Commercial Aviation
Consumers Could Benefit from Better Information about Airline-Imposed Fees and Refundability of Government-Imposed Taxes and Fees Gao ID: GAO-10-785 July 14, 2010To supplement fare revenues, airlines are increasingly charging fees for optional passenger services, notably for checked baggage, for which separate charges did not previously exist. While air fares are subject to a 7.5 percent excise tax that funds the Airport and Airway Trust Fund, which helps fund the Federal Aviation Administration (FAA), many new optional fees are not. As requested, this report addresses (1) the nature, relationship to cost, and disclosure of airline fees, (2) the potential impact of such fees on the Airport and Airway Trust Fund, (3) checked and mishandled baggage issues; and (4) the process, if any, for refunding government-imposed taxes and fees when passengers do not use nonrefundable tickets. To perform this work, GAO analyzed financial data; reviewed applicable laws and regulations; and interviewed airline and government officials.
Airlines have imposed a variety of fees on a range of optional services, such as checked and carry-on bags; meals; blankets; early boarding; and seat selection. According to airline officials, the fees are based on a combination of factors, including the cost of providing the service, competition, and consumer demand. The fees have supplemented airline revenues, providing at least $3 billion in 2009--a small but growing amount of total revenues. However, information about the fees is not fully disclosed through all ticket distribution channels used by consumers, making it difficult for them to compare the total cost of flights offered by different carriers. The Department of Transportation (DOT) does not currently require disclosure of airline-imposed optional fees, apart from those for checked bags, but recently issued a Notice of Proposed Rulemaking (NPRM) considering different forms of disclosure of such fees. Meanwhile, a system is being tested to fully disclose all of the fees to consumers searching for fares, but airlines are not likely to disclose them unless compelled to do so. Airlines' increasing reliance on fees reduces the proportion of their total revenue that is taxed to fund FAA. The Internal Revenue Service (IRS) has determined that many of these fees, including checked baggage fees, are not related to the "transportation of a person"--the basis for imposing the 7.5 percent excise tax. According to GAO's calculations, the checked baggage fee (the largest and only measurable untaxed fee) if taxed in fiscal year 2009 would have accounted for about 2 percent of total Trust Fund revenues but is likely to grow in future years given recent trends. Since DOT guidance requires airlines to report separately only revenues from baggage fees and reservation change and cancellation fees, GAO was unable to estimate potential collections from other untaxed fees. Since airlines first imposed checked baggage fees, the number of checked bags per passenger has declined, contributing to a decline in the rate of mishandled bags. Despite the introduction of fees, airlines have not substantially changed their baggage service or compensation methods. Checked baggage fees have also led to greater amounts of carry-on baggage, resulting in greater competition for limited overhead storage space. According to IRS, aviation excise taxes on unused nonrefundable tickets are not refundable, but if an airline refunds the ticket, a proportionate amount of tax may be refunded. In contrast, consumers with unused nonrefundable tickets with expired or lost value are entitled to a full refund of the September 11th Security Fee, but few consumers request a refund because airlines are not required to inform consumers of this. According to the Department of Homeland Security (DHS), applicable statutes and regulations authorize the refund of its customs and immigration inspection fees if services aren't rendered, but DHS has not issued any policy or guidance that makes this clear. The Department of Agriculture's (USDA) statutes and regulations are unclear as to whether its fee is refundableon unused nonrefundable tickets. If Congress wants to tax currently untaxed airline fees, it would need to amend the Internal Revenue Code. GAO recommends that DOT require airlines to consistently disclose optional fees and notify passengers of any refundable government fees; USDA determine whether its fee is refundable on unused nonrefundable tickets; and DHS issue guidance on the refundability of its fees. USDA and DHS agreed with the recommendations and DOT did not comment on them.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Gerald L. Dillingham Team: Government Accountability Office: Physical Infrastructure Phone: (202) 512-4803GAO-10-785, Commercial Aviation: Consumers Could Benefit from Better Information about Airline-Imposed Fees and Refundability of Government-Imposed Taxes and Fees
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
July 2010:
Commercial Aviation:
Consumers Could Benefit from Better Information about Airline-Imposed
Fees and Refundability of Government-Imposed Taxes and Fees:
GAO-10-785:
GAO Highlights:
Highlights of GAO-10-785, a report to congressional requesters.
Why GAO Did This Study:
To supplement fare revenues, airlines are increasingly charging fees
for optional passenger services, notably for checked baggage, for
which separate charges did not previously exist. While air fares are
subject to a 7.5 percent excise tax that funds the Airport and Airway
Trust Fund, which helps fund the Federal Aviation Administration
(FAA), many new optional fees are not.
As requested, this report addresses (1) the nature, relationship to
cost, and disclosure of airline fees, (2) the potential impact of such
fees on the Airport and Airway Trust Fund, (3) checked and mishandled
baggage issues; and (4) the process, if any, for refunding government-
imposed taxes and fees when passengers do not use nonrefundable
tickets. To perform this work, GAO analyzed financial data; reviewed
applicable laws and regulations; and interviewed airline and
government officials.
What GAO Found:
Airlines have imposed a variety of fees on a range of optional
services, such as checked and carry-on bags; meals; blankets; early
boarding; and seat selection. According to airline officials, the fees
are based on a combination of factors, including the cost of providing
the service, competition, and consumer demand. The fees have
supplemented airline revenues, providing at least $3 billion in 2009”a
small but growing amount of total revenues. However, information about
the fees is not fully disclosed through all ticket distribution
channels used by consumers, making it difficult for them to compare
the total cost of flights offered by different carriers. The
Department of Transportation (DOT) does not currently require
disclosure of airline-imposed optional fees, apart from those for
checked bags, but recently issued a Notice of Proposed Rulemaking
(NPRM) considering different forms of disclosure of such fees.
Meanwhile, a system is being tested to fully disclose all of the fees
to consumers searching for fares, but airlines are not likely to
disclose them unless compelled to do so.
Airlines‘ increasing reliance on fees reduces the proportion of their
total revenue that is taxed to fund FAA. The Internal Revenue Service
(IRS) has determined that many of these fees, including checked
baggage fees, are not related to the ’transportation of a person“”the
basis for imposing the 7.5 percent excise tax. According to GAO‘s
calculations, the checked baggage fee (the largest and only measurable
untaxed fee) if taxed in fiscal year 2009 would have accounted for
about 2 percent of total Trust Fund revenues but is likely to grow in
future years given recent trends. Since DOT guidance requires airlines
to report separately only revenues from baggage fees and reservation
change and cancellation fees, GAO was unable to estimate potential
collections from other untaxed fees.
Since airlines first imposed checked baggage fees, the number of
checked bags per passenger has declined, contributing to a decline in
the rate of mishandled bags. Despite the introduction of fees,
airlines have not substantially changed their baggage service or
compensation methods. Checked baggage fees have also led to greater
amounts of carry-on baggage, resulting in greater competition for
limited overhead storage space.
According to IRS, aviation excise taxes on unused nonrefundable
tickets are not refundable, but if an airline refunds the ticket, a
proportionate amount of tax may be refunded. In contrast, consumers
with unused nonrefundable tickets with expired or lost value are
entitled to a full refund of the September 11th Security Fee, but few
consumers request a refund because airlines are not required to inform
consumers of this. According to the Department of Homeland Security
(DHS), applicable statutes and regulations authorize the refund of its
customs and immigration inspection fees if services aren‘t rendered,
but DHS has not issued any policy or guidance that makes this clear.
The Department of Agriculture‘s (USDA) statutes and regulations are
unclear as to whether its fee is refundable on unused nonrefundable
tickets.
What GAO Recommends:
If Congress wants to tax currently untaxed airline fees, it would need
to amend the Internal Revenue Code. GAO recommends that DOT require
airlines to consistently disclose optional fees and notify passengers
of any refundable government fees; USDA determine whether its fee is
refundable on unused nonrefundable tickets; and DHS issue guidance on
the refundability of its fees. USDA and DHS agreed with the
recommendations and DOT did not comment on them.
View [hyperlink, http://www.gao.gov/products/GAO-10-785] or key
components. For more information, contact Gerald Dillingham at (202)
512-2834 or dillinghamg@gao.gov.
