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]


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

  1. Oliver says:

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

  2. DRG says:

    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.

    • CF says:

      While I’m sure some of this may have come from other airlines, Spirit and Alaska don’t really have as much competition on many routes as you would imagine. I honestly think most of it was probably just because people heard there would be a limited chance to save money and they jumped on it. I’d be curious to see if other airlines saw a bump as well just because people thought there was a deal thanks to media coverage. In that case, it’s probably just pulling forward demand from people who might have booked later.

      You’re right that we don’t know how much of these increases were truly stimulation anyway, but some of it had to be. Lower fare equals higher demand. In the end it doesn’t matter. Taxes aren’t going away permanently no matter what they prove.

  3. Elliott P. says:

    “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.

    • David says:

      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.

    • CF says:

      Elliott P – “Those airlines who kept the money instituted a fare increase, plain and simple.”

      Well, yeah, that’s exactly what they did. And there’s nothing wrong with them putting a fare increase out there whenever they want. The taxation can fluctuate, but it’s always the company’s responsibility to determine the right price for the product. In this case, as others have said, the price was right before the taxes went away so they adjusted their fares to keep the prices steady.

      Not sure why you’re yelling about it being people’s money in the first place. If people don’t like the price, they don’t have to buy the ticket. It’s not their money once they hand it over to the airline. How that amount gets split up shouldn’t make a difference – the out of pocket cost is the same, and if they were willing to pay it before, they should be willing to pay it now.

  4. 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.

  5. David says:

    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 back to passengers, and fill up the cabin with more passengers – the additional revenue will outweigh the potential value of the tax

    Of course, if the tax is of medium monetary value, and the increase in passengers is medium, then it’s difficult to tell which is the optimal choice

  6. David says:

    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 passengers, but it just doesn’t seem to fit with the new Southwest.

    David

    • Gina says:

      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!!!!

  7. 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. Your explaining away their greed only helps shield them and makes it easier for a rerun of a similar nature in the future. Not to mention the general disregard for customer comfort or courtesy or the ever growing list of invented fees, which you seem to condone. Working with the airlines and their management for soo long may have affected your perception of fairness to the traveling public and right from wrong. My opinion.

    • David says:

      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?

      • CF says:

        David – Contrary to popular belief, I have a lot more to do than sit here waiting for people to comment so I can reply. I’ll always be happy to respond, but it’s not necessarily going to happen immediately.

        Unfortunately, there really isn’t much to respond to here. Consumer Mike and I rarely agree, and this is yet another of those cases. My only problem here, Consumer Mike, is that my argument is certainly valid yet you try to diminish it’s value simply because I’ve worked for an airline. But let me try to address it again anyway.

        Money belongs to the customer (not necessarily the same as the passenger) until that money is given to the airline. If you as a customer don’t like the price being charged, you can fly someone else or you can take the bus/train/boat/car, etc.

        You always seem to blame it on greed but airlines barely keep their heads above water. Since when is it greedy to want to make a half decent return? It’s not. And the airlines were smart to take advantage of this short term windfall while they could. If you as a customer didn’t like it, you don’t have to buy a ticket.

        If the airlines were all so greedy and making tons of money, then that would open up opportunity for new entrants to come in and fill a void with far lower fares. That’s what happened with Southwest, America West, AirTran, JetBlue, etc. The last real new entrant in the US was Virgin America and it’s losing a ton of money because there simply isn’t a need, considering the current cost structure in this industry.

        The airlines are trying to make a buck, and that’s what they should be doing.

        • Cranky, I did not even consider your past with America West when I made my comment. What I had in mind was your heavy exposure to different airline management teams during your discussions for your business and news reports. I would never hold your previous employment against you in your blog. I simply do not agree with you. I know, nothing new.

          As I stated previously, Any business should be able to make a fair and reasonable profit. Getting the profit by “other means” is what I cannot accept. Gouging customers to get financially healthier, in any business, is a no – no. In this tax matter, I do not think it was the airlines money to keep in the first place. My opinion.

          P.S. Brett, I personally value your input and opinions most of the time. However, there are those occasions I just cannot digest your written opinion/position.

    • David says:

      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

      • 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 says:

          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.

          • 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. Hopefully that will change in the future. I rarely fly Southwest, but they do service all, but 10 states in the U.S. Wish Alaska flew to Europe or Asia. Maybe even South America. I would use them much more if they did.

  8. Mike says:

    @ 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 a lower cost to the consumer, demand will increase. Airlines can now consider adding planes to fleet, increasing size, frequency etc.(or, increase price)

    However, it was very clear that the reduction in taxes was a short term thing.
    Prices drop by the amount of tax -> demand goes up. But as Cranky has pointed out supply can NOT increase.
    At least from an economics point of view this requires an increase in prices to optimise load & profitability.

