The US ticket tax debate has turned into something of a pretty pickle for the Seven Sisters. The campaign by seven major US airlines, officially known as the Coalition for Fair FAA Funding, to replace the current tax with a user fee has backfired so spectacularly that they now find themselves facing a new system that is expected to cost them an extra US$3 billion over the next five years.

Gerald Greenwald, chairman and chief executive officer at United Airlines, admits that he keeps shaking his head and saying: 'I don't get it: I don't even begin to get it.' Greenwald is not the only one shaking his head, but he is almost alone among the Seven to admit publicly that their campaign has gone awry.

Last year, the majors hatched a plot to get rid of the 10 per cent, flat rate ticket tax and replace it with a user fee system which they claimed would more fairly distribute payments among airlines for the air traffic control services they use. Unfortunately for them, a report on the proposal by the US congressional watchdog, the General Accounting Office, highlighted another reason why the plan might also have been attractive to the nation's seven largest airlines.

Collectively, their own costs would have decreased by nearly $600 million a year, said the GAO, while costs to the low-fare and small airlines would have increased by nearly $550 million. In particular, Southwest Airlines faced an annual hike of $205 million, while the two airlines which stood to gain most were American Airlines and Delta Air Lines, with each set to have been better off by more than $100 million.

Such a major shift in payments would have had 'substantial competitive impacts,' said the GAO and, not surprisingly, the proposal was all but crushed under a weight of scrutiny and heated debate.

What has happened instead over the past year, as the airlines have squabbled over who should pay which taxes, is that Congress and the White House have identified an easy target in their search for ways to balance the federal budget and also reduce net taxes by some $90 billion.

The financially sound majors started to resemble a goose that could spare a golden egg in return for a deal that would still go some way towards suppressing low-fare competition and putting in place the beginnings of a user-fee system. Having invested so much effort and money in their campaign to obtain a 'fairer' user fee, it was difficult for the Sisters to back away from this somewhat unattractive offer.

Accepting the deal means that more than 60 per cent of US tax hikes proposed over the next five years will be raised from the country's airline industry. Somewhat belatedly, airline employees held a rally on Capitol Hill to implore Congress to 'axe the tax', but few seemed to understand how their industry had ended up in this tangle.

The real irony is that if their original plan had been accepted, the majors would have reaped some $3 billion over five years. Instead, they now have to fork out an extra $3 billion, mainly through international taxes that will climb from $6 to $24 per round trip. Yet some of the majors are still claiming a half victory in a campaign that has swung the pendulum $6 billion away from the original goal. 'It is a substantial compromise,' agrees Northwest Airlines. 'We are not pleased about the new international fees. But we are happy with the general direction of the agreement.'

What the majors are 'happy' about is the joint House-Senate conference committee proposal, to be in place from 1 October, that would ultimately reduce the ticket tax over the next five years from 10 per cent to 7.5 per cent and phase in a $3 head tax for each domestic flight segment. This is what the majors interpret as a movement in the right direction towards a user-fee system. It cannot, however, have taken long for them also to calculate that the new system will cost Southwest, which operates on an almost exclusive point-to-point basis and offers some of the lowest fares available in the US, some $450 million over the next six years. And so fearful are the Sisters of the havoc that Southwest can wreak on their domestic ticket prices that they are prepared to take a $3 billion swallow and say Amen.

'This hurts the whole industry,' says Southwest Airlines. 'But they [the majors] don't seem to mind getting hurt so long as we get hurt more. It is a fundamental fight. A head tax will be devastating to the low-cost industry. In the end, it will be worse for everybody and it will drive up costs to the consumer.'

Certainly, the Sisters have not done their international passengers any favours. Presumably, the $18 bill for each overseas round trip will be forwarded to the customer. By the Coalition's own reckoning, this could be sufficient to force a million people annually to ditch their foreign travel plans. Also, for the first time, frequent flyer miles awarded through credit cards and similar systems will be taxed.

The majors are now pinning their hopes on US ATC costs ultimately being reduced if the system is privatised. But they admit that there is a 'way to go' before that happens, and in the meantime the current proposal will be law for the next five years.

Greenwald, at least, is outspoken about the messy corner that the majors have backed themselves into. 'Two industries are being singled out to have their taxes raised - tobacco and the airline industry. The last I knew, we were not a disease,' he says. 'Yes, we are fighting each other, but what has that got to do with raising taxes? There is no redeeming feature that can relate to appropriate policy here.' But Greenwald can see how it happened and summarises the reason bluntly: 'Our industry is a lousy bunch of lobbyists,' he says. Publicly or privately, few could argue with that.

Karen Walker

Source: Airline Business