Why Airlines Shouldn’t Have Passed On Tax Savings to Customers

The FAA is back up and running and tax collection is beginning again, but some people are still angry. Most airlines decided that instead of passing along the tax savings to customers, they’d simply raise fares and keep the difference. I’ve seen some discussion about how the airlines really blew this and should have passed savings on the consumers for a variety of reasons. I disagree.

Airlines Make Money From Taxes

One of the arguments is that airlines like to complain that they’re overtaxed and that demand would be much higher if they didn’t have such a burden. So this was the perfect chance for them to show exactly what kind of benefit could be had, right? Some airlines did just that.

Both Alaska and Spirit passed savings along to customers and they saw big increases in bookings. Alaska showed a 26 percent increase in week-over-week bookings while Spirit showed a 22 percent increase in the early days. Some of that has to be due to the publicity they received for this move, but it was also the short term nature of the deal. There was never a question that taxes would be coming back, so people rushed in to buy before that happened.

That being said, I’m sure that lower fares were the cause of some stimulation. That’s always what happens thanks to simple supply and demand. When fares go down, demand goes up. The problem in this situation, however, is the supply side of the equation.

Within a couple of months of travel, the airlines pretty much have their schedules set. They’ve looked at the demand out there and put out the right number of flights, or at least as best they can see in advance, for the months ahead. In other words, the supply of seats isn’t changing unless something major happens (like the 9/11 attacks) to require a major, urgent shift in capacity. With that set, the airlines work hard to manage demand to fill that supply of seats with the highest revenues possible. If demand is particularly strong and growing, then they can add capacity but that’s more of a mid to longer term move.

When the taxes disappeared, the impact was bound to be short-lived (though longer than it should have been). So you have a two week window where taxes are lower, what can you do as an airline? You aren’t going to be able to add capacity for such a short term thing, so why would you want to pass on the tax savings and stimulate demand? You don’t have the supply to handle any demand increases anyway.

Instead, you should just keep the price to the consumer where it was before, since that was the right price to fill the capacity you were putting out there. Now you just make a little gravy on top while filling your seats exactly as you thought you would previously.

Of course, many will argue that it’s a fairness issue. I’m guessing that’s why Alaska passed the savings on. It just seemed like the right thing to do, or something like that. It’s a feel good thing that probably makes sense for the airline and its brand. But why is that the “fair” thing to do? If the government decides not to collect money, why is it that the traveler should get to keep the money and not the airline? Sure, Congresspeople want to whine and complain about it even though they were the ones who screwed up in the first place, but there’s no real reason that the money should have to go to the traveling public.

For Spirit, I think it’s a different issue. It’s not a fairness issue but rather more of a brand image issue. Spirit has been fighting very hard against the belief by some that its model of having a la carte pricing is not consumer-friendly, but this helps in the fight against that image. Spirit is more than happy to compartmentalize everything. You pay for what you want on that airline. It’s like having separate building blocks where you pick and choose the pieces you want to make the airline ticket you want to have. If the tax “block” goes away, then the airline is not going to reallocate it. So this helps Spirit in its quest to better explain its model and get some positive PR as well.

In the end, each airline’s goal is always to make as much money as it can. For a couple of outliers, that meant giving tax savings to the customer to further their brand proposition. But for most, without the ability to add more capacity, it made sense to raise fares to maximize revenue in the short term. If taxes disappeared permanently, then we’d see a different story because airlines could adjust capacity to match such a structural change, but that’s not what happened here.

Should the airlines have used this as a way to prove to the feds that taxation is killing demand? Why bother? There’s no chance at all that the feds would change their tune. But then again, Alaska and Spirit showed that anyway. No need for others to jump in.

[Original photo via Flickr user planetc1/CC 2.0]

(Visited 36 times, 1 visits today)

Get Posts via Email When They Go Live or in a Weekly Digest

Leave a Reply

67 Comments on "Why Airlines Shouldn’t Have Passed On Tax Savings to Customers"

avatar
Sort by:   newest | oldest | most voted
Oliver
Guest

Ah, well, that double dip recession everyone’s talking about will take care of their demand planning…

Danie
Member

Regarding the first part of your article, you seem to suggest that the increase in bookings at Alaska and Spirit was, in part, proof of the stimulatory effect of lowering fares. I have a bit of an issue with the logic here. If all the carriers had done same thing, then I would agree. But you have a situation in which only two carriers lowered fares. So you have to assume that many of these extra bookings were from passengers who switched from other carriers — these are by definition NOT “stimulated” passengers.

