sipples

I'm just catching up on some action in Congress that started on July 19. What's going on in Washington could have a serious negative impact on mileage runners.

Delta's COO James Whitehurst testified to the Senate Finance Committee, representing the airline lobby (Airline Transport Association). In his testimony he pushed for a new airline ticket tax formula which would include a fixed fee per departure plus a variable rate tax based on the distance flown.

You can probably see the problem already for mileage running, but, just in case, it's worth reviewing today's taxes and comparing to the proposal. Today you pay 7.5% of the ticket's fare in federal excise taxes (plus $7.50 per ticket if flying between the continental U.S. and Alaska or Hawaii). There's an international arrival or departure tax of $15.10 (currently) per ticket. There's a $2.50 security fee per boarding, maximum $5 per one-way trip. And, finally, there's a $3 to $4.50 passenger facility charge levied by 365 U.S. airports, paid per segment, with a maximum of $18 per ticket sale.

The legacy airlines via the ATA have long advocated abolishing all taxes based on ticket value, i.e. the 7.5% excise tax, while airlines such as Southwest have traditionally fought the increasing reliance on per-ticket or per-segment fixed dollar taxes. The reason is quite obvious: low cost carriers tend to charge lower ticket prices.

But this latest ATA proposal, while perhaps designed to be more acceptable to the LCCs who typically fly shorter domestic-only distances, would likely disproportionately harm mileage runners. The reason is obvious. Mileage runners tend to buy high mileage low fare tickets. In order to maintain level total funding, by necessity taxes on such tickets would have to increase. In contrast, for example, first class ticket buyers flying from New York to Chicago would enjoy a big windfall. This change would have the effect of making the airline ticket tax much more regressive as well: "high roller" fare payers would pay less, while longer distance discount coach ticket buyers would pay more.

There are some other side effects. With the reduction in front cabin taxes relative to economy class, airlines are somewhat more likely to fill those front seats with actual fare-paying passengers. That should reduce the number of available first class upgrades.

Also, probably the main reason the legacy airlines want this change is so they have increased price discrimination power. If you eliminate a tax tied to the fare value, then the airlines' revenue management departments have increased leverage over manipulating fares and more directly influencing consumer behavior. Consumers lose, and airlines more effectively price discriminate, soaking up more "consumer surplus."

And a mileage-based tax will tend to favor airlines that can come closest to flying great circle distances. On average that tends to be legacy carriers, with larger and more dense route networks than upstart airlines. Delta, specifically, is now specializing in point-to-point international service, and mileage-based taxes would likely benefit Delta particularly.

Mileage-based taxes would also likely raise the price of frequent flyer award tickets. Since the taxes are based on miles flown and not on the ticket fare (which is zero), the default result would be an increase in taxes for award tickets. This effect could be huge and would discourage redemptions, again disproportionately aiding the ATA airlines.

Personally I think the best public policy is to move in the other direction, to reduce or eliminate per-ticket fixed dollar taxes and return to a pure excise tax based on fare amount. Such a tax formula is more progressive and more consumer-friendly.

sipples

Already the PFCs (passenger facility charges) interfere with mileage running. A common mileage running technique, as many know, is to add in extra connecting cities. For example, why fly from LGA to ORD nonstop when you can fly LGA-RDU-MIA-ORD, for example, and earn extra miles.

Unfortunately some/many airlines already pass along extra PFCs of $3 to $4.50 per extra intermediate airport, depending on the airport. So that's one obstacle, but it's not too severe yet. (There is also talk of increasing PFCs.)

But what happens when taxes are collected per mile flown? Now that LGA-RDU-MIA-ORD run becomes comparatively less attractive than it used to be.

Mileage-based taxes may also have strange effects on special round-the-world and circle fares.

cincypix

ain't gonna happen. The current Congress won't pass a new tax unless it can be tied to uninsured children

JHIN

Well this BITES! I don't agree with it and what can we do about it? Sounds like the rich get rich and the middle class gets stuck with the bills. I think the airlines should be innovative on how to be revenue producing instead of tax manipulation. Though I wonder if the feds are behind this to generate more revenue for all the useless so called security they provide at the airports? Anyhow good to know about this thanks for posting. I think more taxes are ridiculous.

Ammonium

That's totally ridiculous. The length of a flight matters very little to the total cost of a flight to the air transportation system (which is what these taxes are trying to recoup).

A better idea would be to transfer the tax to entire airplane flight segments. Your 50 seat RJ taking up a slot at O'Hare and the controllers' time gets to pay a similar tax as a 350 seat 747.

sipples

Most airports have gate fees and/or landing fees already, but the fees are often correlated to aircraft weight.

I do think there should be slot auctions at the busiest airports.

thebigfish

Cincypix is probably right. These types of taxes do go thru more readily then say a income tax increase. It bears watching in any case, and a
letter writing campaign thru FT may be required.
Michael

KPChicago

Of course, the proper angle to get sympathy is regressive taxation, not mileage runs, that Full F flying direct will pay less than Joe and Jane six-pack making two hops in lowest fare coach.