April 14 - Are Airlines Brutally Regulated And Overtaxed?


Prepared For The U.S. Senate Commerce Committee, Subcommittee on Aviation Operations, Safety, and Security

Airline Industry Regulation and Tax Analysis


Are Airlines Brutally Regulated And Overtaxed; Treated Differently Than Other Industries?

 

I.         INTRODUCTION

U.S. airlines push the storyline that they are “brutally regulated and brutally overtaxed” and are treated differently on a regulatory and tax basis than other industries.(1)  They have extended this message to the U.S. Congress by aggressively lobbying for the Transparent Airfares Act of 2014 (H.R. 4156), which last week was passed by voice-vote out of the U.S. House Transportation Committee.(2) Airline lobbyists are now in a full-court-press in the U.S. Senate for a companion bill to be completed within two weeks.

This proposed legislation would effectively repeal the U.S. Department of Transportation’s (DOT) 2012 full-fare advertising rule. The purpose of the rule - broadly supported by consumer and industry groups - is to ensure that consumers are not misled regarding the total cost of air transportation. Airlines’ highly unusual and aggressive efforts to undermine DOT’s authority to safeguard consumers from unfair and deceptive airline practices are stunning and set a dangerous precedent for participants in any industry, such as gas stations and banking, to undermine their regulator.

Following is an analysis that examines the regulatory and tax burdens that airlines claim that they unfairly labor under vis-à-vis other industries.  

II.         HOW AIRLINES FRAME THE CURRENT REGULATORY ISSUE

             a.     Counterfactual Assertion

i.      Airlines assert that the 2012 DOT rule that requires carriers to prominently display the full price of an airline ticket (base fare, taxes, fees) in a print or online advertisement conceals government taxes and fees, and treats their industry differently than others.

             b.     Factual Analysis

i.      Point 1. Under the 2012 DOT rule, airlines must prominently present total ticket prices in advertisements; however, they are permitted to display breakouts of government taxes and fees so long as they are less prominently displayed than the total ticket prices. Additionally, there is no DOT requirement preventing airlines from also including in an advertisement base ticket prices (net of government taxes and fees), if they are likewise displayed less prominently than total ticket prices. As such, and as a matter of fact, airlines are free today to provide consumers with a detailed breakdown of total ticket prices, including government taxes and fees. 

ii.     Point 2. Air transportation is the subject of a deliberate public policy enshrined in the Airline Deregulation Act of 1978 that recognizes that the industry is affected by a public interest. Nothing comparable exists for other consumer products industries.

iii.    Point 3. The Airline Deregulation Act consolidated virtually all consumer protections at DOT via the federal preemption doctrine. The recent Ginsburg versus Northwest Airlines decision of the U.S. Supreme Court is an illustration of the fact that except for the protection that DOT provides them, airline consumers (with the rare exception of a contract claim where an airline has made and then breached some express commitment) are absolutely bereft of any rights or remedies for unfair or deceptive acts or practices.

             c.     Regulatory Best Practices In Other Industries

i.      If a car company, big box retailer or other consumer products firm deceives a consumer, she has multiple remedies and places where legal redress can be sought including the courts, State AG offices and the Federal Trade Commission. This is not the case for airline consumers. Other retail items are typically, if not exclusively, sold subject to only sales taxes.  Airline tickets, on the other hand, have many other forms of taxes, not to mention airlines' propensity to add mandatory fees such as fuel surcharges as well as an explosion of ancillary fees (e.g., for checked bags). Moreover, car sales, for example, are typically subject to a right-to-reject consumer protection within a period of time, but with an airfare, one pays a penalty, which is very substantial relative to the price of the ticket. Other consumer products can normally be returned anytime.

d.    Regulatory Considerations

i.      In what other industry in the U.S. are consumers totally deprived of the right to bring state and federal law claims even in the face of proven deceptive practices?  Answer: none, which is why DOT must be deferred to in its effort to provide airline consumers the only legal protections against deceptive advertising they have.

ii.     Airlines don’t want to be treated like everybody else.  If they did they would give up the virtual immunity from legal challenges and claims for damages they enjoy by virtue of preemption of state law, or perhaps agree to a private right to sue in federal court for airline violations of 49 USC Section 41712 and the possibility of class actions under that statue.  But of course they would likely never agree to that because they like being treated better than every other industry in the U.S. when it comes to having to answer for unfair or deceptive conduct.  