Elliott P.
Guest

“If the government decides not to collect money, why is it that the traveler should get to keep the money and not the airline? Sure, Congresspeople want to whine and complain about it even though they were the ones who screwed up in the first place, but there’s no real reason that the money should have to go to the traveling public.”

What do you mean, “have to go to the traveling public”? IT’S THEIR MONEY IN THE FIRST PLACE, not government’s. Those airlines who kept the money instituted a fare increase, plain and simple.

davidthomson_98
Member

Thats exactly right! Cranky, I rarely have an issue with anything you right but this statement of yours is patently ridiculous! The taxes being charged are extras lumped onto the travelling public, i.e. us!!!! Its not the airlines money. This is an outrageous money grab by the airlines who are happy to complain about the add on taxes that are not their fault when they have to charge them, but now decide to let the full fare value ride to make hay while the sun shines. This is patently unfair and should be punished in some way.

David SF eastbay
Member

Now that taxes will be colleced again, doesn’t that mean if people who bought tickets with no tax will now have to pay taxes if they change their ticket?

That would mean overall those who purchased tickets from the airlines that increased their fare to make up the tax difference will now have to pay even more money then they would have in the first place.

Nick Barnard
Member

The IRS has said that they’re not going to try to collect those taxes, from either the traveler or the airline.

http://www.irs.gov/newsroom/article/0,,id=242812,00.html?portlet=6

David
Guest
Suppose an airline, OurAirline, flies a route from BigTown to SmallTown, in competition with a rival, OtherCarrier. If OtherCarrier doesn’t drop fares, then OurAirline should decide what to do based on the size of the tax relative to the expected change in demand. If the tax is large, and cutting the tax will give only a small increase in demand, then OutAirline should keep the tax money for itself. If instead, the tax is small and cutting the tax will give a big increase in demand (namely passengers from OtherCarrier switching to OurAirline), then OurAirline should hand the tax money… Read more »
david
Member
I think, at least for Alaska, it was a feeling of good will. Yes, it might only be a short-term benefit for them financially, but it makes customers feel like they are an airline that cares and did the right thing. Living in Seattle, where Alaska is based, I heard a lot of that sentiment. People being happy/proud that they hometown airline passed on the savings. That being said, I was surprised (but not surprised) that Southwest didn’t join in on passing the savings. I think the old Southwest might have done so to show that overt LUV for their… Read more »
Gina
Guest

Absolutey! Why didnt Southwest join in? Hats off to Alaska for Outdoing Southwest LUV for their passengers. I usually fly southwest but Alaska is doing a great deed. My Opinion, any savings to the passenger is the LUV!!!!

Consumer Mike
Guest
Brett, I couldn’t disagree with you more on this issue. The airlines, in effect, raised the fares for 2 weeks blaming it on the tax screwup, laughing all the way to the bank. That money belongs to the passengers. ANY smoke screen type of explanation is simply BS. Bottom line still remains, the airlines made a money grab on the defenseless Consumers. After this theft I personally will not have much sympathy for any whining from the airlines in the future about fairness, tax burdens, etc. The airlines continue to abuse the hand that feeds them with impunity. Very sad.… Read more »
davidthomson_98
Member

100% in agreement. I normally don’t get riled about capitalism in its purest form,and so even the fees don’t bother me. But this is little more than highway robbery. Especially with the way the airlines whinge and whine about taxes and fees that hike up their fares! Cranky, no reply?

david
Member

But shouldn’t airlines have the ability to raise their fares how they see fit? Yes, right now most airlines are making money, but that hasn’t been the case and who knows if fuel or an incident will put the airlines back in the red again. They had an opportunity to make a bit more money and they get punished for that? They aren’t a charity.

That being said, not all airlines raised their fares. So this gives the consumer the ability to vote with their pocket books and continue to give their business to Alaska and Spirit in the future.

David

Consumer Mike
Guest

A bank robber could make the same argument David. I don’t buy it. Also, Alaska and Spirit have limited destinations and only a couple of foreign stops by Alaska. Not a good fit for the majority of travelers.

Ryan
Guest

Consumer Mike, Alaska doesn’t have limited destinations. Compare them to Southwest.

Destinations: Alaska (and Horizon under CPA) 91. Southwest 72.
International Destinations: Alaska 14. Southwest 0.

