NEXTOR Seminar
FAA, Washington, DC
January 20, 2006
Impact of Infrastructure-Related Taxes
and Fees on the Cost of Air Travel
Amedeo R. Odoni (MIT)
Joakim Karlsson (Daniel Webster College)
Shiro Yamanaka (MIT)
Latest Reference
ƒ Yamanaka, S., J. Karlsson and A. Odoni,
“Aviation Infrastructure Taxes and Fees in
the United States and the European
Union”
ƒ TRB, Session 415, Global Airline Issues,
Tue., 1/24, 8:00 – 9:45
ƒ Transportation Research Record, to
appear
ƒ
http://web.mit.edu/TicketTax/
Infrastructure-Related Taxes and Fees
Background
ƒ Concerns about proliferation and increased cost
impact of ticket taxes and fees
à
à
à
à
Airlines everywhere
U.S. Congress/EU Commission
Media
Passengers
ƒ Objective: To quantify U.S. & EU taxes+fees
à
à
à
à
In absolute terms
Relative to ticket price
Changes over time
Distribution by fare levels, type of airline, distance
Infrastructure-Related Taxes and Fees
U.S. ticket taxes and fees
Tax/Fee
Symbol
Rate
Recipient
Federal ticket tax
FTT
7.5%
Federal segment tax
FST
$3.20
per segment
Passenger facility charge
PFC
$3 or $4.50
per enpl.
Collecting airport
Federal security service fee
FSSF
$2.50
per enpl.
TSA
Airport and Airway
Trust Fund
Notes:
ƒ Rates effective 2005
ƒ Only includes domestic taxes and fees added directly to the price of tickets
ƒ PFC and FSSF collection limited to first 2 enplanements per one-way trip
ƒ Rural airports exempt from some taxes
ƒ Special FST & FTT rules exist for Alaska and Hawaii
ƒ FSSF temporarily suspended from June 1 to September 30, 2003
Infrastructure-Related Taxes and Fees
U.S. taxes not included in study
Tax
Rate
Basis
International arrival tax
$14.10
Per arriving international passenger
International departure tax
$14.10
Per departing international passenger
Immigration user fee
$7.00
Per arriving international passenger
Customs user fee
$5.00
Per arriving international passenger
Animal and plant health inspection service
passenger fee
$4.95
Per arriving international passenger
Animal and plant health inspection service
aircraft fee
$70.00
Per arriving international aircraft
Jet fuel tax (commercial use)
4.3¢
Per gallon
Leaking underground storage tank fuel tax
0.1¢
Per gallon
Air carrier security fee
Confidential
Per carrier (based on CY 2000
screening costs)
Cargo waybill tax
6.25%
Domestic freight waybill
Frequent flyer tax
7.5%
Sale of the right to award frequent flyer
miles to third parties
Infrastructure-Related Taxes and Fees
Definitions
ƒ Total taxes and fees (U.S. example):
TTF = FTT + FST + FSSF + PFC
ƒ Effective tax rate:
E(TTF)
ETR =
x 100%
E(BF)
Infrastructure-Related Taxes and Fees
U.S. methodology
ƒ DB1A: DOT Origin and Destination Data Bank 1A Ticket
Dollar Value database
ƒ Includes all tickets ending with “0” (aka “10% ticket sample”)
ƒ 2Q04: 4.4 million records representing 10.5 million pax
ƒ Note: DB1A only reports total fare – individual taxes have to
be computed retroactively:
PFC = f(airports in itinerary)
FSSF = $2.50 x number of segments
FST = $3.20 x number of segments
FTT = 0.075 x BF
BF = Total – (FTT + PFC + FSSF + FST)
Infrastructure-Related Taxes and Fees
U.S. results
BF
TTF
FTT
FST
PFC
FSSF
ETR
$268.29
$44.25
$20.12
$8.06
$9.58
$6.50
16.5%
Base Fare
Total Taxes and
Fees
FTT
FST
PFC
Notes:
ƒ All results for 2Q 04
ƒ Includes round-trip tickets only
ƒ Average number of segments in each direction: 1.30
Infrastructure-Related Taxes and Fees
FSSF
Taxes impact low fares…
30%
ETR (2Q 04)
25%
20%
16.1%
15%
10%
Notes:
ƒ Results for 2Q 04
ƒ Includes round-trip and one-way tickets
5%
0%
$0
$200
$400
$600
$800
$1,000
$1,200
Base Fare
Infrastructure-Related Taxes and Fees
$1,400
$1,600
$1,800
$2,000
…and low-cost carriers
(but less than expected)
Carrier type
BF
TTF
FTT
FST
PFC
FSSF
ETR
Low-cost
$185.91
$34.37
$13.94
$6.99
$7.81
$5.63
18.5%
Legacy
$305.33
$47.00
$22.90
$7.99
$9.66
$6.45
15.4%
25.0%
ETR
20.0%
16.5%
15.0%
10.0%
Notes:
ƒ All results for 2Q 04
ƒ Includes round-trip tickets only
5.0%
0.0%
Legacy
LCC
Type of carrier
Infrastructure-Related Taxes and Fees
Taxes and O-D distance
18%
16.1%
16%
ETR (2Q 04)
14%
12%
10%
8%
6%
Notes:
ƒ Results for 2Q 04
ƒ Includes round-trip
and one-way tickets
4%
2%
0%
0
500
1,000
1,500
O-D Distance
Infrastructure-Related Taxes and Fees
2,000
2,500
3,000
Comparison: 1993-2004
Quarter
BF
TTF
FTT
FST
PFC
FSSF
ETR
2Q 1993
$444.89
$48.40
$44.49
-
$3.91
-
10.9%
2Q 2002
$291.74
$46.26
$21.88
$8.35
$9.07
$6.96
15.9%
2Q 2004
$268.29
$44.25
$20.12
$8.06
$9.58
$6.50
16.5%
ƒ Reported in 2004 dollars; round-trip fares only
ƒ In real terms:
à Average total taxes and fees per ticket: little change
à Base fare has decreased by $175 or 40% (!)
