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Posted: August 15, 2011

Finding the good news in the FAA fiasco

I went through ugly, really bad and pretty bad to get there

Robert Polk

I knew that talking taxes would not be pretty, but I did not realize just how hideous it could get. I had to start with downright ugly and navigate through really bad and pretty bad to find something that was almost good.

As I am sure you know, the FAA has had a rough couple of weeks. After Congress could not get their act together in time, legislation that had been funding the FAA expired on July 24. What ensued was a fiasco that shut down some FAA services, including airport improvement projects and the collection of federal aviation taxes.

It took 16 days to get the FAA back up and running. During this time, airlines stopped collecting the federal taxes that are part of each airline ticket:
• The 7.5 percent tax generally applicable to domestic transportation as well the 7.5 percent tax on amounts received from the sale of frequent flyer miles.
• The $3.70 domestic segment tax.
• The $16.30 international arrival/departure tax.
• The $8.20 departure tax for flights between Alaska/Hawaii and the mainland US.
The Downright UGLY part of this story is that most airlines raised fares the amount of the tax they were no longer collecting, so the amount being paid by you and me was the same. Only Spirit, Hawaiian, and Alaska Air did not pocket those taxes.

During this sixteen-day tax holiday, it is estimated the airlines pocketed an extra $500 million. Southwest said it made an extra $60 million during the tax suspension. Delta said they were making an extra $4 to $5 million per day in bottom-line money.

To be fair to the airlines, they are taxed plenty. According to Airline Weekly, Jeff Smisek, CEO of United Continental Holdings, recently said: "The airline industry is taxed more heavily than alcohol, tobacco and firearms." On average, he says taxes amount to about 20 percent on a standard domestic ticket.

The U.S. Senate managed to approve legislation that will temporarily fund the FAA through September 16th. The Pretty BAD is that Congress went on vacation and left the FAA with no long-term solutions. This is not a new trend. The FAA has not had a long-term funding plan since 2007, and has limped along with a total 20 of these temporary fixes ever since. Shame on Congress.

The Really BAD news, not surprisingly, comes from the IRS. This is not the first "tax holiday" the airline industry has seen. In the past, travelers were entitled to a refund of the taxes they paid on tickets purchased prior to travel during the "holiday." This time, the IRS sees things differently.

They have retroactively reinstated the taxes back to July 23. This means that if you purchased a ticket prior to July 23 and traveled during the tax hiatus, you are not entitled to any kind of refund. The IRS added that they will not retroactively collect taxes on tickets that were issued during the holiday. That is their definition of "providing relief for airlines and taxpayers." Please, don't do us any favors.

For individual travelers, this is disappointing, but not tragic. However, for large corporations who may have had dozens of travelers in the air every one of those sixteen days, the disappointment is much greater. While the aviation tax refunds probably would not have sent a corporation from the red into the black, it certainly would have been enough to treat your travel manager to a couple of nice lunches.

So, our tax-suspension party of 2011 ended last Monday, when the airlines began collecting federal aviation taxes again. The only Almost GOOD news I can find is that airlines graciously rolled back fares commensurate with the reinstated taxes.

The biggest question now is, what will happen on Sept. 17 when the current band-aid expires? Will airport improvements be halted again? Will airlines find another financial windfall in their midst? Will Congress finally put together a plan that keeps the FAA up and running for more than a few weeks or months?

Either way, unless fuel prices really spike before October, the airline's financial outlook for the third quarter just improved.

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Robert Polk is CEO of Polk Majestic Travel Group, Denver's largest independent travel agency. He welcomes your comments and questions at Robert@polkmajestic.com.

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