Plane ticket taxes lower than airlines claim, study says

06/23/04

Work aids Congress' understanding of airlines' financial health

CAMBRIDGE, Mass.--In work that is aiding Congress' understanding of airlines' financial health, researchers from MIT and Daniel Webster College report a wealth of new information on the taxes and fees added to each domestic airline ticket and how they vary depending on carrier, distance traveled and other variables.

The study, to be published in the July issue of the Journal of Air Transport Management, concludes that ticket taxes add about 15 percent to the average domestic fare. In contrast, recent statements by some senior airline executives use examples of ticket taxes as high as 26 percent.

"This paper provides a definitive answer to questions about the size of the 'tax burden' on the cost of air travel, based on a detailed analysis of millions of domestic tickets," said MIT Professor Amedeo Odoni, the project's director, who holds appointments in the Department of Aeronautics and Astronautics and the Department of Civil and Environmental Engineering (CEE). His coauthors are Professor Joakim Karlsson of Daniel Webster College and Shiro Yamanaka, a CEE graduate student.

"We believe this is the first study to measure the impact of ticket taxes by looking at a representative sample of actual tickets sold, instead of trying to pick a single 'typical' ticket," said Karlsson.

Odoni believes the study can add a more factual note to the ticket tax debate. "It provides an objective basis for Congress to examine the issue and make informed decisions on future changes to existing taxes and fees on domestic airfares," he said.

The U.S. General Accounting Office has cited the study's findings in briefings to the Subcommittee on Aviation of the Senate Committee on Commerce, Science and Transportation, as well as in a report submitted recently to all members of Congress.

The federal government and local airports currently add four types of taxes and fees to the basic cost of each domestic airline ticket. These taxes and fees cover a significant portion of the costs of the country's air traffic control and airport systems and, following Sept. 11, 2001, the costs associated with passenger and baggage screening conducted by the Transportation Security Administration.

"When illustrating ticket taxes, the examples presented by the airline executives use a 'typical' ticket, usually priced at around $200. This is always assumed to be a round-trip ticket with connecting flights and with each airport levying passenger facility charges at the allowed maximum of $4.50," Karlsson said. Since the ticket taxes paid by each passenger depend both on the number of connections and the specific airports on the itinerary, these assumptions tend to overestimate the tax paid by the average passenger.

According to Karlsson, "In practice, only about one-third of passengers make a connection. This is significant, since most ticket taxes are charged each time the passenger boards an airplane. Also, airlines make an incorrect assumption that each airport collects a passenger facility charge of $4.50.

"In reality, some airports collect less and some collect no charge at all. Moreover, the $200 pre-tax fare used as an example by the airlines is lower than the true average ticket price paid by travelers, which was $290 in 2002, the year of the study. The combined effect is an overstatement of the amount of ticket taxes," Karlsson said.

The paper also provides information on how taxes and fees vary with the cost of the ticket, the distance traveled on a trip and the type of carrier used.

For example, the study team learned that while taxes, as a percentage of the total ticket cost, are generally highest on the least expensive tickets, low-cost carriers such as Southwest and Jet Blue only pay marginally higher taxes than the so-called "legacy carriers" such as Northwest and American Airlines. This is because passengers on low-cost carriers usually make few connections. Also, low-cost carriers prefer regional airports over congested metropolitan airports.

"This makes a difference because regional airports generally have lower costs and therefore charge lower passenger facility charges compared to their big-city cousins," Karlsson said. There is still a slight difference, however; the study shows that travelers on low-cost carriers pay an average of 17.1 percent in ticket taxes, whereas those on legacy carriers pay 14.6 percent.

While the study does not directly address the public policy issues surrounding ticket taxes, it should contribute to the ongoing national debate on the subject. Earlier this month, the Aviation Subcommittee of the Congress Committee on Transportation held hearings on the financial health of the airline industry. The current level of ticket taxes was one of the topics of discussion.

The study is part of the research program of MIT's Global Airline Industry Program, which is funded primarily through a grant from the Alfred P. Sloan Foundation. Partial support was also provided by a gift to the program from Amadeus, S.A.S. The paper is available at http://dx.doi.org/10.1016/j.jairtraman.2004.03.006.

Source: Eurekalert & others

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