    • 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 be short term, therefore not worth worring about extra capacity issues. This is a straw man thought. A fig leaf for the airline greed. Let’s face it Mike, this was a windfall of money from the sky (litterally) for the airlines. It is indefensable in my opinion.

      • 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 marches to their own drummer, but they did raise prices.)

        Illegal – Nothing illegal about this. They followed the letter and the spirit of the law. I’m sure they fully disclosed where the ticket price was going. It wasn’t as if the web checkout said $18.10 to taxes, and the airlines just kept that line for themselves. They were clear as to where the fees were going.

        Unfair – Um, unfair would be changing the price after the purchase. In fact many airlines offered to do the extra work to help their customers who flew during the no tax time get their money back on the taxes. The only reason they’re not doing this is that Congress made the tax retroactive to the moment it expired. Thats the unfair bit in my book.

        • 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.

          • 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 says:

            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.

        • David T says:

          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 THEN lump on the extras, that is government taxes and their own semi-illegal attempts at tax evasion (i.e. fuel surcharges etc) So it is clear, it is not the Airlines´money. It is a governmental tax or if the government stops charging it, it should be passed on to the consumer.

          • 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..

          • CF says:

            And even on AA’s site and any other, the feds are now requiring the all-in price to be displayed in the next couple of months.

          • David says:

            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.”

  9. iahphx says:

    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 to do that. Nobody knew how long the tax holiday would last. Prices were presumably at the market clearing level, so why give that money away and face later customer resistence?

    Finally, I’m having a hard time understanding what’s happening with prices today. Rick Seaney at farecompare says Southwest rolled back the increases, and the other airlines have matched. Yet, when I look at ticket prices today, they look a lot higher than yesterday (at least with regard to the cheapest fare levels that I watch). So I don’t think the airlines are going to willingly surrender all of their extra revenue to the gov’t today.

    • CF says:

      Spirit was not saying it reduced the price but that it didn’t increase the price to cover the taxes that went away. That of course doesn’t say anything about their revenue management strategies behind the scenes, but they did not increase their fares as most other airlines did.

      On what’s happening today, it’ll take some time for it to shake out. It’s always a dance to see how others will react and then each airline has to decide whether to go along or not. It might care if one airline makes a move but not another. Within a couple of days, we’ll see that everyone has gone back down, in my opinion. The market just can’t handle a hike like that right now.

  10. MJB says:

    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 a grab of money directly from the airlines–most of whom operate with razor thin margins to begin with. Yes, carriers could choose to lower their prices to $250 when the tax is repealed, but from a business perspective that would be idiotic–unless you believed that you could somehow recover more than $50 through other means (free advertising, winning customers who may become loyal).

    Let the airlines keep it–it’s money that should have been theirs to begin with.

  11. 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 says:

      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.

      • CF says:

        I like your explanation above. Well said.

        On one point, however, I have to say that there is value to some taxation to be sure. Some things like nextgen ATC would never happen without tax money to pay for it (and may not thanks to the Congress folk who can’t make a decision to save their lives anyway). Same with many airport improvements. The problem is that these all add up to be a tremendous tax burden, and that becomes an issue.

  12. Jason says:

    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.

  13. Rick G says:

    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.

    • David T says:

      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.

    • CF says:

      The airline did not collect money for “non-existent” fees. The breakdown is clearly made on every website between fare and taxes/fees. There was nothing in there saying that the airlines were collecting a certain amount of tax and then keeping it themselves. They simply raised the base fare when the tax disappeared.

  14. MJB says:

    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 either of these questions. If you take advantage of tax holidays or breaks, why should you hold a company to a higher standard than you would hold yourself?

    • 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 says:

        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.

        • 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 returned to the tax payer because they needed the money as well would probanly not sit well with you or anyone else. However, in my opinion, this is exactly what the airlines have done.

          • 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 it, I’d manage to rent a private jet.

            The airlines have put lots of effort and money into buying planes, fuel, training pilots, flight attendants, ground crew, and all sorts of other expenses. Just because you don’t like the amount they choose to charge to recover these costs doesn’t mean that you’re not a captive audience. There are alternatives.

          • BW says:

            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 hadn’t, you’d probably be looking at overbooked planes or no availability and people would be complaining about that.

          • CF says:

            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 returned to the tax payer because they needed the money as well would probanly not sit well with you or anyone else. However, in my opinion, this is exactly what the airlines have done.

            Your analogy is flawed. In your analogy, the local government (or “airline”) just takes money without there being an action from the taxpayer (or “customer”). In reality, the airlines just changed their fares, and the customer makes a decision on whether to buy that or not. It’s that customer action that makes this very different.

  15. tharanga says:

    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.