Consumer Mike
Guest
Ryan, Let me start by saying that I think Alaska is one fine airline. I have flown it before. When I stated that it had limited destinations I was thinking that it only covers a few states in the U.S., and those are principally in the west mainland, Alaska, western Canada and the 9 cities in Mexico. I wish I could use them more, but their service is pretty sparse once you leave the western region of the U.S. and Canada. Horizon is now history. I believe they have service to less then half the states in the continental U.S.… Read more »
Mike
Guest
@ Consumer Mike: I agree in terms of perceived fairness discussion, but airlines are, after all supposedly in operation to make money? (and are barely doing so) From a business point of view this is very cut as cranky points out and you fail to distinguish between short and long-term when you say airlines shouldnt be whining… If you would own airline shares, you would have wanted them to do the same thing. (the “defenseless” consumer can decide not fly?) If a law came into place that would remove all taxes, airlines would reconsider their pricing in the long-run: At… Read more »
Consumer Mike
Guest
Mike, perception has nothing to do with it, it is a matter of dollars and cents (common sense too). I agree, all businesses are entitled to make a reasonable profit. BUT, not in an unreasonable, illegal or unfair manner. You point out that I do not state if my comment was for long term or short term period. I did state it was for the 2 week period. Most of us felt that this “tax holiday” would be short lived due to the many political, financial and economic factors being impacted. I suspect that the airlines also knew it would… Read more »
Nick Barnard
Member
I don’t get what was unreasonable, illegal, or unfair about this. Unreasonable – People have already indicated that they’d pay a specific amount for a ticket. Unlike shopping at the store prices for airline tickets are quoted all in. Its not as if they said “Well we sell this ticket for $100, and thats the price the customer sees until they check out and find that there is a 10% tax, so they pay $110, so we’ll increase our price to $110.” The customer shops on the whole price for the ticket. (Except on Southwest which just is wonky and… Read more »
Consumer Mike
Guest

Nicholas, the issue here is that an airline charges $XXXX PLUS tax on a published fare. There was a tax holiday for a few days and most airlines DID NOT change the price of a ticket to allow for no tax charge. VERY BASIC, STREIGHT FORWARD. NOTHING COMPLICATED.

Most airlines simply pocketed the tax money not being charged during that period. Now you ask me what was the matter with doing business like that? Obviously you do business differently then me and have different values then me. That is your previlage.

Nick Barnard
Member

First, I value spell check. Or in lieu of that reading over what I typed to check for egregious errors.

Second, airline fare listings aren’t shown to the customer as $XXX.XX plus tax, they’re shown to the customer as $XXX.XX total, and that’s what the customer shops on. Airlines know to sell the quantity they want to sell the ticket needs to be priced at a specific dollar value, so unlike most businesses they price inclusive of tax.

Third, I value cooperation, negotiation, and give and take. If congress had these values we wouldn’t have this discussion.

BW
Guest

Consumer Mike, you are so blinded by rage that you missed the point of the blog post. Maybe you should go back and read it again and pay special attention to the parts about the inability to increase supply in the short term. That’s the key point.

davidthomson_98
Member
Nicholas, you say: “Second, airline fare listings aren’t shown to the customer as $XXX.XX plus tax, they’re shown to the customer as $XXX.XX total, and that’s what the customer shops on. Airlines know to sell the quantity they want to sell the ticket needs to be priced at a specific dollar value, so unlike most businesses they price inclusive of tax.” You must buy tickets in a different manner to the rest of us. If I go on AA´s site and request a reservation, they will quote me a fare as $XXX.XX. It is only at the final checkout they… Read more »
Nick Barnard
Member

I was thinking more along the lines of aggregators such as Kayak and Orbitz. In both cases they list the total fare.

You don’t comparison shop airlines at their own site..

davidwhotz
Member

Taking AA as the example, the “Congressional Incompetence tax holiday” arguably made it more transparent. Instead of saying that you owe $XXX for leg 1 and $YYY for leg 2 plus all the taxes that got added on afterwards, you got $AAA for leg 1 and $BBB for leg 2 with much fewer taxes. Don’t tell me you think that any customer at the end of the day said, “Woh…that money is going to the airline and not the government? I better not buy this ticket.”

iahphx
Member
A couple of things here. First, I don’t believe Spirit actually reduced the price of their tickets during the tax holiday. Like almost everything else about that airline, they rely on a lot of gimmicks to sell tickets. So they just chose not to have one of their weekly (daily?) fare sales, and claimed to have reduced ticket prices. Second, imagine the airlines dilemma if they HAD to raise fares (about 10%) today to account for the tax re-authorization? Who in their right mind would want to train their customers to expect lower ticket prices? It would have been nuts… Read more »
MJB
Guest
So whose money is it really? If a passenger is willing to pay $300 for air travel, then should that $300 not go to the airline that provides the service? When the government adds taxes to the price of a ticket, it does not change the amount that the passenger is willing to pay for air travel (still $300). So now the airline that provides the service is left receiving only $250 for providing a service for which customer was willing to pay $300. Thus, the effect of taxation is not a net grab of money from consumers, it is… Read more »
David SF eastbay
Member

Did you see the latest news brief? Airlines are now rolling back the price increase to the level before the tax expired now that the tax is once again being collected.