[End of section]
Contents:
Letter:
Background:
New Fees for Optional Services Are Based on Cost and Other Factors and
Are Not Always Fully Disclosed to Passengers at the Time of Booking:
Airlines' Increasing Reliance on Fees Reduces the Proportion of Total
Revenue That Is Taxed to Fund FAA:
Imposition of Checked Baggage Fees Has Contributed to Decrease in the
Rate of Mishandled Bags and More Carry-on Bags:
Refundability of Government-Imposed Taxes and Fees Is Not Always Clear
and Communication of Refund Eligibility to the Airlines and Consumers
Is Lacking:
Conclusions:
Matter for Congressional Consideration:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Sample of Airline-Imposed Fees for Optional Services:
Appendix III: Comments from the U.S. Department of Homeland Security:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Airline-Imposed Fees and Surcharges on Domestic Air
Transportation Subject to the 7.5 Percent Excise Tax According to IRS:
Table 2: Government-Imposed Taxes and Fees and Amounts Paid by
Passengers and Legal Basis for Their Refundability on Unused
Nonrefundable Tickets:
Table 3: Domestic Checked Baggage Fees of 17 U.S. Airlines as of July
1, 2010:
Table 4: Other Airline-Imposed Fees of 17 Airlines as of July 1, 2010:
Figures:
Figure 1: U.S. Passenger Airlines Average 3rd Quarter Domestic Fares
and Domestic Passengers, 2000-2009 (2010 dollars):
Figure 2: Select Fees Imposed by U.S. Passenger Airlines and Example
Locations Where Offered for Purchase:
Figure 3: Distribution Path to Agency Accounts of Passenger-Paid
Government-Imposed Taxes and Fees Collected by Airlines:
Figure 4: Total Collections of Baggage Fees and Reservation Change and
Cancellation Fees by U.S. Airlines, 2000-2009 (2010 dollars):
Figure 5: Reported Rate of Mishandled Bags per 1,000 Passengers for
Reporting U.S. Airlines, 2000-2009:
Abbreviations:
ARC: Airlines Reporting Corporation:
ATPCO: Airline Tariff Publishing Company:
BTS: Bureau of Transportation Statistics:
CBP: Customs and Border Protection:
DHS: Department of Homeland Security:
DOT: Department of Transportation:
EMD: Electronic Miscellaneous Document:
FAA: Federal Aviation Administration:
GDS: Global Distribution System:
IATA: International Air Transport Association:
ICE: Immigration and Customs Enforcement:
IRS: Internal Revenue Service:
TSA: Transportation Security Administration:
USDA: U.S. Department of Agriculture:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
July 14, 2010:
The Honorable James L. Oberstar:
Chairman:
Committee on Transportation and Infrastructure:
House of Representatives:
The Honorable Jerry F. Costello:
Chairman:
Subcommittee on Aviation:
Committee on Transportation and Infrastructure:
House of Representatives:
The Honorable Bill Pascrell, Jr.
House of Representatives:
The U.S. passenger airline industry has been under tremendous
financial pressure over the last decade, first from security threats
that kept passengers away, then volatile fuel costs, and more recently
falling demand due to an economic recession. In response, passenger
airlines have adapted their business models. One significant change
since 2008 is the introduction of fees for a variety of passenger
services, such as a first or a second checked bag, for which separate
charges did not previously exist. These fees represent an important
source of revenues to U.S. passenger airlines, which collectively
posted operating losses of $4.4 billion during calendar years 2008 and
2009.[Footnote 1] During that same period, airlines reported
approximately $7.9 billion in revenues from baggage fees and
reservation change and cancellation fees--the two largest sources of
fee revenues. However, the revenues from baggage fees, along with many
other fees, are not subject to the 7.5 percent excise tax on amounts
paid for domestic air transportation, the revenue from which is
deposited in the Airport and Airway Trust Fund and which partially
funds the Federal Aviation Administration (FAA), including the
operation and development of the air traffic control system, among
other things. In addition, the payment of separate fees by passengers,
especially for checked bags, raises questions about whether the
quality of checked baggage service has improved since baggage fees
were introduced. The federal government also imposes various taxes and
fees on passengers to help fund the costs of security, immigration,
customs, and agricultural inspections, among other things. However,
the refundability of these fees is not always clear or communicated to
airlines or consumers.
In this context, you asked us to address the following questions: (1)
What is the nature and scope of the fees airlines charge to
passengers, are the fees commensurate with the costs of the services
provided, and are the fees transparent to passengers? (2) What is the
potential impact of such fees on revenues available to the Airport and
Airway Trust Fund? (3) What changes have taken place in the numbers of
checked and mishandled bags, amount of compensation paid to passengers
for mishandled bags, and other consumer issues since airlines began
charging more widely for checked baggage? (4) What, if any, is the
process for refunding government-imposed taxes and fees to passengers
who do not use their nonrefundable tickets?
To address these objectives, we analyzed Department of Transportation
(DOT) financial and operating data; reviewed applicable laws,
regulations, and past studies; and interviewed officials from the
airline industry, trade associations, consumer groups, global
distribution system (GDS) companies, DOT, the Department of Homeland
Security (DHS), U.S. Department of Agriculture (DHS), and the Internal
Revenue Service (IRS). Specifically, to identify the nature and scope
of airline-imposed fees, we developed a list of fees based on research
of airline and travel Web Sites and corroborated the data in
interviews with officials from 17 airlines.[Footnote 2] To assess the
potential impact of such fees on the Airport and Airway Trust Fund, we
reviewed existing tax laws and regulations. We spoke with IRS
officials about the applicability of the 7.5 percent excise tax
imposed on amounts paid for the domestic air transportation of persons
to the airline-imposed fees we identified. To examine issues with
checked baggage, we reviewed data reported by airlines to the DOT's
Bureau of Transportation Statistics (BTS), interviewed officials from
BTS and other DOT offices, airlines and trade associations, and other
interest groups about compensation for mishandled baggage. To identify
mechanisms for returning government-imposed fees and taxes, we
reviewed relevant agencies' applicable statutes, regulations, and
guidance and interviewed officials from IRS, DHS's Customs and Border
Protection (CBP), Immigration and Customs Enforcement (ICE), and
Transportation Security Administration (TSA); and the U.S. Department
of Agriculture (USDA) responsible for federal taxes and fees applied
to airline tickets. We conducted this performance audit from October
2009 through July 2010 in accordance with generally accepted
government auditing standards. Those standards require that we plan
and perform the audit to obtain sufficient, appropriate evidence to
provide a reasonable basis for our findings and conclusions based on
our audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives. See appendix I for more information on our scope and
methodology.
Background:
In recent years, airlines have faced challenging times as fuel costs
increased followed by a steep decline in passenger demand due to the
economic downturn. The U.S. passenger airline industry[Footnote 3]
incurred nearly $4.4 billion in operating losses during calendar years
2008 and 2009. Volatile jet fuel prices--the airlines' biggest
operating expense in 2008--was the chief contributor to airline losses
in 2008. Lower passenger traffic measured as enplanements, due to the
economic downturn in 2008 and 2009, has also put pressure on many
airlines' operating revenues and average 3rd quarter domestic airfares
fell in 2009. See figure 1 for average 3rd quarter domestic airfares
and domestic passenger traffic from 2000 through 2009.
Figure 1: U.S. Passenger Airlines Average 3rd Quarter Domestic Fares
and Domestic Passengers, 2000-2009 (2010 dollars):
[Refer to PDF for image: multiple line graph]
Year: 2000;
Average 3rd Quarter Domestic Airfare: $421;
Millions of Domestic Passengers: 600.
Year: 2001;
Average 3rd Quarter Domestic Airfare: $370;
Millions of Domestic Passengers: 560.
Year: 2002;
Average 3rd Quarter Domestic Airfare: $365;
Millions of Domestic Passengers: 552.
Year: 2003;
Average 3rd Quarter Domestic Airfare: $368;
Millions of Domestic Passengers: 583.
Year: 2004;
Average 3rd Quarter Domestic Airfare: $339;
Millions of Domestic Passengers: 630.
Year: 2005;
Average 3rd Quarter Domestic Airfare: $339;
Millions of Domestic Passengers: 657.
Year: 2006;
Average 3rd Quarter Domestic Airfare: $354;
Millions of Domestic Passengers: 658.
Year: 2007;
Average 3rd Quarter Domestic Airfare: $341;
Millions of Domestic Passengers: 679.
Year: 2008;
Average 3rd Quarter Domestic Airfare: $365;
Millions of Domestic Passengers: 652.
Year: 2009;
Average 3rd Quarter Domestic Airfare: $309;
Millions of Domestic Passengers: 618.
Source: GAO analysis of DOT data.
[End of figure]
In response to these economic challenges, airlines began in 2008 to
charge for many services for which separate charges did not previously
exist.[Footnote 4] These services include fees for a first or second
checked bag, early boarding, seat selection and meals. Charges for
other services, such as unaccompanied minors, reservation changes or
cancellations, and oversized or overweight baggage, have existed in
the airline industry for many years. In addition, other services that
are assessed fees, such as for Wi-Fi access, are new offerings.
Revenues from fees for all these services have supplemented airlines'
fare revenues.
Airlines provide airfare information to the Airline Tariff Publishing
Company (ATPCO), the tariff publishing house owned by a consortium of
airlines, which, in turn, provides the fare information to GDSs
[Footnote 5] that package this information for use by online (for
example, Expedia and Travelocity) and brick-and-mortar travel agencies
and airline Web Sites. Once an airline ticket is purchased, the
financial transaction is reconciled by the Airlines Reporting
Corporation (ARC), another company owned by an airline consortium,
which offers payment and settlement services for approximately 170
passenger airline and rail companies worldwide. However, while airfare
information and some airline-specific information about fees for
optional services is available on airline Web Sites and through GDSs,
information on airlines' fees for the majority of optional services is
available only through the airlines' Web Sites at booking and check-
in, at their airport kiosks, and on board. Travel agencies, which sell
the majority of airline tickets in the U.S., can provide fee
information to customers only if the agents first search airline Web
Sites or contact airline telephone reservation agents. Because
airlines differ in how they impose fees for purchase of services,
figure 2 depicts selected services and at what point they can
currently be paid--during booking, at the airport, and onboard a
flight. Fees for services can also be paid at other points besides
those shown in the figure; for example, a passenger can often pay
checked baggage fees when checking in online before departure.
