Airlines Balk at Tax Proposal
Deficit-Reduction Plan Would Add New Departure and Security Fees for Carriers
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By SUSAN CAREY

Airlines are expressing alarm over an Obama administration proposal to help cut the federal deficit by imposing a new tax on aviation and raising another.

Carriers, airline labor unions, private pilots, corporate-jet builders and other groups are lobbying hard to make the case to Congress that their industry is being unfairly singled out.

"The airline industry is an easy target," said Richard Anderson, chief executive of Delta Air Lines Inc. "Perhaps there's a sense in Washington that wealthy people fly. But over the past 20 to 30 years, flying in the U.S. has been a very middle-class activity."

The administration says fees assessed on travelers cover less than half the costs of beefed-up security at airports. Officials also say that small private jets need to shoulder more of the burden of the air-traffic-control system.

The industry will pay $17 billion in fees and taxes this year, compared with $3.7 billion in 1993, said Mr. Anderson. An average $300 domestic ticket now includes more than $60 paid for by the passenger but distributed to 17 federal taxes and fees, leaving the airlines with just $240 of that purchase, not including fees for checked luggage, ticket changes and the like.

A committee of lawmakers, the so-called super committee, is working with President Obama's proposal to try to find ways this fall to trim the deficit by $1.5 trillion over 10 years.

In its September proposal, the administration said a large commercial jet "would pay between $1,300 to $2,000 in taxes for a flight from Los Angeles to San Francisco while a corporate jet flying the same route and using the same Federal Aviation Administration air traffic services would pay about $60 in taxes."

So the administration proposed a $100 tax on each flight departure, including corporate jets and general-aviation aircraft that require federal air-traffic-control services, in a bid to more evenly spread out those costs. The fee is expected to raise $11 billion over a decade to support the Federal Aviation Administration's airport and airways trust fund. The commercial carriers say it would be hard to pass this cost along to their passengers.

The proposal includes a doubling of the federal security surcharge of $2.50 per one-way trip to $5. Annual increases would triple the fee to $7.50 by 2017.

About $10 billion of the new revenue over 10 years would go toward the Transportation Security Administration to cover security costs, and $15 billion would go to debt reduction.

Gary Kelly, CEO of Southwest Airlines, estimates the departure tax would cost his company $140 million a year. "We are already struggling with huge (fuel) cost increases and challenges to our profitability," he said. Southwest earned $459 million last year on $12.1 billion of revenue.

US Airways Group Inc. estimates the departure tax could cost it $110 million a year. AMR Corp.'s American Airlines pegs its expense at $124 million.

Delta's Mr. Anderson said if his company couldn't pass on that expense, it would have to shrink. He and others in the industry think smaller communities would be the hardest hit.

"Passengers and small communities will be paying one way or the other: through higher fares or no service," said Roger Cohen, president of the Regional Airline Association. "Why is aviation always an ATM?" he asked. "We're visible, vulnerable and measurable."

 

Airlines Are Driven to Nickel and Dime
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By SUSAN CAREY

Harried travelers might not want to hear this, but in terms of cold economics it's a miracle U.S. airlines are still in business.

Average domestic airfares, adjusted for inflation, have fallen 16% since 1995, according to the Transportation Department. A round-trip ticket that in 1995 would have cost $410.30 (in 2010 dollars), including nominal bag and reservations fees, now goes for $337.97, and that includes $21.66 in bag and reservations charges, the DOT says.

Stripping out those fees, the current fare is down an inflation-adjusted 21% from 1995.

This dismal math is wreaking havoc, particularly at AMR Corp.'s American Airlines. American is the weakest of the major airlines, in part because it avoided bankruptcy proceedings earlier in the decade, unlike its big rivals, who were able to cut costs during their stays in bankruptcy court. It also missed out on an industry consolidation wave.

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AMR's stock price collapsed Monday, losing 33% of its value, on renewed fears that the nation's No. 3 airline by traffic might be forced to file for bankruptcy-court protection. The stock partially recovered Tuesday, gaining nearly 21% to end 4 p.m. New York Stock Exchange trading at $2.39, as investors hunted for bargains.

AMR said Monday that there was no company news to explain the stock volatility. The carrier reiterated that it doesn't aim to restructure in bankruptcy court and is working to improve its performance.

But what plagues American still bedevils the rest of the airline industry, which has racked up $55 billion in losses in the past decade.

