More on Taxes and FAA Reauthorization

Government Regulation

Last month, I wrote about the fight over how to fund the FAA in the future. With less than a month to go before the decision is due (hopefully), I decided to dig in further.

I think the best way to do this is to use some examples. Let’s look at two different itineraries using the current tax structure. You’ll recall that currently, there is a two part tax – a 7.5% tax on the base fare and an additional $3.40 per segment flown. Here are the two examples.

07_09_06 taxcompare

The largest group pushing for a change to this structure is the Air Transport Association (ATA), a lobbying group representing most of the big airlines in the US. Their argument is that the taxes charged don’t really equate with the cost of carrying that passenger. And the above example is a good reason why. You have two very different itineraries with the same fare. Since half the tax is based on the fare, the longer trip with more flights ends up having only slightly higher taxes than the shorter despite the much greater cost to the system.

Another way to look at it is to think about two people on the same flight where one person pays double the other. The cost to the ATC system is the same to carry each passenger, but the person who pays a higher fare pays a lot more in tax.

To remedy this, the ATA came out with their user fee proposal which would theoretically tax people based on actual cost to the air traffic control system. Sounds good, right? If you’re an airline passenger, maybe (definitely if you pay high fares). If you’re in the corporate aviation world, you’re not happy with this plan because your costs are going to go up. For now, general aviation is spared, but you’ll often hear the slippery slope argument that it won’t stay that way for long.

But let’s assume that as an airline passenger and not a user of corporate or private aviation services, are user fees really the way to go? Is this particular proposal a good one? I’m not so sure.

The ATA proposal is also a two part tax, like the current system. There is a departure tax which in execution is the same as the current segment tax. For every flight taken, the passenger pays a flat fee. The second part is where the change happens. The percentage tax based on the fare paid would be replaced with a tax based on distance (beyond 250 miles). According to this testimony, the FAA states that “about one-half of the costs in the ATC system are related to takeoffs/landings (i.e., essentially fixed costs) and one-half of the costs are related to time in the air (i.e., variable costs),” so this makes sense. So far so good, but there are problems when you really think about it.

JetBlue’s announcement that they were against this proposal raise a red flag. Why wouldn’t they want a plan that would reduce costs for passengers?

They really have stated two big objections, and they make sense to me. First, they’re not happy that the first 250 miles are exempt from the tax, and second they don’t like that the distance tax is calculated based on the nonstop mileage between the origin and destination cities regardless of number of stops. They haven’t said anything beyond that, but I have to think that as a low fare carrier, they aren’t happy that high fare-paying passengers, primarily on the legacy carriers, will get the greatest benefit.

Before I go much further, I have to say that a true analysis here is hard to do. I contacted David Castelveter, VP of Communications for the ATA to get more detailed info about the proposal. What I really wanted was to find numbers – examples of what the new proposed taxes would be. He was unable to provide that information and instead referred me to this testimony on the proposal. Unfortunately, it has no per passenger numbers, and so I have to assume that they don’t want to release this information for some reason. Red flag #2. All I can do now is speculate without having concrete numbers. They say it will be less than today, but I have a sneaking suspicion that’s only true some of the time.

Logic says that people will pay more if they’re on short flights or paying low fares. Remember, today you pay based on the fare, so if you eliminate that, the higher paying fares will probably be taxed less and the lower paying fares will be taxed more as they try to even it out. It’s the higher paying, short haul business traveler who stands to gain the most, and that’s not me.

The ATA says the first 250 miles are exempted in order to promote service to small communities. Huh? If the flight is less than 250 miles between a small city and a large one, I’ll bet that the fare is sky high and most people are driving. Most people are taking those flights from small cities to connect beyond that big city, so they’re going to pay taxes anyway.

Instead what this does is exempt people flying major business routes like New York to DC and Dallas to San Antonio (which just squeaks in at 248 miles) from having to pay the distance tax. This helps make air travel more price competitive when compared to the train or car when it probably shouldn’t be.

JetBlue’s second objection that they’ve decided to literally cut corners and base the distance tax on the nonstop mileage between the origin and destination is probably more egregious. Let’s use a Chicago-Dallas flight with a stop in Philly (which you can actually buy on US Airways) as an example. For the geographically challenged, take a look at this map from the Great Circle Mapper.

07_09_06 greatcircleorddfw

As you can see, the connection more than doubles the number of miles it takes versus flying nonstop, yet under this ATA proposal, the distance tax for both the connecting flight and the nonstop one would be based on the nonstop mileage. That doesn’t make any sense.

