Fares on Discount Airlines Due to Rise

Airline passengers should look for fares to rise, particularly among discount carriers, as a result of a new tax measure that culminates two years of political haggling and millions of dollars in airline industry lobbying.

The tax bill reduces the existing flat 10% ticket tax to 9% next year, gradually lowering it to 7.5% by fiscal year 2002. At the same time, however, it imposes a $1 fee on passengers for each segment of their trip, with the fee eventually rising to $3 per segment. That hurts discount carriers, like Southwest Airlines, that fly shorter distances with more frequent stops.

The tax measure is awaiting President Clinton’s signature.

“The low-fare airlines have been disproportionately affected by this blow,” said Ginger Hardage, a spokeswoman for Dallas-based Southwest. She added that Southwest passengers will pay an extra $45 million to $50 million the first year, rising to $135 million in 2002.

“It’s inevitable that fares will be increasing,” she said. “The ultimate loser will be the American consumer.”

Since the airlines were deregulated in 1978, they have been free to adjust fares. For instance, while Southwest’s flight from Baltimore to Chicago is only $89, American charges twice that much to fly the same distance from Washington National to Chicago. The flat tax for the Southwest ticket is $8.90 while American’s passengers pay $13.90.

The 10% ticket tax has been used to help offset the costs of the nation’s air traffic control system. But larger carriers insist that the flat tax does not reflect usage of the air control system since short-haul carriers, like Southwest, use it as often or more but pay less taxes because of their lower ticket prices.

“We are pleased that [the tax bill] moves in the direction of recognizing the fact that the price of a fare has nothing to do with the cost of providing service,” said Tim Smith, a spokesman for American Airlines in Fort Worth.

“The cost of the system is the same,” he said. “It’s all about funding the Federal Aviation Administration and paying for the service it provides.”

Overall, however, the tax bill will boost the industry’s taxes from $30 billion to $33 billion by 2002.

Airlines will be unable to pass the entire cost of the tax on to consumers, analysts said. Air fare battles and tough domestic competition will make it difficult to raise leisure ticket prices substantially, although costs to business travelers may be more likely to rise.

“At the end of the day, the tax will mean higher ticket prices,” said Mark Ray, a senior investment officer and airline analyst with John Hancock Mutual Life insurance Co. in Boston.

But larger carriers, like United and Delta, will at least reap some benefit on the domestic side to offset the impact of the higher international fee. For instance, the current tax on a $904 round trip on American Airlines from San Jose to Washington via Chicago is $90.40. Under the first year, the tax on the same fare will drop to $85 and ultimately to $80.