Why They Want Users Fees

Sunday, January 29, 2006
Airlines let fly over taxes, fees
As government eyes reforms, struggling industry gets loud
BY SUSAN TODD
The Newark (NJ) Star-Ledger

It may be one of the longest running gripes in business. The U.S. airlines are fuming over the special taxes the federal government collects to pay for the nation’s air traffic control system. Under the Airport and Airway Trust Fund, Continental, American, JetBlue and others pay a variety of excise taxes, passing the brunt of them along to passengers as part of the price of flying. But executives at Continental, which operates a major hub at Newark Liberty International Airport, say the taxes are only adding to their financial woes.

“The fees are bordering on the absurd,” Jeffery Smisek, the company’s president, said during a quarterly conference call with Wall Street analysts earlier this month. In 2005, Continental lost $205 million but paid $1.2 billion in fees and taxes, he said.

The industry’s complaints are hardly new, but they’re getting louder these days for a reason. As the year unfolds, federal lawmakers will be considering reforms to the Airport and Airway Trust Fund, a 10-year arrangement which expires in 2007.

As it weighs the industry’s concerns, Congress must also provide the means for the FAA to operate effectively.

“It’s among the industry’s top priorities to get this right. It’s a multibillion-dollar proposition,” said John Heimlich, the vice president and chief economist for the Air Transport Association, an industry trade group.

While airlines are screaming for reform, not everyone agrees it is warranted — or that changes would benefit consumers.

“Every time the government has tried to do anything to make it easier for them, the airlines have put the money in their own pockets, not into the pockets of consumers,” said Tom Parsons, chief executive of Bestfare.com and an industry expert. “The consumer is being nickeled and dimed to death by both the airlines and the government.”

Big airlines complain some of their spunkiest competitors, namely commercial corporate jets, are taxed much less. But, despite the emergence of commercial business airlines, Parsons said, the major carriers are still the heaviest users of the aviation system. “The airlines,” he said, “are going to throw smoke where ever they can.”

The airline industry has a long history of paying excise taxes.

The federal government started imposing them on airline passengers in the 1950s, when flying was considered a luxury. In 1972, the Airport and Airway Trust Fund established a several taxes, including a flat ticket tax and a jet fuel tax, to generate money for the Federal Aviation Administration’s operations, including air traffic control.

As the years passed, Congress has added charges to pay for other airline-related expenses, including Homeland Security following the terrorist attacks of 2001.

It’s what Smisek referred to in an interview Friday as “the sucking sound of the government, sucking the life from the industry.”

To understand the industry’s gripe, consider an analogy used by Heimlich: If an entire neighborhood is paying for cable, everyone expects the cable company to manage the costs wisely, and no one wants any other resident to get a free ride.

David Neeleman, chief executive officer of JetBlue, echoed Heimlich’s point about equity.

“A system must be put in place that has all users of the air traffic control system actually paying for their use of the system,” he said in an e-mail Friday.

As recently as last week, Secretary of Transportation Norman Mineta made remarks, indicating changes were coming. The FAA’s own cash crunch is driving the changes as much as the airline industry’s woes.

“With our primary funding source tied to the price of a ticket, lower fares mean a smaller aviation trust fund,” Mineta said. “In 2005, users paid $3.5 billion less than it cost to operate the system. And the gap could widen.”

Mineta, who was speaking before the Aero Club in Washington D.C., did not release specific details, but said the Bush administration would be proposing a “new, cost-based financing system for the FAA.”

“We are in the final stages of shaping what I believe will be a solid, forward-looking financing proposal that allocates the burden fairly,” Mineta said.

The renewal of the trust fund comes at a precarious time for the industry.

Last year, the airlines lost an estimated $10 billion, pushing its losses to more than $42 billion since 2001, according to Heimlich. While record jet fuel prices and intense competition are eroding revenues, the taxes, executives like Smisek said, prevent the airlines from making more money.

While most of the cost is passed on to passengers, the taxes prevent carriers from capturing as much revenue as they could, airline executives say.

“In a market where the industry has no pricing power, it’s understandable the airlines are upset,” said Robert Mann, an industry consultant from Port Washington, N.Y. “If the market is willing to pay $100, they’d like to make $100.”

Editor’s Note: Lets face facts here, since the government does not appear capable of managing any program within an operating budget, this is just another tax increase attempt.

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