Figure 2: Select Fees Imposed by U.S. Passenger Airlines and Example
Locations Where Offered for Purchase:
[Refer to PDF for image: illustration and accompanying information]
Booking:
* Ticket change fee;
* Ticket cancellation fee;
* Booking fee (phone/in person);
* Seat selection fee.
Counter:
* Unaccompanied minor fee;
* Pet in cabin;
Fees for:
* Checked bags;
* Oversized bags;
* Overweight bags;
Fees for:
* Early boarding;
* Upgrading seat selection.
On board:
* Blanket and pillow sets;
* Inflight food and beverage;
* Entertainment;
* Wireless internet access.
Source: GAO.
[End of figure]
DOT's Office of Aviation Enforcement and Proceedings (OAEP) enforces
airline economic regulations, including advertising requirements
related to the disclosure of the full fare to be paid by the consumer.
[Footnote 6] DOT requires government taxes imposed on an ad valorem
(percentage) basis to be included in the advertised fare as well as
those airline-imposed fees that are required to purchase a ticket,
such as fuel surcharges and peak travel day charges.[Footnote 7] In
addition, in May 2008, DOT issued guidance which requires disclosure
of fees and associated policies for checked baggage.[Footnote 8]
Additional DOT guidance also requires that U.S. passenger airlines
report revenues from certain fees as part of their Form 41 quarterly
financial filings to BTS. In accordance with this guidance, U.S.
airlines are required to separately report revenues from baggage fees
and reservation change and cancellation fees but not other optional
service fees. DOT also prescribes regulations for U.S. airlines
regarding the reporting of and compensation for passengers who have
had mishandled baggage, for instance, baggage that is lost, damaged,
or delayed. Major U.S. passenger airlines are required to report
monthly to DOT the number of mishandled baggage reports filed with the
carrier and DOT then publishes the data.[Footnote 9] DOT specifies
that an airline cannot limit its liability for damages due to
disappearance of, damage, or delay to lost baggage, to an amount less
than $3,300 per passenger.[Footnote 10] Compensation is subject to
negotiation between the passenger and the responsible airline. TSA,
which conducts security screening of checked bags, also submits
monthly reports to DOT for mishandled baggage claims filed by
passengers against TSA.[Footnote 11] TSA reviews complaints to
determine validity and compensation if TSA liability is determined.
The Internal Revenue Code imposes a 7.5 percent tax on amounts paid
for the taxable transportation of a person for domestic air travel.
[Footnote 12] Treasury regulations and IRS guidance set general
parameters for which airline fees are subject to the 7.5 percent
excise tax. There is also a tax of $3.70 imposed on amounts paid for
each segment of domestic travel,[Footnote 13] and, if applicable, a
tax on the use of international air travel facilities (also known as
the international arrival/departure tax) of $16.10, for international
travel that begins or ends in the United States.[Footnote 14] Excise
taxes collected by airlines are remitted to the IRS and deposited into
the Airport and Airway Trust Fund, from which Congress funds FAA
programs. FAA operates the air traffic control system, provides grants
to airports, and oversees the safety of the industry. In addition to
these excise taxes, the government imposes several fees on air travel
that are collected by U.S. and foreign airlines and remitted to
various other government departments and agencies. For example, TSA
imposes the September 11TH Security fee of $2.50 per enplanement, not
to exceed $10 per roundtrip, for aviation security inspection
services.[Footnote 15] Other government-imposed fees are remitted to
agencies including CBP and USDA to help pay for customs, immigration,
and agricultural inspection activities respectively.[Footnote 16] See
figure 3 for the distribution to agency accounts of passenger-paid
government-imposed taxes and fees collected by U.S. and foreign
airlines.
Figure 3: Distribution Path to Agency Accounts of Passenger-Paid
Government-Imposed Taxes and Fees Collected by Airlines:
[Refer to PDF for image: illustration]
Government-imposed taxes and fees:
(A) Percentage tax (7.5 percent);
(B) Domestic segment tax;
(C) International arrival/departure tax;
(D) Immigration air passenger inspection fee;
(E) Customs air passenger inspection fee;
(F) Agriculture air passenger inspection fee;
(G) September 11th security fee.
Taxes and fee are paid to the Airlines;
Airlines forward the taxes and fees to Treasury;
From Treasury to the following destinations:
(A), (B), (C): to AATF.
(D), (E) to: DHS/CBP; the (D) to: DHS/ICE;
(F) to: USDA (also to DHS/CBP);
(G) to: DHS/TSA.
Source: GAO.
[End of figure]
New Fees for Optional Services Are Based on Cost and Other Factors and
Are Not Always Fully Disclosed to Passengers at the Time of Booking:
Airlines Have Introduced Fees for Services That They Previously
Provided at No Charge as Well as for New Services:
Increasingly, airlines are charging fees for a number of optional
services for which separate fees did not previously exist. For
example, before 2008, airlines' baggage fees generally extended only
to passengers who checked a third bag or for overweight or oversized
bags. However, since 2008, most airlines have implemented fees for
both a first and a second checked bag. Currently, 15 of the 17
airlines we contacted charge $15 to $35 for the first checked bag and
16 of the 17 impose a fee of between $20 and $35 for a second checked
bag. One airline recently stated that it will begin to charge up to
$45 for a carry-on bag that does not fit underneath the seat.
Collection of fees for reservation changes and cancellations, which
range from $50 to $150, has grown since 2007. In addition, fees for
services that were previously included in the fare paid have also been
introduced. These services include meals costing between $2 and $10,
telephone booking fees ranging from $5 to $25; and sleep sets, which
go for $5 to $12, that include a pillow, blanket, sleeping mask, and
earplugs. Appendix II includes information on a sample of optional
service fees imposed by 17 airlines as of July 1, 2010.
Airlines are also charging for new services not previously available.
For example, some airlines now offer in-flight wireless Internet
access, one-time lounge access, and multiplying frequent flyer miles
earned for a flight, for a fee. Some airlines are also selling service
packages for annual subscription, for example, the option for
passengers to pay an annual fee for checking up to two bags per flight
as often as they fly with that airline within a year or for priority
check-in and security screening. These services can also be purchased
in combination and on a per-flight basis with fee amounts varying. For
example, one airline offers priority boarding and security screening,
free checked baggage allowance, extra seat legroom, and free alcoholic
beverages for one fee. Airlines also provide a selection of fares that
include specific optional services and benefits depending on the fare
with higher fares including more services and benefits. Airlines are
also offering third-party services such as hotel and car rental
reservations and baggage pick-up and delivery, which can be purchased
through the airline's Web Site.
Not all passengers are assessed service fees equally. For example,
airlines waive some of these fees for elite members of their frequent
flyer programs.[Footnote 17] In addition, 13 of the 17 airlines we
contacted do not charge these fees for their highest-paying
passengers, such as those who hold first or business class tickets or
full-fare economy class tickets. Airlines may also provide exemptions
to select customers such as U.S. military personnel. Airline officials
explained that customers who attain status with their airline's
frequent-flyer program are likely to remain repeat customers if they
are rewarded with service benefits such as baggage fee waivers.
Fees Have Proven Popular with Airlines as a Method of Generating
Revenue While Maintaining Fare-Based Competition:
According to financial data submitted by airlines to DOT, total
revenue from baggage fees and reservation change and cancellation
fees--the largest known sources of revenue for optional services--has
increased since 2008 following widespread implementation of baggage
fees in the United States. In calendar years 2008 and 2009, U.S.
airlines collected nearly $3.9 billion in baggage fees and over $4
billion in reservation change and cancellation fees. Collection of
fees for reservation changes and cancellations, although implemented
prior to 2008, has risen sharply since then following the
implementation of additional and/or higher fees for changing or
canceling reservations. Accordingly, revenues from baggage fees and
reservation change and cancellation fees have grown from less than 1
percent of operating revenues in 2007 to over 4 percent in 2009.
Although small compared with total airline operating revenues, fee
revenues are growing. In the first quarter of calendar year 2010,
airlines reported $1.3 billion in baggage fees and reservation change
and cancellation fees--a 13 percent increase from the corresponding
quarter in 2009. Figure 4 shows the reported increase in revenues from
baggage fees and reservation change and cancellation fees.
[Refer to PDF for image]
[End of figure]
Figure 4: Total Collections of Baggage Fees and Reservation Change and
Cancellation Fees by U.S. Airlines, 2000-2009 (2010 dollars):
[Refer to PDF for image: multiple line graph]
Year: 2000;
Reservation Change and Cancellation Fee Collections: $258 million;
Baggage Fee Collections: $559 million.
Year: 2001;
Reservation Change and Cancellation Fee Collections: $187 million;
Baggage Fee Collections: $628 million.
Year: 2002;
Reservation Change and Cancellation Fee Collections: $217 million;
Baggage Fee Collections: $685 million.
Year: 2003;
Reservation Change and Cancellation Fee Collections: $305 million;
Baggage Fee Collections: $748 million.
Year: 2004;
Reservation Change and Cancellation Fee Collections: $327 million;
Baggage Fee Collections: $808 million.
