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Hidden Baggage: Looming FAA Regulations Will Increase Airfare for Consumers

 

The U.S. Senate is expected to vote on a new FAA reauthorization bill before the end of September that will allow airlines to revert to marketing ticket taxes separately from the total airfare per ticket. While this will mark a major win for airlines, the news is not so good for consumers who will end up paying higher out-of-pocket costs for flights.

According to research by Drexel University’s Sebastien Bradley, PhD, and Naomi E. Feldman, PhD, of the Federal Reserve Board, consumers will face higher total fares and bear most of the burden of ticket taxes, while airlines can expect a commensurate increase in ticket revenues and increased demand along higher-taxed routes.

The researchers looked at how taxes affected the airline industry before the Department of Transportation strengthened enforcement of full-fare advertising rules (FFAR) in 2012 that required airlines and online travel agents to disclose all ticket taxes as part of a single tax-inclusive final price.

“Our analysis shows that airlines were previously able to shift nearly all of those taxes onto customers in the form of higher total fares, virtually dollar for dollar,” said Bradley, an associate professor of economics at the School of Economics of the LeBow College of Business. “However, immediately after the adoption of the new rules in 2012, the share of taxes passed to consumers fell to roughly 25 cents per dollar. Airlines absorbed 75 cents of every dollar in taxes by having to offer lower base fares.”

The researchers attribute this to consumers selecting lower-taxed routes among the various ways to fly between two particular cities when shopping for international flights.

According to the researchers, prior to the 2012 regulation, ticket taxes were less visible to the consumer with taxes being revealed near the end of the purchasing process. Decisions based on initial pricing led consumers to pay more for a flight, especially if consumers weren’t savvy enough to anticipate that alternative routes could yield lower ticket rates due to lower taxes.

Supporting results confirmed that with all else equal, consumers have become more inclined post-FFAR to choose routes that are subject to lower taxes when flying between origin and destination — shunning layovers at high-tax airports, like London’s Heathrow, in favor of flights with fewer layovers or flights with layovers at relatively low-tax airports.

“Taken together, consumers’ better-informed ticket purchases and reduced pass-through of ticket taxes to total fares inevitably imply a loss of ticket revenue for airlines operating relatively high-tax routes,” said Bradley. “It is therefore not surprising that U.S. airlines and airline industry groups have lobbied extensively for the elimination of the full-fare advertising rules while currently relying on other add-on fees such as baggage, early boarding or seat selection to boost total revenues.”

Their paper “Hidden Baggage: Behavioral Responses to Changes in Airline Ticket Tax Disclosure,” is currently under review for publication and is available as a FEDS working paper.

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