2005 March 15 Tuesday
Government Fees Growing Portion Of Air Travel Costs

Government fees on the airline industry are pretty high and set to go higher.

Airline passengers are giving an ever-increasing portion of their travel dollars to Uncle Sam, according to data released by MIT's Global Airline Industry Program and Daniel Webster College.

Airline ticket prices overall have actually dropped over the past several years, the researchers emphasize. However, many of the taxes and fees passengers pay, which fund a significant portion of the costs of U.S. air-traffic control and airport systems, are not linked to the base price of the tickets and have remained about the same.

As a result, the effective tax rate on airline tickets is steadily increasing, and will increase more under the Bush administration's recently released federal budget proposal, researchers report.

...

After the administration's proposed hike in security fees, passengers would, on average, pay 19 percent in taxes and fees on top of the ticket price, the researchers found in their update of last year's study. In 2004, passengers paid 16.1 percent in taxes on top of the price of a domestic ticket. This is up from 15.5 percent in 2002 and 10.9 percent in 1993.

Professor Joakim Karlsson of Daniel Webster College explains the significance of the study's results: "The airlines have lost the ability to raise airfares, even to just keep pace with inflation. The average round-trip ticket has dropped 40 percent in real terms since 1993. Meanwhile, average ticket taxes and fees have stayed relatively constant at $45 per ticket."

Karlsson adds: "With the total cost of taxes changing only slightly, the relative share of each ticket that goes to taxes and fees has been steadily increasing."

The federal government and airports currently add four types of taxes and fees to the basic cost of each domestic airline ticket. The administration's new proposal increases the security fee associated with passenger and baggage screening by up to $6.

$45, let alone $51 with the proposed new fees, strikes me as a lot of money for the government's portion of the costs for getting passengers from point A to point B. Where does that money go?

Private companies have to find cheaper ways to do things. By contrast, government services can become more expensive and, well, government does not have to worry about a competitor offering a cheaper alternative. Of course the terrorist threat has increased the amount of security precautions that are necessary. But the government probably doesn't need as much money per ticket to run the air traffic control system per passenger as it used to. The cost of operating the air traffic control system surely must scale up more slowly than the number of passengers carried. Airplanes have gotten bigger and so carry more passengers per flight. Also, computers have become far more able to track flights and route flights to avoid collisions and computers have become cheaper. Also, the basic software development costs for the system don't go up much as traffic goes up.

Governments need to try to develop ways to automate more government functions. Ticket fees for air flights are a reminder that all government services need to be scrutinized to look for obvious inefficiencies. The market is not going to enforce enough cost discipline on governments. Government operational costs need to be published in formats that would allow better outside scrutiny by knowledgeable citizens to identify areas ripe for potential savings

Share |      By Randall Parker at 2005 March 15 12:39 AM  Economics Government Costs


Comments
GUYK said at March 15, 2005 5:26 AM:

I don't know about this one. I do concur that private interprise is generally a heck of a lot more efficient than anything government touches.However, I also understand the costs of running a major air terminal. Air Traffic control and security are just part of the costs.

Actually, when considering inflation the air ticket taxes are probably not all that bad--especially when considering the taxes on automotive and truck fuel.

So Very Bitter said at March 15, 2005 7:23 AM:

Part of the problem is that some of the taxes/fees, like (if I recall correctly) the 9/11 fee are charged per *segment*, not per itinerary or trip, which makes fees accrue quickly in these days of most airlines running the hub-and-spoke model. When flying most domestic flights, even when transferring thorugh a hub, does one usually need to go through security for each flight? No, but we still get stuck with a charge for each time. A "fairer" tax would only be assessed for each way, not for each flight.

Please correct me if any of this sounds off the mark. . . .

crush41 said at March 15, 2005 9:28 AM:

No, but we still get stuck with a charge for each time. A "fairer" tax would only be assessed for each way, not for each flight.
-----------

Perhaps it would be more fair, but the current taxation system is beneficial, at least in the long-term, to airline travelers because it hurts inefficient carriers (hub-and-spoke) who need to disappear from the industry. The cruel part is the government subsidies that keep the legacy carriers alive (along with the huge amounts of retained cash from the regulation days) when it's becoming increasinly obvious that the old hub-and-spoke model can't cut it. Eventually the price of tickets is likely to come back up after all the blood has been bled, and only a few airlines remain--Southwest continues to turn a profit while virtually every other airline keeps getting pounded, simply unable to compete and only surviving on a perpetually twindling amount of cash reserves, monopolizing ports, and through multiple bankruptcies, etc.

Readjusting the tax would keep the legacy carriers around a little longer, but wouldn't fix the underlying problem. The only way that is likely to occur is for many of the old carriers to die off. When that happens, consumers will be able to choose more efficient airlines like Southwest for every flight instead of only being able to choose this superior company when she flies into the consumer's particular destination.

TangoMan said at March 15, 2005 11:24 AM:

This reminds me of an incident I read about a few years ago:

Flying from Hamilton to Ottawa or Calgary to Edmonton will cost you a measly $3 on June 30, but be careful to read the fine print.

In WestJet's latest promotion entitled: Ridiculous fares, ridiculous fees, the no-frills airline is basically giving away flights for one day on the two heavy-traffic short-haul routes.

But throw in the NavCanada fees, insurance, airport improvement charges, new air traveller security surtax and GST, and the return flight actually costs $83.92 for the Alberta route and $81.78 for the Ottawa jaunt. And that doesn't even include an extra fuel surtax.

[ . . . . . ]

But the airline says this one is more serious. Short-haul flights are disproportionately hurt by the various add-on fees and continue to suffer declining traffic.

If I remember correctly, the Canadian Gov't was so embarassed about this that one of their agencies or departments ruled that the airline couldn't breakdown the costs this way as it was misleading to the consumer, you know false advertising, and they ruled that advertised fares must be all inclusive. Funny that, it just happened to bury all the gov't fees into the ticket price again. How convenient, huh?

Professor Joakim Karlsson said at March 25, 2005 8:36 PM:

There is much I could comment on here, but I do want to correct one point, namely the assertion that "airplanes have gotten bigger and so carry more passengers per flight." We can measure average aircraft size by dividing the average number of enplanements per departure by average load factor (percentage of seats filled by paying passengers). The statitics are available from the Air Transport Association at http://www.airlines.org/econ/d.aspx?nid=1032. This exercise shows that aircraft size steadily increased until 1987. At that point, the average size peaked at 109. It has been declining since then. The 2004 figure is 83 seats.

Cheers,

JK


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