Oh, but it makes plenty of sense if you’re a legacy airline. Airlines that operate a hub-and-spoke system are far more likely to have passengers on connecting itineraries than point to point airlines like, say, JetBlue. Connecting itineraries will end up paying less than their share of taxes if this is how mileage is calculated. The one thing I can’t figure out is why Southwest hasn’t come out against this plan. Maybe that 250 mile exemption is attractive enough to make them ignore the rest of the problems.

As you can see, this proposal has a lot of holes. It seems clear that the leisure traveler paying low fares will be the one who takes the brunt of this while the business traveler will benefit. As someone who generally doesn’t do much business travel and looks for low fares for leisure trips, I selfishly should prefer the status quo. Without actual numbers to play with, I can’t make a true determination about this proposal, but I’ve beginning to lean the other way.

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7 comments on “More on Taxes and FAA Reauthorization

  1. I have no skin in this game and definitely wonder how things skew either way once a thorough number crunch is made, but I have to say your use of the ORD-PHL-DFW routing is a pretty extreme example to the opposite and definitely weakens your credibility. Go find me what percentage of any O&D market actually takes a 2.5 circuity routing. I can certainly see why Jetblue might actually have a beef on some quirks here but they also want things to benefit them (and are not ATA members). I think the ATA proposal (or something similar) could prove much more fair than current and think that the small community argument actually holds some water. Remember these people aren’t just flying 250 miles or less, they are connecting via a hub, without which they wouldn’t have service in the first place. Just a thought.

  2. The legacy carriers use an old and outmoded system and this “user fee” is just another way to try and close the revolving door to bankruptcy court they seem to be in. The hub-and-spoke system that airlines have been clinging to so dearly produces these outrageous flights (and the outrageous delays that go with them). The airlines should have to pay based on how many miles they actually fly, not just the distance between departure city and destination. If they are going to waste time flying to Philly on their way to Dallas from Chicago they should have to pay for it. And leave the efficient fliers – general aviation and point-to-point carriers like JetBlue – alone.

  3. I was simply using ORD-PHL-DFW as an extreme example to more clearly demonstrate the difference. It’s obviously rare that anyone would have such a circuitous routing, but routings like SEA-PHX-ORD, RDU-ORD-LAS, or one I recently almost purchased, LAX-ATL-IND are still significantly different in terms of number of miles versus the nonstop option.

    As for the small city argument, I think we agree that most people from small cities are connecting through a hub and not ending their journey at it. But that connecting itinerary will be over 250 miles so the passenger will end up paying some taxes on the trip. I can do some number crunching on this when I get some time, but I’ll bet that of all the people who fly on itineraries that are less than 250 miles, most of them are in business markets like the ones I mentioned.

  4. Great analysis! Let me state that I don’t agree with the user fees proposal. Putting that aside, one way to explain the 250 mile exemption is that those miles are built into the departure tax. The first and last segments of the flights are the heaviest in terms of ATC time. While traveling up and down, the plane is crossing multiple altitudes where other planes are flying, often makes several turns to get onto its main flight path, and is changing speeds. This requires continual support from ATC. Once at a stable flight level, ATC is still continuously monitoring the flight but does not need to put much effort into it besides the handoffs from station to station. I don’t know how far out commercial jets begin their descent but combined with the climb to altitude, this could easily hit 250 miles. On a short flight, a pilot may only end up speaking to departure control then approach control at the next airport. Therefore this portion of the flight should be considered part of the fixed landing/take-off cost.

  5. Dear Clark:

    It is clearly all the network carriers’ fault. They have been growing at 30% per year at the most congested airports. Wait — maybe they haven’t. Did you ever stop to think that perhaps a hub and spoke is, in fact, quite efficient, as it maximizes the traffic/demand on the fewest amount of flights? I certainly don’t want to pick on Jetblue or anyone specifically but I think you might be best-served not spewing nice catch-phrases before you actually think them through. There is a place for both point-to-point, and hub & spoke flying in this nation’s airline industry, and in fact most airlines use both models in their own networks. This includes JetBlue, Airtran, and Southwest, though they might disguise them with other names. Whether or not the 250-mi rule is another foolish thing the ATA is trying in order to squeeze more value out of its proposal for the member carriers, what is clear is that a new system most-likely needs implementation in order to make the system/funding far more equitable.

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