Airlines Raise Fares to Scoop up Tax Lapse

Monday, 25 Jul 2011 03:26 PM

 

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ATLANTA  - Many U.S. airlines raised fares in recent days to take advantage of a lapse in U.S. ticket tax collection after Congress failed last week to fully fund the Federal Aviation Administration budget, but passengers will likely not notice any price difference.

The expiration of the FAA reauthorization on Friday means some aviation taxes are no longer being collected. These include a 7.5 percent sales tax on U.S. air transportation and a 7.5 percent sales tax on the purchase of air miles, said fare watcher FareCompare.com. Additionally, taxes on jet fuel are also reduced.

"Friday evening we adjusted prices so the bottom line price of a ticket remains the same as it was before prior to the expiration of federal excise taxes, etc.," American Airlines spokesman Tim Smith for AMR Corp's American Airlines said by email.

JetBlue Airways Corp and Southwest Airlines Co began raising ticket prices by at least 7.5 percent on Friday, according to FareCompare.com. Other airlines, such as Delta Air Lines Inc and United Continental Holdings Inc, boosted prices on Saturday.

The changes could save consumers of 10 percent to 15 percent of the cost of a ticket, should the FAA-related tax relief be passed along, Rick Seaney, CEO of FareCompare.com, said Monday.

U.S. airlines have long complained about taxes and security fees, which they say they cannot always pass along to customers. The Air Transport Association, the top airline lobbying group, said that on a $300 ticket, about $61 goes to taxes and fees.

ATA declined to comment on specific airline pricing strategies, but spokeswoman Jean Medina said consumers are not impacted by the latest round of fare hikes because they will pay the same amount for tickets as they did last week.

"This short-term additional revenue for airlines, which does not mean a fare increase for consumers, benefits all stakeholders -- customers, employees and investors -- by temporarily improving tiny industry margins to better cover costs, and enable airlines to invest in their product and service," Medina said.

Ray Neidl, senior aerospace specialist at Maxim Group, said passengers will not notice the latest fare increases because the price they pay for tickets will not change.

"Basically (airlines) are just charging what they think the consumer will pay to fill the seats," Neidl said.

Neidl also said the benefit to airlines would be minimized if Congress reached a deal soon to resolve the partial FAA shutdown.

"It looks to me like it's going to be very temporary," Neidl said. "So whatever effect it has, it's going to be very minor."

Attempts failed on Friday to resolve the dispute over the FAA's funding, due to fighting between the political parties. Members of Congress hope to take up the issue on their return Monday.

Shares of U.S. airlines were down Monday amid a growing perception in the market that recent signs of renewed pricing power will fade after the peak summer travel season.

The Arca airline index was down 2.2 percent at mid-afternoon. United Continental was down 5.0 percent at $18.95 and US Airways Group Inc was off 4.4 percent at $6.50. Both stocks touched new year lows on the New York Stock Exchange on Monday.

(Additional reporting by Kyle Peterson and Lisa Lambert; Editing by Richard Chang)

© 2014 Thomson/Reuters. All rights reserved.

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