DWC and MIT Study: Taxes Comprise 16% of Airfare

DWC and MIT Study: Taxes Comprise 16% Of Typical Airfare

By Jay Boehmer
Business Travel News

JULY 17, 2006 -- Ask airline executives how much taxes and fees eat into the price of a domestic roundtrip and they likely will tell you that they hover around 26 percent per ticket. It's no surprise, then, that taxes often follow fuel as the biggest gripe expressed by domestic carriers.

However, new data show taxes and fees are about 10 percentage points lower than many in the industry purport. In fact, on tickets typically favored by corporate travelers—those for higher-yielding, higher-bucket nonstop flights—government-levied fees fall below the 16 percent average tax rate.

The percentage of an airline ticket comprising taxes hinges on such factors as the cost of the base fare, the number of connections and through which airports passengers pass. Airline taxes as they relate to tickets follow a few rules of thumb: the higher the airfare, the lower the percentage of taxes and the more connections, the higher the percentage of taxes.

Though taxes on domestic flights certainly can fall in the 26 percent-plus range, professors at MIT and Daniel Webster College, who have studied how taxes and fees are applied to airfares, place the average figure in the 15 percent to 16 percent range, according to yet-to-be-published data collected for two years through the last quarter of 2005.

While the professors' research first debunked the 26 percent myth several years ago in their first report on the subject, the inflated figure has persisted.

Using a sample fare of $200, in 2002 American Airlines then-CEO Donald Carty noted the 26 percent figure before Congress.

"Compared to any other mode of transportation, air travel was overtaxed to begin with following the nearly $1 billion per year tax increase imposed on the industry in 1997," Carty told a congressional subcommittee in 2002, the year the government began imposing a new security fee on airline tickets. "Today, federal taxes and fees on airline tickets account for $51.16, or 26 percent, of a $200 roundtrip ticket involving a single connection—that's a $11.16 federal ticket tax, $12 federal flight segment tax, $10 federal security surcharge, and up to an $18 airport passenger facility charge."

Carty's math was correct, but the scenario includes assumptions that do not apply to most tickets: the base fare of $200 is lower than the average, it involves a connection—the "typical" ticket does not—and the passenger facility charge is the maximum allowed. All of those factors inflate the tax rate, according to Joakim Karlsson, associate professor in the Division of Aviation at Daniel Webster College, who is among the researchers exploring airfare tax rates.

"The ticket base tends to be on the low side, but not too much—the average is about $280," Karlsson said of how airlines come to the 26 percent figure. "The lower the base you pick, the higher the tax rate will appear, because of the flat charges that stay the same regardless of fare. That drives the tax rate up artificially. Another thing is the number of connections. They often assume that you have a connection in each direction. All the taxes that are charged by each segment—the Passenger Facility Charge or the segment tax—if you tack on a connection, therefore another tax, it will drive up the tax rate."

Karlsson added that connections for the average ticket are actually not the norm: "In our research, we show that the average number of coupons per trip—if you have one connection, then you have two coupons in each direction—the average is 1.4 or so. It turns out, and it was a surprise to me, that the majority of people don't connect."

Yet, the 26 percent figure and sin tax comparisons have become a war cry of those who argue airlines are a tax-burdened industry: In a 2005 BTN op-ed (BTN, Jan. 17, 2005), then-president of WorldTravel BTI Danny Hood wrote, "The average tax on an airline ticket is 26 percent or $53. This is higher than 11 to 21 percent 'sin tax' on alcohol and tobacco products and we are trying to reduce consumption of those products;" in various lobbying efforts, the National Business Travel Association also has bandied about 26 percent figure (BTN, March 15, 2004); and an airline executive recently passed along to BTN a PowerPoint presentation on airline taxes—a breakdown that totaled 26 percent.

Most recently, Air Transport Association president and CEO James May during a global air transport conference in Europe last month perpetuated—and further exaggerated—the inflated figure, when he asked rhetorically, "Who would have thought that taxes, fees and surcharges would rise to nearly 30 percent of a typical airline ticket?"

While May's figure is significantly higher than the true average, according to Karlsson, the ATA president correctly asserted that the percentage has increased.

"In 1992, roughly 10 percent of the ticket price charged to our customers was remitted to the government to pay federal excise tax," said American Airlines vice president of global sales Frank Morogiello, noting that at the time, that was the only federal tax imposed on airline tickets.

Since the early 1990s, the tax structure for airfares has changed significantly. Although the federal excise tax was dropped from 10 percent to 7.5 percent in 1997, other fees have since been added: The government began levying a $2.50 fee per segment following Sept. 11 and in recent years airports have been given greater power to charge up to $4.50 through a Passenger Facility Charge. In total, there now are four major taxes imposed the typical domestic airline ticket. In addition to the federal excise and the Passenger Facility Charge, there is a federal flight segment tax of about $3.30 per domestic enplanement and the security service fee—also known as the September 11th Fee—of $2.50 per domestic enplanement.

However, apart from the 7.5 percent federal ticket tax, all of the fees have caps—and the maximum is often included in tax breakdowns that hit the 26 percent mark.

Yet, Karlsson said that taxes only appear to have grown. "The major reason the tax rate has grown is not because taxes have gone up but because airfares have gone down," he said. "The average airfare in 1994 was in the $140 to $160 range per one way, and today it's in the $139 to $150 range one way—and that's in nominal dollars. When the inflation adjusts to that, it's a huge decrease. While the price of everything else has gone up, airfares have dropped. As the base fare drops and taxes stay roughly the same, it makes the tax rate appear to be higher."

So, why do airlines and trade associations inflate the figure?

"What I would guess is that they clearly are in a financial crisis and they're looking to turn things around a bit. They're looking in every corner to look at places where they can save," Karlsson said. "One of the things they hope to save are charges and fees collected for government agencies. It's a natural extension of the lobbying efforts in that area. For example, they have sought from Congress relief from several of the taxes. It's in their interest to portray the tax picture as a serious burden to the industry."

Bob Harrell, an airfare analyst and president of Harrell Associates, said the taxes, which airlines collect on behalf of the government and are included in the ticket price, actually take away a level of pricing power for the airlines.

Harrell noted that Congress in the summer of 2003 temporarily suspended passenger security fees on air tickets, and the airlines responded by raising fares.