Year: 2005;
Reservation Change and Cancellation Fee Collections: $379 million;
Baggage Fee Collections: $932 million.
Year: 2006;
Reservation Change and Cancellation Fee Collections: $473 million;
Baggage Fee Collections: $966 million.
Year: 2007;
Reservation Change and Cancellation Fee Collections: $484 million;
Baggage Fee Collections: $953 million.
Year: 2008;
Reservation Change and Cancellation Fee Collections: $1,174 million;
Baggage Fee Collections: $1,704 million.
Year: 2009;
Reservation Change and Cancellation Fee Collections: $2,748 million;
Baggage Fee Collections: $2,392 million.
Source: GAO analysis of DOT Form 41 financial data.
[End of figure]
U.S. airlines must separately identify and report to DOT in their
quarterly Form 41 filings only those revenues from baggage fees and
from reservation change and cancellation fees, while other fee
revenues are reported in a variety of other accounts that may also
contain non-fee revenue. In 2009, BTS issued an accounting and
reporting directive for U.S. passenger airlines to report ancillary
revenues in a like manner. The directive allows airlines to report
revenues from fees in different accounts such as in Transport-Related
Revenues and Miscellaneous Operating Revenues that include revenue
from other sources such as the sale of frequent flyer award miles.
[Footnote 18] Further, the guidance does not include all sources of
ancillary revenues. Given this, we are unable to determine total
revenues from other airline-imposed fees, such as those for telephone
booking, seat selection, and early boarding. DOT has reported airline
ancillary revenues were $7.8 billion in 2009, up from $5.5 billion in
2008. However, these reported revenues include not only those from the
discrete accounts of baggage fees and reservation change and
cancellation fees, but also fees from the Miscellaneous Operating
Revenues account for such items as pet transportation and revenue from
the sale of frequent flyer award program miles. Absent guidance that
requires airlines to report revenues from fees in specific accounts,
we found that there were differences among airlines in how some fee
revenues were reported. For example, we found that telephone booking
fees were reported as part of Reservation Cancellation Fees by some
airlines and as Transport-Related Revenues by others. In addition,
some airlines accounted for revenues from unaccompanied minors as
Transport-Related Revenue, Transport Passenger Revenue or
Miscellaneous Operating Revenue, while others reported it as part of
Reservation Cancellation Fees, and one airline reported fees for
unaccompanied minors as revenue from Excess Baggage Fees. Although
there is a lack of clarity regarding the revenue amounts from most
optional fees, not including those for baggage fees and reservation
change and cancellation fees, it is likely that these revenues would
be comparatively smaller because, according to airline
representatives, these fee amounts are less than those for checked
baggage or reservation changes and cancellations.
Airlines Have Imposed Fees, Which Are Partly Based on Costs, for
Multiple Reasons:
Several factors motivate airlines to make greater use of a pricing
strategy that relies on charging fees for optional services. One
factor airline officials told us is the opportunity to generate
additional revenue while keeping fares lower. Airline officials said
that by charging fees for services, they are able to keep fares lower
than if fares were inclusive of checked baggage and other services as
they had been in the past. Another factor airline officials told us is
the ability to differentiate their customers' willingness to pay. In
this way, customers that value the service can pay for it while
customers that do not want to pay for the service don't purchase it.
If airlines charged higher fares rather than charging for optional
services, those passengers placing little value on optional services
might decide not to purchase a ticket because there is more passenger
resistance to higher fares, particularly during difficult economic
times, than there is to paying for optional services. Airlines largely
compete on their base ticket fares and passengers generally compare
these fares when deciding which flight to purchase, often picking the
lowest fare displayed. Several economic studies have found evidence
that increases in the less transparent part of the price of a product--
in this case optional service fees--has less of an effect on sales
than increases in the price of the product itself--in this case,
fares.[Footnote 19] Officials from several airlines told us that
another reason they impose fees is the ability to differentiate their
airlines from their competition by providing some services for free
and others at a fee.
Airlines that we interviewed indicated that costs were a consideration
in setting fee levels, but other factors were also considered, such as
competition and consumer demand. An official at one airline stated
that the costs of providing services vary by airport and the routes
served. For example, this official told us that the airline analyzes
the costs of providing checked baggage service at each of the airports
it serves and, while these costs differ, the airline sets a standard
checked baggage fee to apply at all locations. Like prices for other
products and services sold in a competitive market, fees for these
services are also influenced by what competitors charge. Much like
airfares, changes in fee amounts may be matched by competitors. In
January 2010, Delta Air Lines increased its fee to check a first bag
at the airport from $20 to $25, and within a month Continental
Airlines, United Airlines, and American Airlines matched the increase.
Furthermore, airlines evaluate consumer demand to determine what
passengers are willing to pay for. One airline official told us that
the airline conducts market research to determine whether a fee for a
service would be acceptable to customers. This official said that the
airline had eliminated a fee for the first checked bag on
international flights and decreased the amount of a fee for its
premium services based on customer feedback. Public discontent over a
fee can also lead airlines to decide not to impose it. For example,
Spirit Airlines announced that it will charge a fee for carry-on bags
that cannot fit underneath a seat for travel beginning in August. In
response to congressional and public outcry, 5 other airlines stated
that they will not impose such a fee and to date no other airline has
imposed a fee for carry-on bags.[Footnote 20] Also, in 2008, US
Airways tested consumer response by charging $2 for non-alcoholic
beverages including sodas, juices, bottled water, and coffee, but
discontinued after no other major airline began charging a fee for
these drinks.
While airlines have collected a substantial amount of fee revenues,
there is no clear link between the implementation of optional service
fees and the profitability and financial stability of an airline. For
example, American Airlines, Continental Airlines, Delta Air Lines, and
Virgin America impose charges for checked baggage and other services,
but each reported an operating loss for 2009. Not all profitable or
financially stable airlines impose optional service fees. Southwest
Airlines has not adopted a fee for a first or second checked bag, but
continues to report an operating profit. On the other hand, both
Spirit Airlines and Allegiant Air impose many fees for services on
passengers and both also reported an operating profit for calendar
year 2009.
Airlines recognize that their approach to offering services for a fee
gives passengers choices that allow them to travel without paying the
fees, such as by carrying bags into the cabin or by bringing their own
meals onboard. Some passengers may prefer this approach in which they
pay for only the services they want. One airline allows customers
either to pay one higher price that includes the fare as well as
services or to pay a lower fare for the flight and pay for services if
desired. According to an official of this airline, 85 percent of that
airline's customers prefer to pay the lower fare and pay for services
separately.
Most Airline Fees for Services Are Not Incorporated in the Booking or
Payment Process, Making It Difficult for Passengers to Compare Prices:
Complete information on fees for optional services is not submitted by
airlines filing their fare information with ATPCO or incorporated into
the GDSs' fare offerings used by travel agencies. In contrast, all
airline-imposed required charges, such as fuel surcharges and peak
travel day charges, must be included in the advertised fare--the "full
fare," or entire price to be paid by the consumer, regardless of
distribution channel (airline or travel agent).[Footnote 21] Unlike
fare information, information on other service fees is not available
through the GDSs with the exception of checked baggage, as discussed
below, although it can be obtained from individual airlines by
searching their Web Sites or contacting them directly. DOT does not
specify in its advertising guidance that optional service fees be
disclosed at ticketing with the exception of checked baggage fees and
accompanying policies.[Footnote 22] As a result, customers using
online travel agencies and traditional or corporate travel agents,
which together sell 60 percent of all airline tickets, cannot readily
obtain and compare information on complete trip prices that include
both the fare and selected service fees. This lack of information also
makes it impossible for customers using online travel agencies or for
travel agents using a GDS to select or make payment for optional
services at the time of booking, which for many corporate customers is
important for tracking payments. Travel agents and customers must then
go directly to airline Web Sites to find out fee information.
Since checking a bag and the associated fees are deemed optional, they
are not considered by DOT to be part of the "full fare" for purposes
of its advertising rules, and therefore are not required to be
disclosed prior to ticketing. However, DOT has required airlines and
travel agents, including GDSs, to disclose checked baggage fees and
accompanying policies at the time of purchase.[Footnote 23] However,
because this information is not filed with fare information by
airlines, it is not readily available to GDSs and, therefore, to
travel agents. DOT contends that travel agents utilizing a GDS can
find this information by searching airline Web Sites, but GDS and
travel agent officials we spoke with said that assuring that this
information is accurate and up-to-date is time consuming and not
practical if a customer is on the phone. Thus, even though travel
agents are held to the same advertising and disclosure requirements as
airlines, including those for checked baggage fees and policies,
travel agents may not have information on checked baggage fees to
accurately meet those requirements by relying on a GDS.