iii.   As The Wall Street Journal reported, “Consumer groups broadly back the [DOT consumer protection] proposals, and some observers view them as a key step toward treating airlines like any other customer-focused industry. ‘It treats airlines like a normal industry,’ said Michael Levine, an architect of deregulation in 1978 who is now a research scholar and senior lecturer at the New York University School of Law. ‘The industry can't say 'Look! We want to be treated like a normal industry but don't want [more] consumer protection[s],' he said.”(3)

III.         HOW AIRLINES FRAME THE TAX ISSUE

                      a.     Counterfactual Tax-Rate Analysis

i.      Airlines state that taxes and fees on a “typical” round-trip domestic U.S. airfare of $300 in 2014 will amount to $63 dollars, or 21%.(4) 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 in 2012 was $375.(5) Using airlines’ $63 taxes-and-fees number with the average DOT airfare drops the tax percentage to 17%. Furthermore, a Philadelphia-to-Miami non-stop itinerary, for example, priced near the DOT 2012 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.(6)(7)(8)(9) However, according to the economic consulting firm Orzechowski and Walker, U.S. cigarette taxes as a percentage of the average retail price (generic brands included) as of November 2011 was 44.2%.(10) 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.(11) 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.(12)

                      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 services used and aviation infrastructure investment that benefit airline shareholders.

ii.     The three biggest charges – excise, flight segment and 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 increasing portion of air travel revenues exempt from 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? 

IV.         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 services 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 resources 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.

V.         WHAT CONGRESS SHOULD CONSIDER

Airlines are waging a war on price transparency in the U.S. Unlike in any other industry, consumer-protections, as few as there are in commercial air transportation, are consolidated at a federal agency - DOT. Congress should be evaluating ways to strengthen DOT’s consumer-protection authority and not considering airline-sponsored legislation to undermine it. Congress should likewise consider legislation to repeal the narrow federal preemption provision of the Airline Deregulation Act that cancels out consumers’ rights to legal redress in federal and state courts for harm due to unfair and deceptive marketing practices. 

A Government Accountability Office (GAO) investigation into these issues would properly inform legislative initiatives to provide additional price transparency and protection for commercial air transportation consumers. 

Treating consumers fairly is not mutually exclusive of the notion of an industry expanding its revenues. Actually, the inverse is more certainly true, i.e. the more consumers trust a shopping and purchasing process the more likely it is that they will buy more services more often. Over the long term, providing consumers with "all-in" transparent pricing will increase competition, create market efficiencies, encourage innovation, expand markets, increase sales of airline services and satisfy customers. These are outcomes that benefit all stakeholders in any industry.

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NOTES

(1)    CNN (June 2012) available at http://edition.cnn.com/video/data/2.0/video/business/2012/06/26/qmb-united-ceo-smisek.cnn.html

(2)    U.S. House of Representatives (March 2014) available at http://transportation.house.gov/uploadedfiles/transparent_airfares_act.pdf

(3)    The Wall Street Journal (September 24, 2010) available at http://online.wsj.com/news/articles/SB10001424052748703384204575510141468669322

(4)    Airlines For America (April 2014) available at http://www.airlines.org/Pages/A4A-Applauds-Committee-Approval-of-Shuster-DeFazio-Legislation-to-Restore-Transparency-of-Airfare-Taxes.aspx

(5)    U.S. Department of Transportation (June 2014) available at http://www.rita.dot.gov/bts/airfares/programs/economics_and_finance/air_travel_price_index/html/AnnualFares.html

(6)    Airlines for America (June 2014) available at http://www.airlines.org/Pages/A4A-Applauds-Committee-Approval-of-Shuster-DeFazio-Legislation-to-Restore-Transparency-of-Airfare-Taxes.aspx

(7)    CNN (June 2012) available at http://www.politico.com/story/2013/06/baggage-airline-fee-revenues-draw-tax-scrutiny-93073_Page2.html

(8)    Politco (2013) available at http://www.nytimes.com/2013/05/07/business/tax-proposals-open-a-debate-on-airline-industrys-troubles.html?pagewanted=all&_r=0

(9)    Ask The Pilot (June 2013) available at http://www.askthepilot.com/questionanswers/upsides/

(10)  Orzechowski and Walker, The Tax Burden On Tobacco (2011) available at http://www.taxadmin.org/fta/tobacco/papers/Tax_Burden_2011.pdf

(11)  PhilipMorrisUSA (2014) available at http://www.philipmorrisusa.com/en/cms/Responsibility/Government_Affairs/Legislative_Issues/Cigt_Excise_Tax/default.aspx?src=search

(12)   Distilled Spirits Council of the United States (2014) available at http://www.discus.org/economics/

 

Note: At http://btc.travel find relevant foundational documents, analyses and industry statements representing all views on H.R. 4156 as well as press editorials and stories. 

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