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]

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