Recently proposed legislation would extend the disclosure requirements
to include not only checked baggage fees, but also fees for seat
assignments and other services that an airline may charge after the
ticket is purchased.[Footnote 24] In addition, legislation introduced
in April 2010 would require the Secretary of Transportation to
complete a rulemaking prohibiting airlines from charging fees for any
carry-on baggage that falls within the restrictions imposed by the
airline with respect to the weight, size, or number of bags, among
other things.[Footnote 25] Further, on June 8, 2010, DOT issued a
Notice of Proposed Rulemaking (NPRM) that would, among a number of
other things, if adopted, require U.S. and foreign airlines to
disclose all fees for optional services, including those for checked
baggage, advance seat assignments, and seat upgrades through a
prominent link on their Web Site's homepage.[Footnote 26] DOT also
states in the proposed new rule that it is considering requiring that
U.S. and foreign airlines make this fee information available to
applicable GDSs.[Footnote 27]
Travel Industry Efforts to Improve Fee Disclosure and Access Are
Underway but May Not Lead to Full Disclosure:
To improve travel agencies' ability to provide information on and
payment for airline-imposed fees, ATPCO, the tariff publishing house,
is working to include these fees as part of the information available
in GDSs. ATPCO, which provides fare information to GDSs, has developed
the Optional Services product--an automated approach to distribute fee
information for flight-related services such as checked baggage and
seat selection and for non-flight-related services such as lounge
access. Airlines could then provide fee information to ATPCO, and, in
turn, ATPCO could provide the information to the GDSs. When fully
integrated into a GDS, travel agents, including corporate travel
agents, could access and purchase optional services at the time of
booking. Customers that purchase tickets at online travel agencies
could also purchase optional services when booking tickets. This
product would allow consumers to search airfares based on the total
price of their trip rather than just the base airfare. Currently, 12
U.S. airlines constituting 79 percent of the operating revenues
reported by U.S. airlines in 2009 are test filing this information
with ATPCO, which is allowing GDSs to access it on a test basis.
In an attempt to ensure industry standards for the display,
distribution, and financial settlement of fee transactions, ATPCO is
coordinating its efforts with the International Air Transport
Association (IATA)--a worldwide trade organization representing
approximately 230 airlines--and ARC, which settles ticketing financial
transactions. IATA has begun an initiative that would develop a
standard for electronic transactions of miscellaneous documents,
including those that contain airline-imposed fees. Stemming from its e-
ticket effort, which eliminated the majority of paper-based ticketing
transactions in June 2008, IATA is developing the Electronic
Miscellaneous Document (EMD) standard, which will allow airlines and
GDSs to electronically record fees that have been paid for optional
services. Once this standard is incorporated by GDSs, customers using
a corporate, online, or traditional travel agency would have the
ability to pay for optional services at the time of ticketing. Use of
the EMD will also facilitate miscellaneous financial transactions
between airlines involving tickets that include transportation on more
than one airline. IATA anticipates that by the end of 2010, GDSs will
be capable of issuing EMDs and by the end of 2012 all airlines will
have EMD capability.
GDS companies have also developed their own products that accommodate
fee information. For example, Sabre has developed a merchandising
product that enables the consumer to comparison shop fares, including
selections of optional services by incorporating ATPCO's Optional
Services product. Consumers could select optional services as part of
a fare search to compare airlines' offerings that include the fare and
services. Sabre officials told us that its product is currently used
in other countries, but no U.S. airlines have committed to providing
fee information to ATPCO. Amadeus and Travelport--the next largest
GDSs--have developed similar products that, according to officials
with these companies, U.S. airlines have not committed to supporting.
GDS and travel agent representatives say that there is little
incentive for airlines to disclose their fee information through the
GDSs as such disclosure will increase the fare displayed to many
passengers if fees are included. Airlines largely compete on fares and
passengers compare fares when deciding which flight to purchase, often
picking the lowest fare displayed. If one airline provided fee
information and another did not, the airline that disclosed the fees
would be at a disadvantage. Consequently, according to GDS
representatives, it is unlikely that airlines will provide fee
information or offer these services for sale through GDSs unless
required to do so. In addition, trade associations are advocating that
the airline industry work to standardize policies on fee disclosure
and access. For example, the Interactive Travel Services Association,
Business Travel Coalition and American Society of Travel Agents are
leading efforts to have all fees available for sale through GDSs and
to establish uniform codes for fee transactions. Similarly, the
National Business Travel Association has supported efforts to make
fees for services available through GDSs so that corporate travel
agents can access and monitor fees when they are instituted or
changed, buy services, and track them through their expense management
systems.
Overall, we found that airlines we contacted were generally supportive
of efforts to improve the transparency of fees for their customers.
Officials from one airline indicated that providing the customer an
opportunity to pay for additional services at the time of booking
would create both greater choice and transparency while still allowing
the airline to offer unbundled services. However, officials at another
airline were more cautious indicating that the time of booking was not
always the best point to sell additional services as passengers may
not know at that time what additional services they will need. For
example, they may not know how many, if any, bags they will check on
the day of travel. Further, officials at another airline indicated
that although they support transparency of optional service fees, the
GDS environment may not be the best choice for distribution of this
information, and there are alternatives to the GDS that can be cost
effective to use to inform travel agents and passengers of fees for
optional services. Officials from another airline stated that they are
waiting until the testing of ATPCO Optional Services product has been
completed before they decide whether to provide fee information to
ATPCO. As noted earlier, DOT's June 2010 NPRM proposes greater fee
disclosure and seeks comment on whether airlines should make this fee
information available to applicable GDSs.[Footnote 28] DOT officials
told us that requiring fee disclosure provides additional information
and resources to benefit consumers; however, imposing such a
requirement must be weighed against the disadvantages of government
interference with airline competition and the deregulated GDS
environment.
Airlines' Increasing Reliance on Fees Reduces the Proportion of Total
Revenue That Is Taxed to Fund FAA:
Many Airline-Imposed Fees Are Not Subject to the 7.5 Percent Excise
Tax:
Unlike fares for domestic air transportation, a majority of the fee
revenues collected by airlines on amounts paid by passengers for
various airline services, including amounts paid for checked baggage,
are not subject to the 7.5 percent excise tax,[Footnote 29] in
accordance with Treasury regulations and IRS guidance.[Footnote 30]
The Internal Revenue Code imposes a 7.5 percent excise tax on amounts
paid for the taxable transportation of a person by air, the revenue
from which is deposited into the Airport and Airway Trust Fund.
[Footnote 31] Treasury regulations, the last iteration of which were
promulgated in the 1960s, set general parameters for which airline-
imposed fees are subject to the 7.5 percent excise tax and which are
not subject to the tax.[Footnote 32] As a general rule, all amounts
paid to the airline to procure domestic air transportation are part of
the tax base unless exempted by regulation or IRS guidance. Generally,
all mandatory charges necessary to transport passengers are included
in the tax base,[Footnote 33] but fees for optional services are
not.[Footnote 34] IRS has further clarified which airline-imposed fees
are subject to the excise tax in guidance documents, including Revenue
Rulings and Private Letter Rulings.[Footnote 35] Treasury regulations
and IRS guidance provide that revenue from many airline-imposed fees
for airline services are generally not subject to the 7.5 percent
excise tax, including fees for checked baggage, early boarding, phone
reservations, and on-board meals.[Footnote 36] On the other hand,
amounts paid for other airline-imposed fees that are required as a
condition of receiving domestic air transportation, such as some
reservation change and cancellation fees, fuel surcharges, and peak
travel day charges, are subject to the 7.5 percent excise tax in
accordance with IRS guidance and applicable regulations,[Footnote 37]
and tax revenues from these fees are being deposited into the Trust
Fund. See table 1 for a list of airline fees and surcharges on
domestic air transportation that, pursuant to IRS guidance and
Treasury regulations, are subject to the 7.5 percent excise tax.
Table 1: Airline-Imposed Fees and Surcharges on Domestic Air
Transportation Subject to the 7.5 Percent Excise Tax According to IRS:
Subject to 7.5 percent excise tax: Fee to upgrade to higher class of
accommodation (first or business class); An additional charge, paid in
cash, for changing the class of accommodation is a payment for
transportation and is subject to tax by regulation[A];
Not subject to 7.5 percent excise tax: Fee for checked baggage;
The fee is excluded from the tax base by regulation.[B]
Subject to 7.5 percent excise tax: Fee for ticket cancellation when
passenger requests refund; If an airline keeps a portion of the amount
paid for a ticket as a cancellation fee when refunding the ticket
amount to the customer, the consumer does not get a refund of tax
already paid on that portion of the ticket amount (cancellation
fee).[C] There is no additional tax on the amount retained;
Not subject to 7.5 percent excise tax: Fee for seat selection/seat
preference within class of accommodation; If the service is optional
and not a change in the class of accommodation, it is not included in
the tax base.[D]
Subject to 7.5 percent excise tax: Fee for ticket change of
destination or time of travel; Additional charges for changing the
destination or route, extending the time limit of a ticket, or as
"extra fare" are payments for transportation and subject to tax by
regulation.[E];
Not subject to 7.5 percent excise tax: Fee for early boarding within
class of ticket purchased; As long as the fee for early boarding is
optional, it is not included in the tax base.[F]
Subject to 7.5 percent excise tax: Fee for frequent flyer award
redemption; Service charge for a passenger to redeem frequent flyer
miles[G];
Not subject to 7.5 percent excise tax: Fee to apply already-purchased
unused fare to new ticket; If a fee were charged so that the customer
could apply the fare (on which tax was already paid) for an unused
nonrefundable ticket to a new ticket, then that fee is not included in
the tax base because it is optional.[H]
Subject to 7.5 percent excise tax: Fee for unaccompanied minors;
If the fee charged to provide support and care to an unaccompanied
traveling minor is mandatory, such fee is taxable because the amount
is paid as a condition of receiving air transportation. If it is
optional, however, (e.g., for children of a certain age), then it is
not included in the tax base[I];
Not subject to 7.5 percent excise tax: Fee for reservation by phone;
reservation by Internet; If the airline provides a mechanism for the
customer to book travel for free, the use of a mechanism to book that
charges a fee is then optional and the reservation fee is not subject
to a tax. If there is no mechanism for the customer to book travel for
free, the reservation fee is included in the tax base, regardless of
the mechanism used.[J]
Subject to 7.5 percent excise tax: Charge for peak travel/holiday
travel; The fee is subject to tax because it must be paid as a
condition of receiving air transportation[K];
Not subject to 7.5 percent excise tax: Fee for pet/animal
transportation; The fee is treated as a baggage fee and not included
in the tax base, per regulation.[L]
Subject to 7.5 percent excise tax: Fuel surcharge;
The charge is subject to tax because it must be paid as a condition of
receiving air transportation[M];
Not subject to 7.5 percent excise tax: Fee for standby; Assuming the
fee is optional, the fee is not included in the tax base.[N]
Not subject to 7.5 percent excise tax: Fees for pillows and blankets;
The fees are not included in the tax base because they are for non-
transportation service.[O]
Not subject to 7.5 percent excise tax: Charges for food and alcoholic
beverages; The charges are not included in the tax base because they
are non-transportation services, as described in regulation.[P]
Source: GAO analysis of applicable statutes, regulations, and guidance.
