Tax increase would mean higher fares Proposal seen hurting smaller carriers

THE BALTIMORE SUN

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 percent ticket tax to 9 percent next year, gradually lowering it to 7.5 percent 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, who fly shorter distances with more frequent stops.

The tax measure is part of the legislation to balance the budget and cut taxes that passed the House yesterday and is expected to be approved by the Senate today.

"The low-fare airlines have been disproportionately affected by this blow," said Ginger Hardage, a spokeswoman for Dallas-based Southwest Airlines. 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 charge whatever they pleased. 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 passengers pay $13.90.

The 10 percent 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, Texas.

"The cost of 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. Major airlines that have large international operations will see higher costs since the bill includes a new $12 departure fee and $12 arrival fee on international flights starting Oct. 1, effectively quadrupling the current $6 international departure fee.

Airlines will be not be able 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, Calif. 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.

The tax bill has produced high- ly visible public relations campaign among the airlines. Travelers calling to make reservations got recorded messages urging them to call their congressmen. To entice its employees to political rallies, American offered free airline tickets. In characteristically colorful ads, Southwest depicted the Big Seven with jets lined up like horses in a race, different colored bandannas around their noses, with the caption, "Skyway Robbery."

But in the end, Congress is bowing to the Big Seven.

"It was the big guys ganging up on the little guys," said O. James Lighthizer, lobbyist for Southwest and former Maryland transportation secretary. "They used their muscle in Washington."

Most of Maryland's congressional delegation had opposed the final version of the airline tax. Southwest Airlines operates 46 flights at day at Baltimore-Washington International Airport and has been credited with sparking much of BWI's passenger growth in recent years. The airport's future could hinge on

Southwest's expansion plans.

Hardage said the airline could slow its expansion plans because of the new tax. But it also might launch more long-haul flights, giving big carriers more competition. "We're reviewing our options," she said.

At the very least, the new tax is likely to keep out some new small carriers, analysts say. "It will establish a little higher threshold for them to exist," Ray said.

Pub Date: 7/31/97

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