  16. Chris says:

    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 says:

      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 and local governments offer sales tax holidays in order to stimulate sales for local businesses. Stimulation is the point of the holiday, because states and local governments recognize that the additional cost of taxes results in less revenue for the businesses.
      4) States and local governments can plan their tax rates to be revenue neutral when they account for the revenue loss of a tax holiday (8% with a tax holiday, vs 7.9% with no holidays)

      Essentially, any business should be free to make pricing decisions that maximize its own profits. That’s capitalism. That behavior should be encouraged, as it leads to strong businesses that create wealth for all constituents. Airlines are criticized for acting in their own interest because we as the traveling public feel entitled to visit Grandma and Grandpa for $99, regardless of what it costs to provide that service. When airlines raise fares, they are treated like evil corporations who simply want to prevent you from seeing a dying relative.

      Finally, for the W haters, just assume that I referenced Obama’s payroll tax holiday. Let’s ignore the politics and stick with the principals here.

  17. Anonymous says:

    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 says:

      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.

    • CF says:

      It’s a great question. As I think I mentioned in an earlier comment, much of this stimulation is probably just pulling forward from future bookings. So Spirit and Alaska might see bookings dip in the next couple of weeks because people pulled forward their purchase decisions to take advantage of the deal. But for the amount that was true stimulation of demand, that’s exactly the case. There will be fewer seats to sell.

  18. 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

  19. Evan says:

    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 taxes on tickets, as they proved that they would simply pocked the money. In other words, the tax trade-off is money in the airlines pocket vs. the governments, and has nothing to do with consumers or demand. So the gov’t should logically not lower taxes unless as an explicit stimulus to the airline industry.

    I understand lobbying goes beyond math and logic anyways, so you can easily argue this point is moot. But I believe given the investment the airlines make in lobbying, they do believe this is in an important point.

    So either they think lobbying can overcome (e.g. it’s based on lobbying alone, not real logic), or they are just so hungry for short-term cash, they were willing to concede this point of long-term gain.

    • Galaxy says:

      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 happen? Initially fares would jump to $140, just as we saw in the last few weeks. But that additional $30 over what airlines are willing to take for the service would entice more competition/supply to enter the market until equilibrium is once again reached. The new number would be greater than $110 and less than $140. Airlines would generate more revenue and the average passenger would pay less to travel.

      What if the government doubled the fees? Of $140, $60 goes to the government and $80 to the airline. In the short term airlines would raise fares but would be unable to raise them enough to cover the lost revenue. In long term airlines with high cost structures would fail, unprofitable routes would be canceled, and ASMs (seats and frequencies) would be removed from the schedule. The equilibrium for the airlines would then be somewhat less than $110 due to a reduced cost structure (let’s say $100) and the new average willingness to pay for the customer would be $160 (let’s ignore the % scaling due to higher fares). The people that can afford to fly pay more, the poor get to drive more, and the airlines lose revenue.

      No one really questions this reality, though you’ll never hear a politician admit it in public.

  20. Galaxy says:

    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 of decentralized work to adjust the forecasts with likely somewhat uneven results.

    2) Many of the attacks focus on the “unfair profits” taken by the airlines during the tax holiday, so let’s look at that claim. Bookings during this time of year are mainly for travel dates in the 3rd & 4th quarter. Airlines typically lose money, and most certainly will if oil returns to +$90 or demand craters due to a double dip.

    It costs an airline more on average to provide the service than the customer has to pay for the service in the back half of the year. So are these profits we are talking about? Most likely not, rather revenue that at best covers the cost of providing the service. Is it fair? I don’t see that question as any more relevant than asking if it is fair that a customer can fly below the cost of transport. Market forces determine what is fair. To me, if one party is willing to provide a service for a price and another party is willing to pay that price for the service then it is by definition a fair price.

    • 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 yhe asking price or you don’t travel by air no matter what the airlines price their tickets for travel. You pay what you must. However, one unemployed blogger said he would rent a private aircraft if he had to fly. I personally don’t have that luxury.

      • 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.

  21. Galaxy says:

    “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. I have a right to decide to purchase or not purchase.

    Now it is different if you are claiming collusion in the marketplace, but you can’t reasonably claim airlines collude to set prices above market rate. If you do I’d like to see your evidence.

    “ If you have to travel by air… “

    I’d claim your point was a non starter right from the start. You never have to travel by air. You choose to travel by air. You seem to believe that there are circumstances where your ability to pay should dictate the price of the service you desire. I disagree. Air service isn’t a right.

  22. Matt Sattler says:

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

  23. Pingback: Top Aviation Stories Of The Week « Aviation Queen

  24. 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 leads to trade-offs. What I would love to see is more data/analysis showing how willing people are to trade-off and what’s more profitable for the airline. Spirit clearly believes that a small ticket price leads to profitable trade-offs in other areas.

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