If airlines have their way on the PFC issue, they will do for the airport experience what they have done to the cabin experience. Eventually, just as some U.S. airlines whine about competing with foreign carriers that offer lower fares, newer airplanes, faster connections, more destinations and superior customer service, they will complain about government “subsidized” modern and customer-focused foreign airports all the while operating in what many industry observers contend is the most heavily and longest subsidized airline industry on the planet.
II. HOW AIRLINES FRAME THE TAX ISSUE
a. Airlines’ Tax-Rate Position
i. Airlines state that taxes and fees on a “typical” round-trip domestic U.S. airfare of $300 in 2014 amounted to $63 dollars, or 21%.(2) This example inflates taxes on “typical” fares by selectively constructing multi-segment itineraries to maximize segment fees, security fees and PFCs and deflates the top airfare-revenue number by choosing a substantially lower-than-average round-trip airfare and, importantly, by ignoring ancillary fees and airline surcharges.
b. Factual Analysis
i. According to DOT data, the average domestic U.S. round trip airfare through the 3rd quarter of 2014 was $391.(3) Using airlines’ $63 taxes-and-fees number with the average DOT airfare drops the tax percentage to 16%. Furthermore, a Philadelphia-to-Miami non-stop itinerary, for example, priced near the DOT 2014 average airfare level, drops the taxes and fees on a $388 round-trip ticket amount to $47.54, or 12%.
c. Tax Treatment Worse Than Vice Industries
i. Airlines encourage the notion that government fees and taxes on their industry exceed those industries with anti-consumption “sin taxes” on products such as tobacco and alcohol.(4)(5)(6)(7) However, according to the economic consulting firm Orzechowski and Walker, U.S. cigarette taxes as a percentage of the average retail price is 44.2%.(8) Indeed, according to Philip Morris, 55% of the price of a pack of Marlboro cigarettes in the U.S. is comprised of government taxes and fees.(9) Regarding alcohol, taxes accounted for 54% of the average price for a 750ml bottle of 80 proof distilled spirits in the U.S. in 2012.(10)
d. Use of Tax Funds
i. Importantly, these referenced “sin taxes” typically flow into general government tax revenue accounts while taxes and fees in the airline industry typically pay for government aviation services used and aviation infrastructure investment that benefit airline shareholders.
ii. The three biggest charges – excise, flight segment and passenger facility charges (PFCs) – are not airline burdens at all; passengers pay them directly. And because they are actually fees-for-service, and do not flow into the general funds of either the U.S. government or airports, they are not taxes.
iii. Convincing arguments can be made, however, that security, customs and immigration processing, Animal and Plant Health Inspection Service (APHIS) fees, and others, are general government needs benefiting all citizens, are not airline needs and should not be paid for by travelers, exclusively.
iv. U.S. aviation system participants have chosen to pay for federally provided air traffic management (ATM) services through a series of ticket surcharges, unlike what almost every other industrialized country has chosen – specific fees for specific ATM services paid out of airlines’ operating budgets. And Congress has chosen to open a limited window to allow airports to charge passengers PFCs instead of charging airlines to finance some of their capital improvements.
e. Taxation Considerations
i. How should FAA operations and investment programs, now funded by earmarking the excise tax and per-segment fees, and airport improvements now supported by PFCs, be financed in the alternative? Do airlines have a proposal? If they don’t want to be taxed and they don’t want passengers to be taxed, how do they envision the complex and expensive aviation infrastructure to be funded? In place of this “no more taxes/no new taxes” refrain, what constructive solutions are they proposing?
ii. Should ever-increasing general revenues from the U.S. Treasury flowing into the Airport and Airway Trust Fund (a direct government subsidy of private businesses) to cover FAA shortfalls continue, especially in light of product unbundling and with an billions of dollars of air travel revenues exempt from ticket taxes?
iii. If U.S. airlines really want a change in the current system of paying for ATM and airport services and infrastructure costs and investments, would they rather move to a direct fee-for-service system, like Nav Canada, with attendant growth in landing fees to replace PFCs, even though that would show up in their operating expense statement?
III. OVERALL IMPLICATIONS
Airlines have always claimed that just a few extra dollars in an air ticket price can significantly dampen consumer demand, especially for price sensitive travelers. However, the historically strong correlation between such increased prices and demand would seem to have been negated by the seemingly demand-neutral acceptance by consumers of all manner of increasingly hefty ancillary service fees, e.g., $200 dollar ticket change fees. Moreover, while over-emphasizing the dampening effects taxes might have on consumer air travel demand, airlines indeed raised fares and pocketed a $25M per-day windfall when the taxes were temporarily suspended in July 2011. There is sometimes little correlation between airlines’ rhetoric and their behavior.
Airlines’ operations make huge demands on federal, state and local government resources, but these firms want to be treated as if no public subsidies were required to support their businesses. Airlines maintain they are just an underappreciated industry endeavoring to eke out a profit in a hostile regulatory and tax environment. The “public interest” in air travel is, however, manifest in the continued existence of the Airline Deregulation Act and the recognition that the air transportation system is essential to our economic existence as a nation. It is a product for which there is no complete substitute and that is connected to the economic-development engines of communities of all sizes. There appears to be a fundamental inconsistency in the posture of airlines regarding who they are, the business they are in and the implications for society.