MJB
Guest

This proves my point. Customers pay the same, but the airline collects less money. Thus, the airlines are the only entities that suffer the consequences of taxation.

Jason
Guest
I agree. Imagine if an airline sells a flight for $99. With the 7.5% tax, the airline only collects $92.09. The customer is willing to pay $99…that’s what the demand forecast says. Let’s say the government raises the tax to 15%. The airline can either A) sell it for $99 and only collect $86.09 or B) try to sell a flight $106 to a customer who is only willing to pay $99. Either way, the customer is only willing to pay $99. The airline has to give up the taxes every time, regardless of the tax amount.
Rick G
Guest

How is collecting money for non-existent fees anything short of theft?
Your position that we should let the poor, mis-managed airlines keep it is ludicrous.

davidthomson_98
Member

Unfortunately it legally isn’t because the airlines just had a massive over the board fare increase that coincidentally coincided with the exact fare total (tax included) that was in place BEFORE the tax holiday. Now, we are experiencing another wonderful coincidence, airlines rolling back the same fare increase to the same levels pre- tax holiday! Will wonders never cease? Irony aside, this may not legally be theft but is is certainly unfair, even for big business.

MJB
Guest
In a free market, charging a price that a customer is willing to pay is not unfair, it is what all companies should be striving to do. For those of you who disagree with my logic, I’ll pose a few simple questions back to you: When President Bush reduced your personal income tax rates, did you keep the money for yourself or did you send it back to the government to be “fair?” If you shop online, do you remit taxes to your state if the vendor did not charge them? I would be shocked if anyone answered “yes” to… Read more »
Consumer Mike
Guest

MJB,
Charging what the market will bear to a captive audience is stretching the definition of a “Free Market”.

Also, using “W” as an example in your blog is self defeating. Especially in the area of taxes, such as corporate welfare. travelers have been made to “donate” to big business due to another tax loop hole such as this matter.

BW
Guest

Suggesting that air travelers have no alternative is stretching the definition of “Captive Audience”.

As for you second argument, how about trying to refute his point? All I got out of that was that you don’t like Pres. Bush so using something that happened to be passed while he was in office is somehow invalid as evidence.

Consumer Mike
Guest
My thinking regarding the “captive audience” comment was that anyone who must fly is forced to use one of the major airlines more often than not. Not everyone is able to switch to a bus, train or car. In most cases there is no alternative. I hope this addresses your comment. Your second question I will try and answer while trying not to start a political debate. A clearer response from me is to say should the taxes which were returned to the public by the Bush regime have been held by the local government rather then allowed to be… Read more »
Nick Barnard
Member
Regarding “Captive Audience” I don’t believe that this argument flies. There are many actual alternatives: Bus, Train, Driving, Renting a private jet, learning how to fly and renting a plane, learning how to fly and buying a plane, and I’m sure there are more. Now just because these are too expensive or take to long doesn’t mean that they’re not alternatives, they’re just not alternatives that fit your needs. Many people are able to do all of these, they just decide that the economic costs aren’t worth it to them. H*ll, I’m unemployed but I’m sure if I completely needed… Read more »
BW
Guest
I agree with Nicholas below on the first point. I don’t see how your second point has anything to do with the original question. You just changed the whole situation by throwing local governments in there. A refund given by the federal government directly to the citizen has nothing to do with money given by the federal government to municipalities. At any rate, the fed never gave a refund that somebody stole, they just stopped collecting a tax. At the same time, the airlines raised their prices so the overall price is the same so demand stays flat. If they… Read more »
tharanga
Guest

I agree with cranky entirely. Pocketing the money was the rational thing to do here. Sure, you might get some goodwill for not doing so, but I wonder how long that goodwill would last.

christophe.bottega
Member

I don’t agree.
Airlines charge for the ticket (whatever they want) and collect the tax in behalf of government (airport, …). When there is a government decision to waive said tax for a few days, the new total price paid by the customer should be lower.
I think you have “sales tax exemptions week-ends” in the US. Would you appreciate if the vendors were raising their prices during that week-end to offset the benefit of the “tax free week-end” ?