Structurally, the business is capital-intensive, labor-intensive, highly leveraged and fiercely competitive. It is also vulnerable to external shocks, including terrorism, oil-price spikes, waning consumer confidence and high taxes.

Even though the industry generates billions of dollars in annual revenue, it rarely is able to cover its huge expenses, much less show a decent return on invested capital.

Passengers love to accuse the airlines of gouging, and a dizzying array of fares adds to the outrage. A new raft of fees for better seats, expedited security lines and meals on board only makes passengers angrier.


But airlines, caught between a steady decline in fares and rising costs, have no choice but to look for every nickel they can find. Passenger tickets now account for just 71% of U.S. airlines' total passenger revenue, down from 88% in 1990, according to the DOT. The rest comes from fees it charges for, among other things, reservation changes, standby service, checked luggage, in-flight food service and transporting pets.

American, like its rivals, is trying to boost these alternative revenue sources. In the second quarter, the Fort Worth, Texas, carrier took in $659 million in "other revenue," a sum that was up 5.5% from a year earlier. But $659 million was only 11% of its total quarterly revenue of $6.1 billion. The company posted a net loss of $286 million for the quarter and analysts say it is on track to lose money for the rest of this year and all of 2012.

Despite many mergers over the years, competition in the domestic industry remains white-hot. Discount airlines, which tend to act as the price policemen, now cover about three-quarters of the domestic landscape.

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Airlines Balk at Tax Proposal
"Ultra low cost" airlines have sprung up, led by Spirit Airlines Inc., which sells tickets for as little as $9, and makes its money charging passengers for such things as seat assignments and carry-on baggage.

Overseas flights tend to fetch higher fares but account for less than half the major U.S. carriers' capacity. And even with $1,000 coach tickets to Asia in its portfolio and $5,000 business-class flights to Europe, United Continental's second-quarter average fare–revenue divided by number of passengers, excluding taxes paid by those passengers–was $273. By contrast, Southwest Airlines Co., a budget carrier that flies only domestic routes, had an average one-way fare for the quarter of $143.

Darin Lee, an aviation economist for consulting firm Compass Lexecon, says years of consolidation would suggest less competition and higher fares.

But "there is no significant change in the secular, long-term cycle of prices—which is, they are going down," Mr. Lee says. "If airlines had pricing power, they wouldn't be rushing to buy more fuel-efficient planes and trying to eke out every little efficiency."

Fuel prices are a huge problem. For the first five months of this year, jet fuel was fetching $2.84 a gallon, up 243% from 1995 levels after adjusting for inflation.

While most airlines hedge some of their fuel needs, that is a costly form of insurance. So they are taking other steps to become more resilient. They no longer chase market share for its own sake and instead have trimmed underperforming flights, so they can charge higher fares for the fewer seats remaining.

Longer term, says Jeff Smisek, chief executive of United Continental, there has been a move "to professional management, as opposed to more charismatic, cowboy management," which is helping airlines behave more maturely, stabilize their businesses and focus on earning their cost of capital. "Investors are fed up with us destroying capital," he says. "They're fed up with us destroying capital," he said, and they're holding our feet to the fire, and that's a good thing."

 

I remember going to Applebee's in college, about 15 years ago, a big mouth burger was like $7. Today it's $8.

The coke however has gone from a dollar to $2.50 or more.

I think everyone has bought into the razor and blades business model.

 

This will be the death of RJ's IMO. Smaller cities would lose a ton if not all service, & ticket prices will go even higher.

 

Death to the RJ's. Oh what will ALPA do to survive then?

 

Ah, the irony. Airlines (and their customers) need to pay more to keep a bloated and ineffective security system everyone wants to get rid of.

Sounds like Europe. Flight training is going to become prohibitively expensive. Bring on the MCL - the true death of the profession, no barriers to entry, zero skill in the right seat.

 

The problem with the TSA is the cost and lack of accountability. Obama's plan has nothing to address that.

Round two will be cap and trade, which is nothing more than a tax on the fuel that has already been taxed.

Obama was going to cancel his helicopters, which apparently cost more than Air Force One to acquire (who knew?). He changed his mind on that.

 

You must be joking.

 

No I'm not. Being taxed per flight will result in less flights resulting in larger gauge aircraft. That's how I see it. Why would they lower the gauge resulting in higher frequency & more taxes?

 

Let's see: $100/flight divided by 50 seats equals $2.00. If $30/bag fees have not scared away all our impoverished passengers then $2.00 is unlikely to do too much damage.