The political brinksmanship that led to the weekend expiration of the U.S. government's authority to collect air ticket taxescontinued this week, keeping the Federal Aviation Administration partially dark, prompting the Internal Revenue Service to ask airlines to provide applicable tax refunds to passengers and presenting many other questions. The immediate ramifications included FAA worker furloughs, suspension of various airport construction projects and new airline fare hikes. Because the price increases offset the removal of the ticket taxes, air travelers generally aren't paying more, but airlines are realizing more revenue.
As of Thursday morning, a resolution was nowhere in sight. Sen. Jay Rockefeller (D-W. Va.), chairman of the Senate Committee on Commerce, Science and Transportation, planned on Wednesday to convene a House of Representatives-Senate conference to hammer out a deal that would allow funding to resume, "but House Republican leadership rejected that offer," according to a statement from Rockefeller's office.
The House of Representatives passed what would have been a 21st extension of the previous FAA authorization, but the Senate objected to an item that would eliminate subsidies to some small markets. "If the Senate cannot agree to a simple provision, which it approved earlier this year, to eliminate excessive subsidies between $1,358 and $3,720 per ticket at three airports, then we don't need to convene a conference meeting," according to a Monday statement from Rep. John Mica (R-Fla.), chairman of the House Transportation and Infrastructure Committee.
Rockefeller also "told airlines to stop profiting on the FAA shutdown" and "warned Delta and other airlines about the risks to the industry if the House insists on making its anti-worker agenda part of the FAA authorization."
Responding to the first point during Delta's quarterly earnings conference call on Wednesday, general counsel Ben Hirst said, "What the industry has done is simply to maintain prices at market clearing levels. We are not quite sure what Sen. Rockefeller expects the industry to do."
On the second point, Hirst said, "The issue on the FAA bill was the Essential Air Services program. Republicans insisted that as a condition of extending FAA funding, 13 markets which were pretty clearly able to function without subsidy ceased to receive subsidy. There was no labor-related condition attached to that. It is not a Delta issue. It is between Republicans and Democrats in Congress."
Taxation Implications
FAA since Saturday has not collected the 7.5 percent federal excise tax on the base ticket price or the sale of frequent flyer miles, the $3.70 domestic segment tax, the $16.30 international travel facilities tax on flights to or from the United States and the $8.20 departure tax for flights between Alaska or Hawaii and the continental United States. State taxes, security fees, excess baggage fees and passenger facility charges are among the fees still being levied.
The affected fees combined, according to various reported estimates, amount to between $25 million and $30 million per day. Delta executives pegged the number for their carrier at $4 million to $5 million per day.
While airlines are collecting more revenue than they were before FAA's tax authority expired, the logistics of the situation may cause headaches for some travelers and travel agencies.
The Internal Revenue Service, which in 1996 and 1997 accepted excise tax refund applications from affected travelers during similar air ticket tax holidays, on its website, wrote that "passengers who paid for tickets on or before July 22, 2011, for travel beginning on or after July 23, 2011, may be entitled to a refund of the tax. Airlines are permitted to refund the tax to the passenger, just as they do in the ordinary course of business when issuing refunds for unused refundable tickets (including the associated taxes). The IRS has asked the airlines to provide refunds to eligible passengers when requested. However, passengers who are unable to obtain a refund from the airline may obtain a refund by submitting a claim to the IRS."
IRS also posed this question to itself: "If I purchase my ticket at a time when the tax is not in effect but I travel after the tax is reinstated, will I be subject to tax?" The not-so-simple answer: "That depends on how such travel is treated in any legislation reinstating the tax. The legislation could either impose tax on all travel occurring after its enactment or provide an exemption for passengers who purchased tickets during the period when the tax was not in effect."
According to a joint statement issued by the American Society of Travel Agents and the Business Travel Coalition, the two groups do not expect "any retroactive tax collections," but suggested ticket taxes "will apply to a reissued ticket in cases where the ticket was issued during the no-tax period and exchanged once the tax is restored."
'Windfall' For Airlines
According to a July 26 research note from J.P. Morgan analysts, "all-in ticket prices for consumers haven't changed, but fare collection (which translates into revenue down the road) is now approximately 9 percent higher than at the same point last week. Each day FAA remains out of commission, cash collection is reflecting this windfall."
The analysts quantified that windfall in a few ways:
• Delta "could earn back its second-quarter Japan-related revenue hit [of $125 million] in under three weeks."
• "Each week of shutdown is expected to lift Delta quarterly earnings [per share] by $0.07, AMR's by $0.12 and UAL's by $0.15."
• "A shutdown lasting a single quarter would improve AMR results by $1.39. That is close to what AMR earned in the entire year of 2006."
Though an FAA shutdown is temporary, J.P. Morgan analysts cautioned that it could last a while and reminded investors of the nine-month tax holiday in 1996 and a three-month one a year later.
LaHood: Congress Can 'Avert The Worst'
In a posting this week to his official blog, Department of Transportation Secretary Ray LaHood detailed some of the other consequences and implored Congress to reach a deal. "Congress' inaction has forced the FAA to issue stop-work orders on dozens of control tower construction projects already underway," he wrote. "Even worse, $2.5 billion slated for additional airport construction is sitting idle rather than paying salaries." LaHood also noted that FAA was forced to furlough 4,000 workers.
"Of course, Congress still has time to avert the worst," LaHood continued. "On 20 separate occasions since 2007, it has passed short-term measures to keep the FAA up and running. This is a deeply flawed solution because it creates enormous uncertainty for states, airports and contractors, but at least it keeps American workers on the job site. There is absolutely no reason that Congress can't pass another temporary fix while it works out the details of a longer-term vision for the future of America's air transportation system."
The article originally was published in Business Travel News.