Summary

For 2001 through the third quarter of 2003, the U.S. airline industry reported operating losses of $20.7 billion. A number of factors--including the economic slowdown, a shift in business travel buying behavior, and the aftermath of the September 11, 2001, terrorist attacks--contributed to these losses by reducing passenger and cargo volumes and depressing fares. To improve their financial position, many airlines cut costs by various means, notably by reducing labor expenditures and by decreasing capacity through cutting flight frequencies, using smaller aircraft, or eliminating service to some communities. Carriers have also reduced some airfares to encourage travel. Despite these efforts, several airlines filed for bankruptcy protection. It remains to be seen when the industry will emerge from this downturn. In response to the industry's financial condition, Congress has provided several forms of financial relief. In September 2001, Congress passed the Air Transportation Safety and System Stabilization Act, which authorized payments of up to $4.5 billion in pretax cash assistance to reimburse air carriers for losses incurred as a direct result of the 4-day government shut-down of air traffic and incremental losses stemming from the terrorist attacks and also authorized up to $10 billion in loan guarantees to help airlines gain emergency access to capital. In January 2002, Congress appropriated $100 million for new or modified cockpit doors on commercial aircraft to improve security of the flight deck. In the fiscal year 2003 supplemental appropriations act, Congress appropriated $2.4 billion in security cost relief for airlines. To provide information to Congress for its continuing deliberations about whether and, if so, how to provide additional help to the airline industry, we reviewed the payments of major commercial aviation taxes and fees over the last 5 years. The federal government levies or approves various taxes and fees on the commercial aviation industry. These taxes and fees generally are levied as a percentage of the base ticket price or are assessed at a flat rate per occurrence (e.g., per departure or passenger enplanement). The revenues from these taxes and fees support various aspects of the civil aviation system--including operation of the air traffic control system, modernization of airport facilities, and support of aviation security related activities. As requested, we focused on the following research questions: (1) What are the major commercial aviation taxes and fees, how much is collected annually, and how are the proceeds used? (2) How did changes in aviation tax and fee collections compare with changes in the industry's operating revenues and expenses from 1998 through 2002? (3) How has the total amount of aviation taxes and fees paid varied among carriers? (4) In the two instances since 1996 when an aviation tax or fee was not collected, how did airfares change?

In 2002, the collections from 13 major commercial aviation taxes and fees--including the ticket tax and passenger fee for security--totaled about $12.6 billion. These collections finance aviation infrastructure, including air traffic control, and services provided to the industry, such as security inspections. Collections did not cover all government aviation expenditures in 2002. For example, the taxes covered about 92 percent of the Federal Aviation Administration's (FAA) 2002 budget; the general fund covered the remainder. For 1998 through 2002, tax and fee collections rose in absolute terms and as a percentage of industry revenues and expenses. Collections of taxes and fees rose more than 15 percent during this period. Particularly after 2000, when industry revenues and expenses fell significantly, taxes and fees increased as a percentage of revenues and expenses. Similarly, because base airfares declined from 1998 through 2002, taxes and fees in 2002 accounted for a larger share of carriers' average annual airfares. The total amount of taxes and fees paid by carriers in 2002 varied, largely based on passenger volume and the type of service provided. Additionally, according to a recent study by a team of researchers from the Global Airline Industry Program of the Massachusetts Institute of Technology (MIT) and from Daniel Webster College, the share of taxes and fees included in the final ticket price in the second quarter of 2002 varied by carrier type (e.g., low cost), trip length, and ticket price. This study found that taxes and fees paid directly by air travelers added 15.5 percent, on average, to the cost of tickets sold during that quarter. During the 1996 ticket tax lapse and 2003 security fee holiday, carriers generally raised "base" airfares (i.e., airfares net of taxes and fees) compared with what they were in periods before the absence of the tax or fee. The effect of this to consumers was to maintain or increase gross fares. These fare increases were more moderate in markets where a low-cost carrier (e.g., Southwest) was operating and among leisure travelers.