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A Bonanza for Airlines as Taxes End

Joe Sharkey|The New York Times
Tuesday, 26 Jul 2011 | 12:07 PM ET

Let’s talk about taxes. Wait a second, come back here! I mean airfare taxes.

Passengers are pictured at Check-In desks at London's Heathrow airport.
Carl de Souza | AFP | Getty Images
Passengers are pictured at Check-In desks at London's Heathrow airport.

The subject comes up because of what Congress just did — or, rather, did not do — and what the airlines did in response.

On Friday, Congress failed to approve the extension of a bill to keep the Federal Aviation Administration running. Among other things, that meant the agency no longer had the authority to impose the various federal taxes that airlines add to the price of each ticket.

So as of 12:01 a.m. Saturday, the federal government began losing an estimated $25 million a day in tax revenue.

But did airlines simply pass on this savings to customers?

No, they did not.

Last week, evidently in anticipation of the tax’s expiring, some airlines quietly began raising fares — on average, roughly by the same amount as the federal taxes. Others did the same over the weekend, and most of the rest joined in on Monday.

Alaska Airlines and the discount carrier Spirit Airlines were among the few holdouts, said Rick Seaney, the chief executive of FareCompare.com, which monitors airline fares. In a statement, Spirit Airlines took the opportunity to chide its competitors.

“Spirit is passing along all of these tax-rollback savings to its customers,” it said. “Some carriers have not been so generous and have pocketed the difference in taxes, in the form of higher fares.”

“The consumer should have saved anywhere from $25 to $50 round trip,” Mr. Seaney said. “Instead, it’s a windfall for the airlines.”

But Jean Medina, a spokeswoman for the Air Transport Association , the airline industry trade group, said, “Basically, consumers are now paying the same as they did last week.”

The main federal fare levies that expired are the 7.5 percent excise tax on all domestic tickets, the $3.70 federal charge on each flight segment, and the $16.30 tax on each international arrival and departure.

These taxes cannot be collected again until Congress passes another extension of the legislation that finances the F.A.A. Before Friday, the extension had been stalled repeatedly, and its budget temporarily extended 18 times over the last four years.

The airlines had been raising fares in small increments for much of this year, as fuel costs have stayed high. The last increase, the sixth of the year, came in mid-April.

A report by American Express Global Business Travel, which came out on Monday, found that the average domestic fare paid by clients was 7.5 percent higher this May than last May.

And the latest increase would probably have gone through without much comment had it not coincided with the expiration of the federal taxes.

Airlines have long complained about the burden of taxes and government-imposed fees, which now add up to about $61 on an average $300 fare, according to the Air Transport Association. While airline revenue was 8 percent higher this June than in June 2010 — the 18th consecutive month of year-on-year improvement — growth had been slowed by rising fuel costs, the association said.

None of the airline industry experts I spoke to expected the airlines to roll back the new fare increases once the taxes are reauthorized. But what about the taxes the airlines already collected on tickets bought before Saturday for travel during the tax expiration period?

“Are tax refunds in order?” asked Kevin P. Mitchell, the chairman of the Business Travel Coalition, which represents corporate travel managers. Good question.

There is some rough precedent to indicate what recourse passengers might have. In 1995, airlines collected a federal excise tax for travel bought for 1996, assuming that the tax would be routinely renewed before the end of the year. But Congress didn’t renew the tax until the summer of 1996 and didn’t make the tax retroactive.

The airlines that were sued by customers were not liable, a federal court ruled. They did not pocket any of the money because they had forwarded it all to the government, as required, the court said. Instead, that court and others subsequently ruled that consumers’ main redress was to claim the outlays as losses on their federal tax returns.

The current situation is complicated, of course, because the airlines are not collecting the tax at all, but did collect it on ticket purchases made before Saturday for travel through the period the tax is not in effect.

Airlines are generally keeping their heads down on this. One, JetBlue, publicly addressed the matter on Monday, telling customers that it would accept requests for refunds of taxes already paid, for travel within the next seven days. Possible refunds will be “based on the guidance by the federal government,” JetBlue said. For travel beyond seven days, JetBlue said it would provide more information later.

Virgin America, which joined the fare increase on Monday after holding out all weekend, informed affected customers, “You may be entitled to a tax refund through the Internal Revenue Service.”

The Internal Revenue Service said only that it would “continue to work with the airline industry to address issues relating to the collection and payment of the taxes involved” and would “provide further guidance” soon.

Meanwhile, Michael Boyd, an aviation forecaster with Boyd International Group, said that airlines badly needed more revenue to sustain a degree of profitability. With fares now essentially the same as they were a week ago, the current situation is “a wash for the consumer and a plus for the airlines,” said Mr. Boyd, a persistent critic of federal aviation policies. “At least now we know where the money is going,” he said.

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