MJB
Guest
Chris, My whole point is that the airlines could charge more if the government did not add these taxes. As consumers, we should be indifferent as long as the total cost is the same. Sales tax weekends are a good example, and I actually considered posing them in the questions in my last post. I ended up choosing not to include them for a few reasons: 1) Retail pricing gimmics could effectively result in price increases during tax holidays (example: 40% OFF & no Tax vs. 50% off + tax), but… 2) Price changes are not as transparent 3) States… Read more »
Anonymous
Guest

If you’re right that airlines can’t adjust their capacity over the time horizon that people would be purchasing tickets for, then how did Alaska and Spirit deal with the additional 26 and 22% increase in demand? Do those two airlines now just not have those seats to sell, implying that they lost out on a lot of money, or did they find a way to add in a few planes here and there to capture additional revenue?

BW
Guest

An interesting question. I’d be surprised if they increased capacity. If they didn’t then they either felt they already had the excess capacity to cover the increase or they figured these people would book later anyway and were willing to give them the discount in exchange for good press. It’s also possible that there’s some very crowded Alaskan and Spirit flights coming up and they are just planning on dealing with it.

Nick Barnard
Member

Cranky, can we get a boring, non-controversial topic? Perhaps something that doesn’t have anything to do with Delta’s SkyMiles, USAirways, fares, taxes, or a crash?

Keeping ontop of all these comments from the is getting to be a part time job. :-p

Evan
Guest
I won’t dispute any of Brett’s logic, although I’m not convinced I agree. But I do think it may have been a bad move for the long-term. The airlines have spent a lot of resources lobbying the government to reduce (or not raise) taxes on tickets, talking ad nauseum about the impact they have on demand and the role they play in the airlines minuscule margins. This would have been a great opportunity for them to demonstrate there is truth behind this thesis and they are prepared to play ball. Instead, they gave lawmakers no reason to ever consider lowering… Read more »
Galaxy
Guest
Evan- You are right that math and logic has little to do with politics. Indeed, politicians understand fully that higher taxes reduce demand; no live experiment is needed. Let’s say the maximum price the average consumer is willing to pay for a particular route is $140. That $140 is divided between the airline, $110 and the government $30 (excise fees, segments fees, 9/11 fees, PFCs, ect.) So the customer is willing to pay $140 for the service and the airline is willing to provide the service for $110. If taxes & fees went down, let’s say to $0, what would… Read more »
Galaxy
Guest
I’d like to add two points to the many excellent posts explaining why airlines raising fare was reasonable and appropriate. 1) It has been pointed out that basic short term supply and demand dictates that prices must go up to maintain equilibrium. Even if the airlines had not raised fares, the demand forecasts and optimization programs at the airlines would quickly see an increase in demand and restrict lower fares. Same fares just lower availability for those fares. This route may have been a preferable one from a PR point of view, but it would have required a large amount… Read more »
Consumer Mike
Guest
I am just wondering if you feel that generous in your definition when you are paying extortionist prices at the gasoline pump, knowing that the oil companies continue to make record breaking profits every quarter. Market forces DO NOT always determine what is fair. Total control of a commodity can also set the price – fair or not. Short of walking or biking you have no alternative but to pay what is asked. This is the point I tried to make yesterday. If you have to travel by air (family emergency, etc.) and are an average income individual you pay… Read more »
Nick Barnard
Member

So if I have a family emergency, money or debt doesn’t matter. My point with renting a private jet is if it was a situation that I completely had to be there, money wouldn’t be an obstacle.

But let’s be clear these taxes were what $40 on average? This isn’t going to make or break your travel decision.

Galaxy
Guest
“I am just wondering if you feel that generous in your definition when you are paying extortionist prices at the gasoline pump” I’ve never paid extortionist prices at the pump. I have paid prices that made me rebalance my priorities (commute more, combine errands, not take that Sunday drive). At one time I even took the bus to work, 20 miles each way, due to personal economic circumstances, but I’ve yet to have someone hold a gun to my head at the gas pump. I just don’t consider it my right to have cheap gas, or a cheap plane ticket.… Read more »
matt.sattler936
Member

One clarifying point, Virgin America also used this tax break to their benefit.

Nick Barnard
Member

Uh, how so?

I’d say every airline used this to their benefit in one way or another. Either as a marketing bump, or as some extra revenue.

trackback

[…] Cranky Flier (aka Brett Snyder) says why the airlines were correct in NOT passing along a temporary FAA tax cut along to passengers. […]

Adam Williams
Guest
One side benefit from lowering the fare, though, is the increase in uptake among ancillary or a-la-carte priced goods/services. For example, in addition to seeing a rise in ticket sales at Alaska, there was also a sharp rise in the number of digEplayer rentals. So having spent less money on the ticket, passengers were more willing to spend in other areas such as IFE (which depending on the airline can be a good money maker). It’s the same thing with movie theaters. Studies show that a lower ticket price usually leads to more sales at the concessions counter. So it… Read more »