Note: IRS determinations of the applicability of the 7.5 percent
excise tax depend on the facts and circumstances of the imposition of
the fee and, accordingly, may vary from airline to airline for similar
services.
[A] 26 C.F.R. § 49.4261-7(c). See also Priv. Ltr. Rul. 118216-09.
[B] 26 C.F.R. § 49.4261-8(f)(1).
[C] Rev. Rul. 89-109; but see United Airlines, Inc. v. U.S., 929 F.
Supp. 1122 (N.D. Ill., 1996).
[D] Rev. Rul. 80-31.
[E] 26 C.F.R. § 49.4261-7(c).
[F] Rev. Rul. 80-31.
[G] Rev. Rul. 73-508. See also Priv. Ltr. Rul. 118216-09.
[H] Rev. Rul. 80-31. See also Priv. Ltr. Rul. 118216-09.
[I] Rev. Rul. 73-508. See also Priv. Ltr. Rul. 118216-09.
[J] Rev. Rul. 80-31. See also Priv. Ltr. Rul. 118216-09.
[K] Rev. Rul. 73-508.
[L] 26 C.F.R. § 49.4261-8(f)(1).
[M] Priv. Ltr. Rul. 118216-09 (Sept. 28, 2009); Rev. Rul. 73-508.
[N] Priv. Ltr. Rul. 118216-09; Rev. Rul. 80-31.
[O] 26 C.F.R. § 49.4261-8(f)(4).
[P] 26 C.F.R. § 49.4261-8(f)(4).
[End of table]
Potential Tax Revenues from Baggage Fees, If Taxed, Would Have
Constituted Less Than 2 Percent of Total Trust Fund Revenues in Fiscal
Year 2009:
We estimate that if baggage fees, which generate the largest fee
revenues reported to DOT, were subject to the 7.5 percent excise tax,
the additional tax revenues collected in fiscal year 2009 would have
contributed less than 2 percent of total Trust Fund revenues. In
fiscal year 2009, airlines reported nearly $2.5 billion in fee revenue
from checked baggage.[Footnote 38] If baggage fees in that year had
been subject to the 7.5 percent excise tax, an additional
approximately $186 million[Footnote 39] in excise taxes would have
been credited to the Trust Fund. This amount is small--less than 2
percent--relative to the approximately $11 billion in revenue that the
Trust Fund received during fiscal year 2009. However, this percentage
is likely to grow because baggage fees have increased and some
airlines have introduced additional service fees. For example, in the
first quarter of calendar year 2010, airlines reported a 33 percent
increase in revenues from baggage fees compared to the same quarter in
2009.
As noted earlier, aside from checked baggage, DOT guidance does not
require airlines to separately report revenues received from fees for
services that have not to date been considered part of the
transportation of persons--such as early boarding, seat selection, and
standby--and these revenues are also not subject to the 7.5 percent
excise tax according to IRS. Thus, we cannot be certain how much
additional revenue Treasury might have collected and credited to the
Trust Fund if that tax had been applicable to all these fees.
Extending Scope of the 7.5 Percent Excise Tax Would Require
Legislative or Regulatory Changes:
The Internal Revenue Code defines taxable transportation in terms of
the arrival/departure of the transportation, but does not define or
discuss what is "amount paid for taxable transportation of any
person."[Footnote 40] Treasury regulations provide examples of what
payments are and are not subject to the 7.5 percent excise tax.
[Footnote 41] Treasury regulations regarding the scope of payments for
transportation subject to the 7.5 percent excise tax were established
in the 1960s at a time of a regulated and very different airline
industry. In light of changes in airline pricing, the Treasury
regulations do not discuss many of the fees currently charged by
airlines. The recent IRS private letter ruling, which provides some
clarification of the applicability of the excise taxes to examples of
current airline fees, is based on the facts and circumstances
presented to IRS by the letter ruling requester and is not fully
applicable to all fees airlines may charge. Without a statutory change
with explicit directions on what fees are to be subject to the 7.5
percent excise tax, each new airline fee, or even the facts and
circumstances of how each airline charges current fees, may require
interpretation on a case-by-case basis as to whether or not to impose
a tax. Therefore, eventual effects on the Trust Fund remain unknown.
Imposition of Checked Baggage Fees Has Contributed to Decrease in the
Rate of Mishandled Bags and More Carry-on Bags:
Since Checked Baggage Fees Were Implemented, the Reported Rate of
Mishandled Baggage Has Declined:
The introduction of checked baggage fees has, by several estimates,
led to fewer checked bags, which, among other factors, has contributed
to a decline in the number of mishandled bags per 1,000 passengers.
[Footnote 42] Some airline officials told us that the number of
checked bags per passenger has decreased since the checked baggage
fees were implemented. One airline official said checked baggage had
decreased by half and officials at another airline reported the number
of checked bags per passenger had decreased by 40 percent. As a
result, the rate of mishandled bags per 1,000 passengers has declined
since baggage fees were widely implemented. According to data
submitted by airlines to DOT, the reported rate of mishandled bags per
1,000 passengers varied from 2000 through 2007 and declined 40 percent
(from 7 per 1,000 to less than 4 per 1,000) from 2007 through 2009.
[Footnote 43] Figure 5 shows the decrease in the reported rate of
mishandled bags per 1,000 passengers from 2000 through 2009 for U.S.
airlines reporting to DOT.
Figure 5: Reported Rate of Mishandled Bags per 1,000 Passengers for
Reporting U.S. Airlines, 2000-2009:
[Refer to PDF for image: line graph]
Year: 2000;
Mishandled bags per 1000 passengers: 5.29.
Year: 2001;
Mishandled bags per 1000 passengers: 4.55.
Year: 2002;
Mishandled bags per 1000 passengers: 3.84.
Year: 2003;
Mishandled bags per 1000 passengers: 4.19.
Year: 2004;
Mishandled bags per 1000 passengers: 4.91.
Year: 2005;
Mishandled bags per 1000 passengers: 6.04.
Year: 2006;
Mishandled bags per 1000 passengers: 6.73.
Year: 2007;
Mishandled bags per 1000 passengers: 7.03.
Year: 2008;
Mishandled bags per 1000 passengers: 5.26.
Year: 2009;
Mishandled bags per 1000 passengers: 3.91.
Source: GAO analysis of DOT data.
