FAA Airline Tax Holiday

One result of the recent government budget crisis was that the FAA temporarily lost its authority to collect certain taxes from the airlines, including a 7.5% federal excise tax on domestic travel.  The result was a temporary and partial airline tax holiday.

Airlines could have passed the benefits on to consumers as lower fares.  Most did not and instead kept fares flat (raising prices to offset the missing taxes), pocketing an estimated extra $25M per day.   This created a flurry of anti-airline commentary.  I’m a frequent flyer, but I was not dismayed.  I’ll explain, but first some context.

The Pool

Statistically I represent a small sample.  Compete data show that in July 2011 there were 42.1M unique visitors across all sites (suppliers and OTA flight paths).  Numbers avoid double-counting; e.g., someone visiting two supplier sites and three OTA sites in a month counts as one person, not five, in the chart below.

But I was very representative in that I did not pay any more than I planned. The total I paid did not change.  My budget was unscathed.  And my ease of research and booking was unchanged.  But how unique was this tax holiday?

Taxachusetts Holiday

At just about the same time the FAA’s tax collection authority was hobbled, Massachusetts (aka “Taxachusetts”) had its annual sales-tax-free weekend.  The state voluntarily gives up collecting sales tax in the interest of spurring purchases.   The hope is that consumers get so excited they actually spend more in total that weekend.  The spending boost and the net shift in funds collected from the state to retailers is supposed help spur spending by retailers, which trickles down to elsewhere in the economy.

Likewise, the airline tax holiday shifted funds from the government to the airlines, with little adverse impact on consumers.  The airlines are far from a high-margin business so, in my view, benefit from such a shift far more than might Apple for instance (which recently reported it had more cash than the US government), or the serially-profitable oil companies.

Holiday Investing

So how could airlines invest that money that might help drive new business?  Compete surveyed 600 consumers on the extent to which airlines should include certain things in their prices vs. charge extra for them.  For example, 85% of respondents expect the first checked bag to be free, while 75% expect to pay extra for the third bag.  Investing in in-flight cell access might make sense because consumers expect to pay extra for that (so it could become an incremental revenue stream, assuming it’s priced correctly).

Turbulence?

In isolation, the airlines failing to pass on tax holiday savings to consumers is unlikely to have a lasting impact on consumers’ perception of airlines.  The event was generally transparent to consumers given flat fares (in contrast to things like fuel surcharges, which raise fares).  And the issue may have been too complex for general travelers, or was lost among media coverage of the broader government budget challenges.

Further muddling consumer awareness was the tax holiday was not all-encompassing.   Many other taxes/fees were still collected, such as state taxes, passenger facility charges, security fees and excess baggage fees.

Given bailouts for industries like automotive, and the model of state tax holidays, maybe the airline industry should get a tax holiday every year!  To inform that decision, the impacts of the recent businesses can be assessed as follows:

  • Was any kind of consumer backlash evident, such as was there an atypical drop in consumer airline research during the brief holiday period?  “Atypical” as in not seasonal and not driven by things like a drop in consumer confidence and stock market volatility.  If so, does research recover in September?
  • Did booking rates change m-o-m, and if down do they recover in September?
  • Did consumers shop a greater variety of airlines (on supplier sites or OTAs) in hopes of isolating any that did pass on savings?
  • To what extent were consumers even aware of the issue, and if they knew a tax holiday was coming each year would they postpone purchases until then (assuming in that case some of the savings were passed on to them)?

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About Lincoln Merrihew:
Lincoln Merrihew is the Vice President of Transportation at Millward Brown Digital. At Millward Brown Digital, Lincoln is responsible for steering the Transportation Team, which encompasses the automotive and travel practices. Before Lincoln joined the Millward Brown Digital team, he worked at TNS Custom leading the Automotive team, and then continued on there to lead business development for 10 different industry verticals. Lincoln's career aspiration is to create game-changing solutions and insights. Connect with Lincoln on LinkedIn.