US airlines make strategic mistake in keeping ticket taxes

If perception is everything then US airlines made a tactical error in keeping the windfall created by the expiration of the government’s authority to collect ticket and other taxes. Nearly all carriers opted to keep the money (Alaska and Spirit being the exceptions), filing fare increases that covered the tax revenue.

Even passengers’ best friends Southwest and JetBlue, who have increased market share on their first bag fee policies, surprisingly opted to keep the money rather than rolling out another passenger-friendly, consumer-centric campaign. We know they can act fast given JetBlue’s brilliant, last-minute marketing coup two weeks ago which capitalised on the hysteria surrounding the closing of a major Los Angeles highway by offering USD4 fare between two Southern California airports along that route.

The windfall is estimated by Morgan Stanley at USD25 million daily and observers indicate this could cost the government USD200 million per week of much-needed dollars. While it might seem crazy to leave USD25 million on the table, keeping it only diluted the airlines’ message to Congress that lowering taxes would be good for the economy because travel, hiring and general income tax revenue would increase and the recessionary malaise hitting America would ease. Keeping the taxes also weakened the argument against Congressional desire to impose deficit-related taxes on passengers. Instead, the industry just confirmed what Congress has already suspected, that airlines only want to reduce taxes so they can raise fares. Case closed. 

Air Transport Association suggest short-term duration of the windfall did benefit stakeholders

“The short-term additional revenue for airlines, does benefit customers, employees and investors by temporarily improving tiny industry margins to better cover costs, and enabling airlines to invest in their product and service, while not increasing fares,” spokesperson Victoria Day told CAPA. “The media tends to cite an incremental USD25 million-30 million per day in revenue being realised by the airlines from the tax lapse, however, based on full year forecasts, ATA estimates that fuel alone is adding USD38 million per day to our operation costs. Airlines lost USD1 billion in the first quarter due to high fuel costs and USD55 billion over the past decade.  

“The airline industry continues to oppose any plan that increases taxes on the American airline industry and its passengers, who are already subject to 17 different federal taxes that total USD17 billion annually — up from USD3.7 billion 20 years ago,” she continued. “On a USD300 ticket, about USD61 goes to taxes and fees.”

While the industry has been careful to avoid the link between taxes and hiking fares, signals to that effect have been sent as illustrated by AMR CEO Gerard Arpey when he indicated in the depth of the recession that the company was only USD18 million away from break even. Today, that is compounded by fuel increases and the fact airlines have found the ceiling on fares.

Tax battle has taken on new significance since consumer rule completed

The industry lost a round with the Department of Transportation when it required airlines to include taxes and fees in advertised fares rather than leaving them to the fine print. The change makes it look as if the airlines are raising fares. While DoT said it was an effort to increase transparency and help passengers determine the bottom line, the only thing the change really accomplished was to provide cover for the government to hide behind the airlines when it comes to taxes and fees.

The fact airlines are keeping the money has raised the ire of DoT Secretary Ray LaHood who roundly criticised the industry. Keeping the taxes further alienating a department that is already anti-airline. His calls to the Air Transport Association fell on deaf ears.

Mr LaHood has been making the rounds discussing the tax expiration’s impact on jobs and construction projects strengthening the administration’s economic message. He’s gained impressive headway in his argument and raising the visibility of the issue while airlines failed to grasp how this crisis could help their own message.

Airline actions in keeping the taxes took away any incentive Congress may have had – as remote as that is – to reduce taxes. Keeping the taxes by increasing fares means the industry, as usual, shot itself in its foot just as it did when it opposed the increase in passenger facility charges and security fees while loading on ancillary fees of its own.

Taxes on airline passengers alone raise between USD16 billion-20 billion annually and the industry is in a pitched battle to lower them even as republicans in Congress want to pile on more in order to pay for the deficit.

Instead of lowering fares in the absence of the tax requirement, airlines missed an extraordinary opportunity to educate the public about what taxes do to the price of their tickets which would, in turn, leverage public anger with what is going on in Washington. Right now, the public is paying attention to discussions about increasing taxes and airlines would have found a willing audience to which to deliver its messages. While Wall Street is probably applauding the industry move because the industry is so desperate for money, such plaudits are short sighted.

The Air Transport Association is right that government policy should do everything it can to encourage more travel because of its incredible contribution to the economy. It is also right that aviation taxes are higher than sin taxes on alcohol and tobacco, which is designed to discourage use. It is also right about quantifying the industry’s contribution to the US economy: USD1.2 trillion per year, and, especially relevant today, every airline job brings 12-15 jobs to the economy.

Airlines contribute 1.2 trillion to the economy and each airline job creates 12-15 non-airline jobs across that economy.

Airline taxes are x percentage points higher than those designed to discourage use such as alcohol and tobacco. Taxes hurt demand because they raise fares costing airline passengers USD16 billion annually.

If taxes were reduced the contribution to the economy would increase exponentially and more jobs and income taxes would be created both within and outside the airline industry. More income taxes would also help the deficit.

Congress should lower aviation taxes as airlines wish

Those are all impressive stats that have failed to resonate in Congress for God knows how many years. While various grass-roots, public education campaigns have failed to work in the past, this would have been a golden opportunity to launch such a campaign with full-page ads across the country in addition to dispatching members to educate business and travel reporters who are now falling all over themselves to write about how greedy airlines are in keeping the revenues that would otherwise go to the Aviation Trust Fund. By dispatching members to educate the press, the industry’s message could be included in the tax holiday stories that are now appearing by the dozens.

The airlines could have even called the anti-tax politicians on their hypocrisy. Politicians can crow all they want about how they are against higher taxes but the reality is they have been steadily raising taxes for decades. They just call them fees or user taxes. This would have been a good time to educate the public about that.

The inability to collect revenues is costing the government USD30 million daily. That would make a hell of a headline in an ad, or message in a story -- airlines save consumers USD30 million on their fares. For once, airlines would be the good guys. While that may seem simplistic, it is not.

Think of it this way, one guy tweeted “F-you, Washington” and got 65,000 to tweet the same thing in only a few hours. Tweeters didn’t just re-tweet the expletive to signal their disgust with the political grandstanding now underway in the nation’s capital. They coupled their expletive with their personal gripes about what is going on in Washington and its affect on the middle class, the ones that drive the economy. That means they are not only listening, they are primed to become active.

Think of what the airlines could accomplish if it would have placed a full-page ad coupled with a request to tweet about the massive burden Washington imposes on passengers and the other syllogistic messages. Add to that a message on the impact on jobs, this becomes a no brainer for activism at the grass roots level.

That would be the wake-up call to passengers that could finally galvanize them. Past campaigns to reduce taxes or get government to spend on next gen may have failed but they were all before the internet came of age. The airlines could have easily leveraged their frequent flier and twitter data bases to get their tax message out.

But they lost the moral high ground by keeping the money and forever forestalled such a campaign. Too bad.

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