[End of figure]
Airline Policies Differ in How Compensation to Passengers for
Mishandled Bags Is Determined and Have Not Changed Due to the
Introduction of Baggage Fees; TSA also Reviews Mishandled Bag Claims:
Airline policies to compensate passengers in case of mishandled
baggage, as outlined in their contracts of carriage, differ in the
assistance to passengers and in the process for determining
compensation.[Footnote 44] For instance, 7 of the 17 airline contracts
of carriage that we reviewed specify that baggage will be delivered if
delayed, whereas the remaining 10 are silent on the issue.[Footnote
45] In addition, 10 airline contracts state that efforts will be made
to return delayed baggage within 24 hours, whereas the remaining 7
contracts do not specify a time frame. Airline policies on how
passengers are compensated for mishandled bags are all subject to
DOT's regulatory requirement that precludes airlines from limiting
their liability for damages due to disappearance of, damage, or delay
to checked baggage, to less than $3,300 per passenger.[Footnote 46]
However, other than this requirement, DOT does not currently specify
baggage policies to include in contracts of carriage. DOT conducts
random on-site investigations at airlines for compliance with domestic
and international air travel rules and has completed 15 investigations
in the past 2 years with 7 planned investigations for fiscal year
2010. DOT investigations result in either an enforcement order
assessing civil penalties and specifying what the airline must do to
be in compliance if problems are found or a notice letter to the
airline when minor or no problems are found. DOT has no detailed
requirements for how compensation should be determined, instead
allowing baggage liability issues between passengers and airlines to
be resolved through negotiations and in the courts.[Footnote 47]
Furthermore, most airline officials reported that they have not
adjusted their compensation policies for mishandled baggage since
baggage fees were implemented because, according to some officials,
the service provided has not changed. When asked whether DOT should
specify airline compensation policies in cases of mishandled baggage
in contracts of carriage, the agency responded that it has the
authority to act against particular practices on a case-by-case basis
and has done so with individual enforcement actions and industry
letters to airlines. For example, in October 2009 DOT sent an industry
letter to airlines advising that it had become aware of certain
policies, such as denied reimbursement for necessities when the
baggage is expected to reach the passenger within 24 hours, limited
reimbursement to actual expenses up to a fixed maximum amount per day
after the first day, and passenger reimbursement for incidental
expenses only on the outbound leg of a roundtrip flight-
-all of which are considered arbitrary limits on expense reimbursement
in violation of DOT guidance.[Footnote 48] DOT's recent proposed
rulemaking seeks comment on requiring carriers to include minimum
standards in their customer service plans that would reimburse
passengers for baggage fees if the baggage is lost or not timely
delivered as well as establishing a definition for when a bag is not
"timely delivered."[Footnote 49]
Checked Baggage Fees Have Led to an Increase in Carry-on Baggage and
Flight Crew Concerns Regarding Crew and Passenger Safety:
According to some airline officials, since checked baggage fees were
imposed, there has been an increase in carry-on baggage because some
passengers who have chosen not to check a bag for a fee have instead
brought bags into the cabin. Airline policies generally state that a
passenger can carry on board one bag and one personal item.[Footnote
50] An employee union representing flight attendants noted that this
increase in carry-on baggage can slow passenger boarding and adversely
affect the safety of passengers and flight attendants. In a recent
survey by the Association of Flight Attendants, more than half of the
responding flight attendants cited excess and oversized or overweight
carry-on bags. The survey respondents also reported concerns with full
overhead bins, an increase in checked bags at the gate, pushback
delays, and stressful boarding situations. Almost one-third of the
responding flight attendants reported concerns about injuries to
airline staff and passengers from lifting carry-on bags.[Footnote 51]
As noted earlier, Spirit Airlines has introduced a fee for carry-on
baggage--a policy that the carrier asserts is at least in part aimed
at reducing the amount of carry-on baggage.
Refundability of Government-Imposed Taxes and Fees Is Not Always Clear
and Communication of Refund Eligibility to the Airlines and Consumers
Is Lacking:
The refundability of government-imposed taxes and fees on unused
nonrefundable tickets varies depending on the tax or fee. TSA's
September 11TH Security Fee, which funds passenger aviation security
services, is the only government-imposed fee or tax that is clearly
refundable on unused nonrefundable tickets that expire or lose their
value, according to TSA.[Footnote 52] However, according to airline
officials, the security fee is rarely refunded because its
refundability is not well known by consumers, and a refund is only
provided if a passenger requests a refund from the airline.[Footnote
53] The IRS states that the aviation excise taxes--the 7.5 percent
ticket tax, passenger segment tax, and international arrival/departure
tax that fund FAA activities--are not refundable on unused
nonrefundable tickets; however, to the extent that a portion of the
ticketed fare is refunded, the collected tax attributable to that
portion of the fare may be refunded to the passenger.[Footnote 54]
Thus, if airline policy allows a passenger to apply part of the fare
for an unused nonrefundable ticket as a credit for future travel on
the airline, the passenger receives a credit for the proportionate
share of the taxes applied to the next ticket (less a change fee) and
thus does not have to pay the taxes a second time. If, however, a
passenger does not use the credit, the passenger may not receive a
refund of the taxes. For example, according to DOT, some airlines
offer a credit for the price of the ticket, including taxes and fees,
minus a reservation change or cancellation fee and the difference in
fares. Normally, passengers have to notify the airline prior to flight
departure to qualify for a credit which is valid for 1 year for travel
on the airline. However, these airlines would not provide a refund in
cash of the ticket price. Because the excise tax is imposed on amounts
paid for air transportation and not connected to the transportation
itself, taxes paid on unused purchased tickets remain in the Airport
and Airway Trust Fund.
In regards to other government-imposed fees, according to CBP, which
administers the Customs Air Passenger Inspection Fee and the
Immigration Air Passenger Inspection Fee, applicable statutes and
regulations authorize the refund of these fees on unused nonrefundable
tickets. In the past, as CBP officials noted, the agency has allowed
for such refunds and CBP indicated that they would not consider the
refund of its fees to be improper insofar as fees can be refunded if
inspection services are not provided. However, CBP has not issued
policy or guidance that clarifies this practice or whether airlines
can or must refund fees if requested by consumers. Additionally, CBP
told us that when airlines do refund fees to passengers, it accounts
for those with CBP as a "credit" on a subsequent submission of
collected fees. In contrast, with respect to the Animal and Plant
Health Inspection User Fee, USDA officials said that airlines may have
refunded consumers this fee on occasion but do not know the
circumstances of this and acknowledge that their controlling statute
is silent on this issue. In regards to all of these fees, airline
officials told us that they have received few, if any, requests for
fee refunds. An official of a trade association that represents travel
agencies told us that there is confusion about whether government-
imposed taxes and fees are refundable. As a result, this official
said, many travel agents state that they do not try to recoup taxes
and fees on unused nonrefundable tickets for their customers. Table 2
shows government-imposed taxes and fees, their amounts, and agencies'
interpretations of their refundability.
Table 2: Government-Imposed Taxes and Fees and Amounts Paid by
Passengers and Legal Basis for Their Refundability on Unused
Nonrefundable Tickets:
Government-imposed tax/fee: Passenger Ticket Tax[A];
The law imposes a tax of 7.5 percent on the ticketed fare for flights
within the continental U.S. or Canada/Mexico 225-mile buffer zone,
with certain exceptions;[B] this amount is deposited in the Airport
and Airway Trust Fund that primarily funds FAA activities;
Refund of government-imposed tax/fee authorized? No.[C]
Government-imposed tax/fee: Passenger Segment Tax[D];
The law imposes a tax of $3.70 per domestic flight segment;
this amount is deposited in the Airport and Airway Trust Fund that
primarily funds FAA activities;
Refund of government-imposed tax/fee authorized? No.[E]
Government-imposed tax/fee: International Arrival/Departure Tax[F];
The law imposes a tax of $16.10 per passenger for all flights arriving
in or departing from the United States, Puerto Rico, or the U.S.
Virgin Islands;
this amount is deposited in the Airport and Airway Trust Fund that
primarily funds FAA activities;
Refund of government-imposed tax/fee authorized? No.[G]
Government-imposed tax/fee: September 11th Security Fee[H];
TSA imposes $2.50 per enplanement not to exceed $5 one-way or $10
roundtrip for aviation security inspection services.[I];
Refund of government-imposed tax/fee authorized? Yes.[J]
Government-imposed tax/fee: Customs Air Passenger Inspection Fee[K];
A $5.50 fee is imposed for the arrival of each passenger aboard a
commercial aircraft from a place outside the United States, with
certain exceptions, for customs inspection services;
Refund of government-imposed tax/fee authorized? Yes. According to
CBP, relevant statutes authorize airlines to refund fees if services
are not rendered and have allowed for refunds in the past. However,
CBP has not issued policy or guidance that clarifies this practice or
whether airlines can or must refund fees if requested by consumers.
Government-imposed tax/fee: Immigration Air Passenger Inspection
Fee[L]; A $7 fee is assessed for each passenger arriving at a port of
entry in the United States, or for the pre-inspection of a passenger
in a place outside of the United States prior to such arrival for
immigration inspection services;
Refund of government-imposed tax/fee authorized? Yes. According to
CBP, relevant statutes authorize airlines to refund fees if services
are not rendered and have allowed for refunds in the past. However,
CBP has not issued policy or guidance that clarifies this practice or
whether airlines can or must refund fees if requested by consumers.
Government-imposed tax/fee: Animal and Plant Heath Inspection User
Fee[M]; USDA imposes $5 per passenger upon arrival from a place
outside of the customs territory of the United States for its health
inspection services;
Refund of government-imposed tax/fee authorized? Unclear. According to
USDA, relevant statutes and regulations are silent as to whether the
fee is refundable on unused nonrefundable tickets.
Source: GAO analysis.
[A] 26 U.S.C. §§ 4261(a), 4262(a).
[B] 26 U.S.C. §§ 4261(a), 4262.
[C] Rev. Rul. 89-109.
[D] 26 U.S.C. § 4261(b). A domestic flight segment consists of one
take-off and one landing.
[E] Officials with IRS stated that the reasoning of Rev. Rul. 89-109
is applicable here.
[F] 26 U.S.C. § 4261(c). Section 4261(c)(3) provides a modified
international arrival/departure tax rate of $8.10 for domestic flights
beginning or ending in Alaska or Hawaii.
[G] Officials with IRS stated that the reasoning of Rev. Rul. 89-109
is applicable here.
[H] 49 U.S.C. § 44940, 49 C.F.R. part 1510.
[I] 49 C.F.R. § 1510.5.
