Airlines, lawmakers butt heads over taxes, security fees

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Airlines, lawmakers butt heads over taxes, security fees
Bush Administration rebuffs industry drive to save money

The airline industry is finding out how hard it will be to convince the new Congress and the Bush Administration to substantially trim taxes and security expenses. It does not appear the 108th Congress is motivated to reduce airline taxes that amount to about $10 billion a year or pare back security fees that add another $1.5 billion. And a top Bush Administration official said this month that airline taxes and security costs should be kept in place.

The Air Transport Association (ATA) launched a campaign late last year to shed the tax and security burdens, saying the industry could collapse and be nationalized if carriers have to shoulder such onerous expenses.

Sen. John McCain (R-AZ), the incoming chairman of the Senate Commerce Committee, may have left the door open this month to helping the industry. But he is far from endorsing scaled-back taxes and security expenses. While he fears the failure of one or more airlines could substantially increase market concentration, he emphasized he does not want to keep "inefficient" airlines afloat. A committee source said at press time it is too early to say what McCain will do on this issue. But Sen. Ernest Hollings (D-SC), who will be the committee's ranking Democrat, argues the burden is on the airlines to change their business structure.

It doesn't get better in the House either. House sources, repeating assertions made in December, said it is highly unlikely Congress will free airlines from a $2.50 ticket segment tax and other security fees. One source said he is not particularly impressed that groups such as the Air Line Pilots Association (ALPA) are becoming allies of ATA in the fight to cut taxes and security costs.

"ALPA members have to take wage cuts, so it saves the airlines money and does not cost their members money," he said. By contrast, he said the "people in government who have to come up with the revenue" see things very differently. The airline industry lobbying also is supported by the Business Travel Coalition and the National Business Travel Association.

John Heimlich, director of economic and market research at ATA, said Congress "does not want to touch" the $2.50 ticket segment tax. The airline industry has been trying for months to abolish or reduce this passenger fee that can amount to $10 for a roundtrip ticket. He emphasized there is a big difference between propping up individual airlines and imposing an "unfunded mandate" of security expenses on carriers.

"We do not need policy assistance in going out of business," he told AFN. "Current federal policy is accelerating consolidation of the airline industry." It is possible the House Ways & Means Committee will examine whether airline taxes are too high. "The big question is the Ways & Means Committee," said one congressional source. "They could reduce [airline] taxes if they wanted." However, a House GOP source said that is probably wishful thinking. According to the source, if House members are exploring whether to reduce airline taxes, they are playing their cards very close to the vest. (While Ways & Means would have to take the lead on taxes, the Transportation Committee would have to address security expenses.)

Congressional sources noted there was talk of reducing excise taxes for airlines when lawmakers considered the airline "bailout" package soon after the Sept. 11 terrorist attacks. At that time, however, airlines were more interested in getting a $10 billion loan guarantee program and a $5 billion direct grant program, which Congress indeed did pass.

Partly for that reason, Congress rejected a cut in the excise taxes. One observer pointed out, for example, that a reduction in the excise taxes paid by airlines would lead to reduced funding for the Airport & Airways Trust Fund, which helps pay for some security expenses.

The $2.50 ticket segment tax is actually a passenger fee that was part of the bailout legislation. Because it is technically a fee, the House Transportation Committee would have to reduce it, a highly unlikely prospect. Moreover, the Department of Transportation does not support the drive to reduce airline taxes and security expenses. Jeffrey Shane, associate deputy secretary, told the Senate Commerce Committee on Jan. 9 that he does not support efforts to reduce airline taxes and security costs. The airline industry was taken aback by the public pronouncement.

At that hearing, McCain said the current condition of the airline industry and its future prospects are of "paramount concern." But he said lawmakers must be cautious. "We must ask whether our actions would improperly distort the marketplace," he said. "The ability of some airlines to remain profitable in the current climate raises the question of whether there is something wrong with the rest of the industry. We should be reluctant to do anything that might keep inefficient businesses afloat. Many people believe that the basic business model of the traditional hub-and-spoke air carriers was broken long before these current difficulties."

He went on to say, however, that there is a drawback to allowing the market to sort out winners and losers. The failure of one or more airlines could substantially increase market concentration, which means consumers would suffer. He said he does not relish the thought of having the airline industry restored to financial health through consolidation if that erodes competition and significantly increases airfares in captive or semi-captive markets. Furthermore, he said there could be significant losses of service in some markets and regions if one major carrier were to be liquidated.

Whether or not Congress provides additional assistance, the industry must act to help itself, McCain said. "The aviation industry may simply need to adjust to the new realities of air travel before we can take any further significant action," he said. "There are signs that such efforts are underway at some airlines. These efforts may lead to difficulties that might be painful in the short term, but also might be better for the industry as a whole in the long term."

Hollings is an even tougher sell, telling the industry that committee members are a "skeptical audience" when it comes to cutting taxes and security costs. Before the tax system is altered, he said airlines must show how they are going to improve their business structure, service and economic viability.

"Clearly, the industry is too important to our nation's economy not to take action - but what steps will best provide the most dependable and equitable aviation transportation system for the traveling public?" he asked. "These issues must be very carefully considered in light of the airline industry's current market failure. We need to see real fixes with real results, not a system of continual boom and bust that overcharges customers in good times and asks for handouts from them in bad."

Hollings noted that a number of carriers have expressed the need to have their tax, fee, and security burdens lessened. He said some airline CEO's have explained that when the airlines were profitable, these costs could be passed on to customers, but now that the demand is down these costs are absorbed by the airlines.

"We know the carriers were weakened by 9-11, but some were weak prior to 9-11," he said. "Now, the market has radically shifted and the major carriers cannot change quickly enough to make a profit."

He emphasized that Southwest Airlines [LUV] and JetBlue Airways [JBLU] continue to make money as passengers look for lower fares. The major carriers, like American Airlines [AMR] and United Airlines [UAL], have announced fare reductions in an effort to lower business fares and attract more people to fly.

"I like the lower fares, and the one-way walk up even for my Charleston flight has dropped by about $400," he said. "This is good news for the consumer, but the carriers need to reduce costs if they are to survive," he said.

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