Wednesday, November 25, 2009
Appearances often are deceiving.
— Aesop, The wolf in Sheep’s Clothing
Today we deal with a fascinating tax question, insofar as tax questions can ever be described as fascinating to the average reader. The question we consider is when does an airline’s invention of a new way to extract money from its passengers constitute a really new invention and when is it simply putting old wine in new flasks. The wine in question is the myriad charges airlines have begun imposing on passengers in order to increase revenue. The question is important because airlines pay a 7-½% “Passenger Ticket Tax” on what they charge for tickets, but not on non-ticket related charges that they describe as “fees.”It started modestly but insidiously, when airlines closed ticket offices outside of airports and shortly thereafter imposed a fee on a ticket purchased over the phone instead of on a computer. Delighted with the revenue thus raised, they conjured up additional fees. The most notorious was imposed on suitcases.
It has long been understood that if Ms. Jones wants Mr. Jones to accompany her on a trip, each person purchased a ticket and the airlines understood that the money they received for those tickets was subject to the ticket tax. Then the airlines decided that if they charged Mr. Jones for accompanying Ms. Jones on the trip, they should charge the suitcases that accompanied them. Since the suitcases don’t have a choice of window, middle or aisle seats and have to ride in the lower part of the airplane, the airlines charge suitcases less than they charge people and consider the charge a fee not subject to the ticket tax. If you think about it, that makes sense. The only difference between Mr. Jones and the suitcases is that Mr. Jones gets himself to the airport whereas the suitcase has to be carried. Charging suitcases for their transport was not the end of the airlines’ inventiveness.
The airlines compressed the space between rows of seats and said if a passenger wants room to stretch out his or her legs, the passenger must pay an extra charge and that charge, too, is called a fee rather than part of the ticket price. The apparent reason for treating this charge separately from the ticket price is that even though the airlines’ computers can accommodate a multitude of fare structures on every flight (and have no trouble charging more for first class tickets than for economy class tickets) the computers are unable to come up with a fare structure that would permit them to price tickets for seats that have leg room and seats that do not. Therefore, they call what they charge for seats with legroom “fees”. The same problem confronts the airline computers when pricing tickets for travel during holiday seasons. They can easily adjust prices for travel between high demand and low demand times and, indeed, can easily change ticket prices every second as anyone who has bought a ticket on-line knows. That sophistication notwithstanding, airline computers cannot figure out how to incorporate increased prices for travel during certain holiday seasons into their programs. To solve the problem they added a fee to the price of tickets for travel during Thanksgiving, Christmas and Spring Break.The beauty of all these fees is that the airline views them as unrelated to the price of the ticket and, therefore, not subject to the 7-½% ticket tax. Most readers by now will be astonished that the airlines can, with straight faces, add all these charges to the cost of flying but say they are unrelated to the price of a ticket and not, therefore, subject to the ticket tax. In their astonishment they are joined by Congressmen James Oberstar of Minnesota and Jerry Costello of Illinois. The congressmen have asked the Government Accountability Office to investigate the practice and intend to hold congressional hearings so airline executives can explain the logic of the illogical. As the New York Times posits the issue it is: “do the fees reflect what it costs the airlines to provide the extra service, or are they just an added charge of services the airlines have always provided?” Mr. Oberstar seems to anticipate the outcome of the hearing suggesting that the airlines have “found a backdoor way to raise ticket prices.”
According to the NYT, this year alone the airlines have taken in more than $3 billion in “fees”. If those fees had been treated as part of the ticket price, the government would have received $225 million. Many passengers think the addition of the plethora of fees effectively takes them to the cleaners. The airlines don’t see it that way. John Tague,president of UAL, said, “we have been aggressive and creative” in coming up with new fees. You have to hand it to Mr. Tague. Whatever he may choose to call what you pay for the privilege of riding on his airplanes, at least he’s willing to call a spade a spade when describing the steps taken by his company to increase revenue.