à There has been an 8% fare decline since 2002
ƒ With a constant base fare the ETR would have been
12.9% in 2004, ceteris paribus
Infrastructure-Related Taxes and Fees
Conclusions – U.S.
ƒ The effective tax rate on all domestic tickets
in the U.S. in 2004 was about 16.5% [“bad,
but not as bad…”]
ƒ Ticket taxes impact the lowest fares, but
impact on low-cost carriers is mitigated
ƒ Effective tax rates are relatively insensitive to
O-D distance traveled
ƒ Tax rate increased from 11% to 16.5% over
last ten years, mostly due to decline in fares
Infrastructure-Related Taxes and Fees
1. EU results [Preliminary]
Case
BF
TTF
BF+TTF
ETR
EU-15 Total
$274.24
$34.17
$308.41
12.5%
EU-15 Roundtrip (81%)
$298.82
$38.68
$337.50
12.9%
EU-15 One-way (19%)
$169.64
$14.97
$184.61
8.8%
U.S. Roundtrip (2Q 04)
$268.29
$44.25
$312.54
16.5%
Note: Results for EU-15 nations from January 13-14, 2004 sample of 335,000 tickets
Infrastructure-Related Taxes and Fees
ETR by country of origin [Prelim’ry]
Luxembourg
EU-15 average = 12.5%
Spain
Italy
Portugal
France
Germany
Austria
Belgium
Denmark
Netherlands
Sweden
Finland
Greece
Ireland
U. K.
0%
5%
10%
15%
ETR
Infrastructure-Related Taxes and Fees
20%
25%
30%
Rough US-EU Comparison
[Preliminary]
ƒ An important difference between the US and
the EU is that in the EU airlines pay directly
for Air Navigation Services (i.e., ATM), not
through taxes and fees on passenger tickets
ƒ Based on data provided by LH and SAS, ANS
fees amount to roughly 7% of average base
fare
ƒ Thus, ETR for EU-15 seems to be about 19%
(=12%+7%), slightly higher than 16.5% for US
Infrastructure-Related Taxes and Fees
2. The Larger Question
ƒ What is the total cost of aviation
infrastructure (capital expenses,
operations, and security of airports and
ATC) as a % of the total amount spent
by passengers and by freight shippers
for air transportation?
Infrastructure-Related Taxes and Fees
The Larger Question [2]
ƒ Ongoing project with ATA cooperation
ƒ Comprehensive template prepared
ƒ Includes international and domestic
taxes and fees, fees paid directly to
airports, cost of airline financed
facilities
ƒ Template distributed to ATA airlines
Infrastructure-Related Taxes and Fees
Guesstimate
ƒ In 2004, approximately 20 ¢ out of every $
spent by air transportation consumers for
domestic or international travel (passenger or
freight) on US airlines was used to cover
infrastructure costs
ƒ Compare: labor ~30 ¢; fuel ~17 ¢; aircraft
ownership ~8 ¢
ƒ “Stay tuned” for more definitive estimates
Infrastructure-Related Taxes and Fees
Overall Conclusion
ƒ Whether paid directly (in the form of taxes and
fees) or indirectly (by the airline), the total cost
of infrastructure is the second or third highest
component of cost experienced by aviation
consumers (behind labor, comparable to fuel).
ƒ It is essential to contain, as much as possible,
infrastructure costs, in the same way that
carriers attempt to contain all the other cost
components.
Infrastructure-Related Taxes and Fees
Questions?
Infrastructure-Related Taxes and Fees
Distribution of ETR
16%
14%
Share of pax
12%
10%
8%
6%
4%
2%
0%
More
40%
38%
36%
34%
32%
30%
28%
26%
Infrastructure-Related Taxes and Fees
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
ETR
EU challenges
ƒ No database equivalent to U.S. DB1A
ƒ Limited GDS sample for EU-15:
à 335,000 intra-EU tickets collected
January 13-14, 2004
à Ongoing analysis: 15 more days of 2004
ƒ Does not include LCCs or charter carriers
ƒ Does not cover air navigation service fees
ƒ Results are not directly comparable to U.S.
Infrastructure-Related Taxes and Fees
EU ticket taxes and fees
AT
ZY
BE
EX
FN
IT
VT
Infrastructure-Related Taxes and Fees
DK
ZO
LU
YJ
DQ
FI
QU
WL
YF
ZX
CJ
NL
RN
VV
FR
QW
QX
UI
PT
YP
DE
RA
RD
ES
QV
RS
GR
WP
WQ
XS
YA
BC
UP
GB
UB
YO