[J] See Letter from Randall Fiertz, Transportation Security
Administration, Acting Director of Revenue, to James Hultquist, Air
Transport Association, Managing Director, Taxes, November 21, 2002,
Docket No. TSA-02-11120-59. TSA is considering promulgating further
details on refunds under the Final Rule for 49 C.F.R. part 1510, which
has yet to be issued. k19 U.S.C. § 58c(a)(5)(A), 19 C.F.R. § 24.22(g).
[L] 8 U.S.C. § 1356(d), 8 C.F.R. § 286.2(a).
[M] 21 U.S.C. § 136a, 7 C.F.R. § 354.3(f).
[End of table]
Airlines Are Not Required to Notify Consumers That They May Be
Eligible for Refunds:
Although applicable TSA guidance requires the refund of the September
11TH Security Fee on unused nonrefundable tickets that expire or lose
their value, at the passenger's request,consumers are generally
unaware that they may be eligible for a refund. According to TSA,
regulations require airlines to refund the fee to consumers when a
change in their itinerary occurs, but this occurs automatically.
[Footnote 55] We asked airline officials to describe the process by
which they refund TSA fees to consumers and asked if consumers have
requested refunds. Some airlines replied that they have not been
requested by consumers to refund the fee and others were not aware
that consumers were entitled to a refund but if requested they would
issue one. We asked TSA officials why no policy has been developed to
notify consumers of their rights. TSA responded that current refund
policy sufficiently ensures that refunds will be provided upon request
by the airline and TSA has not received complaints regarding an
airline failing to comply with TSA regulation and guidance regarding
refunds. Similarly, while CBP allows airlines to refund the customs
and immigration inspection fees on unused nonrefundable tickets,
because the agency has not communicated this to airlines or the
public, consumers are unaware that they fees can be requested. We
believe that given that consumers are not notified of a potential
refund, they may be unlikely to realize their entitlement to such and,
thus, would be unlikely to request a refund. DOT has the authority
under 49 U.S.C. § 41712 to prohibit unfair or deceptive practices or
unfair methods of competition and DOT believes ensuring that consumers
are not mislead regarding their rights to refunds is within the scope
of this authority. However, DOT staff point out that it has received
few, if any, complaints about refundable government fees.
Conclusions:
Airlines are increasingly charging fees for optional services that
were previously provided without a separate charge. These fees, which
may be paid at the time of booking, at check-in, or onboard, are not
uniformly disclosed to passengers through the various distribution
systems available to purchase tickets. DOT's current guidance does not
require disclosure of airline-imposed optional service fees apart from
those for checked bags although the agency issued a Notice of Proposed
Rulemaking in June 2010 requesting public comment on this issue.
Because information on some of these fees for optional services may be
available only through airline Web Sites and not through the global
distribution systems used by passengers who purchase tickets through
online travel agencies or by travel agents, passengers may have
difficulty calculating the total price of a trip and comparing prices
among airlines. Making complete, clear, and uniform information on
airline fees available through travel agents and airline Web Sites
would enable passengers to make fully informed choices about travel
options.
While certain airline fares are subject to the 7.5 percent excise tax,
this tax does not apply to many airline-imposed fees, and consequently
the Airport and Airway Trust Fund receives less revenue than if that
tax applied to all fee revenues. IRS has determined that fees for
checked baggage and many other services not currently considered to be
part of the transportation of a person are not subject to the 7.5
percent excise tax. If baggage fees alone had been subject to the 7.5
percent excise tax in fiscal year 2009, the Trust Fund would have
received approximately an additional $186 million in revenues. This
amount is expected to grow in future years if airlines continue to
shift toward more fee revenue relative to fare revenue.
It is hard to determine the amount of total fee revenues that airlines
collect. Currently revenues from fees other than baggage fees and
reservation change and cancellation fees are reported in miscellaneous
and other accounts that also include revenues from non-fee sources.
The BTS accounting and reporting directive on ancillary fees allows
airlines to report in their quarterly financial filings to DOT
revenues from most fees in various accounts. Not having a clear
accounting makes it difficult for policymakers and regulators to
determine total revenues from airline-imposed fees and the impact on
the airline industry.
Finally, TSA's security fee is refundable on unused, nonrefundable
tickets that expire or lose their value; however, there is currently
no requirement or process in place to alert passengers that they are
eligible for such refunds. Additionally, relevant statutes and
regulations authorize CBP, via the airlines, to refund its customs and
immigration fees but has not issued any policy or guidance that
clarifies this. Finally, it is unclear if USDA's agricultural
inspection fee is refundable. Without this guidance and determination
of the refund eligibility of USDA's fee, consumers are not aware the
fee is refundable and consequently may not be receiving refunds to
which they may be entitled.
Matter for Congressional Consideration:
If Congress determines that the benefit of added revenue to the
Airport and Airway Trust Fund from taxation of optional airline
service fees, such as baggage fees, is of importance, then it should
consider amending the Internal Revenue Code to make mandatory the
taxation of certain or all airline imposed fees and to require that
the revenue be deposited in the Airport and Airway Trust Fund.
Recommendations for Executive Action:
We are making six recommendations to the Departments of
Transportation, Homeland Security and Agriculture.
To improve the transparency of information on airline-imposed fees and
government-imposed taxes and fees for consumers and improve airlines'
reporting of fee revenues to the Department of Transportation, we
recommend the Secretary of Transportation take the following four
actions:
* Improve the disclosure of baggage fees and policies to passengers,
in accordance with DOT guidance, by requiring that U.S. airlines and
foreign airlines that fly within or to or from the United States
disclose baggage fees and policies along with fare information such
that this information can be consistently disclosed across all
distribution channels used by the airline.
* Require U.S. airlines and foreign airlines that fly within or to or
from the United States to disclose all airline-imposed optional fees
that it deems important to passengers to know and further require that
this information be consistently disclosed across all distribution
channels used by the airline.
* Require that U.S. passenger airlines and foreign airlines that fly
within or to or from the United States consistently disclose to
passengers, applicable government-imposed fees on unused nonrefundable
tickets that may be eligible for refunds once these determinations are
made by relevant agencies.
* Require U.S. passenger airlines to report to DOT all optional fees
paid by passengers related to their trip in a separate account,
exclusive of baggage fees and reservation change and cancellation fees.
To eliminate the ambiguity regarding the refund of government-imposed
fees to purchasers of unused nonrefundable tickets, we recommend that
the Secretary of Homeland Security issue guidance regarding the
refundability of the customs and immigration inspection fees to U.S.
and foreign airlines collecting these fees.
To eliminate the ambiguity regarding government-imposed fees that are
eligible for refund to purchasers of unused nonrefundable tickets, we
recommend that the Secretary of Agriculture determine whether a
passenger is eligible for a refund of the animal and plant heath
inspection fee and convey this determination to U.S. and foreign
airlines collecting these fees.
Agency Comments and Our Evaluation:
We provided a draft of this report to DOT, DHS, Treasury, and USDA for
their review and comment. Within DHS, CBP noted in their oral comments
that applicable statutes and regulations authorize the refund of
customs and immigration inspection fees on unused nonrefundable
tickets; however, officials stated that the practice had not been
articulated in policy or guidance to airlines. As a result, we
modified our recommendation to DHS from determining if consumers are
entitled to refunds of customs and immigration inspection fees to
issuing guidance to clarify refundability. DHS agreed with this
recommendation. On July 9, 2010, DHS provided written comments from
the Department and CBP, which are reprinted in appendix III. In
comments, USDA also agreed with our recommendation to the Department.
DOT neither agreed nor disagreed with our recommendations. All four
departments provided technical comments which we incorporated into
this report as appropriate.
Copies of this report will be sent to the Secretaries of
Transportation, Homeland Security, Agriculture and Treasury. This
report is also available at no charge on the GAO Web Site at
[hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-2834 or dillinghamg@gao.gov. Contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this report. GAO staff who made key
contributions to this report are listed in appendix IV.
Signed by:
Gerald L. Dillingham, Ph.D.
Director, Physical Infrastructure:
[End of section]
Appendix I: Scope and Methodology:
We were asked to answer the following research questions: (1) What are
the nature and scope of the fees airlines charge to passengers, are
the fees commensurate with the costs of the services provided, and are
the fees transparent to passengers? (2) What is the potential impact
of such fees on revenues available to the Airport and Airway Trust
Fund? (3) What changes have taken place in the numbers of checked and
mishandled bags, amount of compensation paid to passengers for
mishandled bags, and other consumer issues since airlines began
charging more widely for checked baggage? and (4) What, if any, is the
process for refunding government-imposed taxes and fees to passengers
who do not use their nonrefundable tickets? To address these
objectives, we analyzed airline financial and operating data; reviewed
applicable laws, regulations, and past studies; and interviewed
officials from the airline industry, the Department of Transportation
(DOT), the Internal Revenue Service (IRS), the Department of Homeland
Security (DHS), and the U.S. Department of Agriculture (USDA). Our
financial analysis relied on airline financial information reported to
DOT by airlines from calendar year 2000 through calendar year 2009--
the most recently available. We used the Department of Commerce's
chain-weighted price index for gross domestic product to adjust dollar
figures to 2010 dollars to account for changes over time in the price
level of the economy. To assess the reliability of the DOT Bureau of
Transportation Statistics (BTS) data, we reviewed the quality control
procedures applied by BTS and determined that the data were
sufficiently reliable for our purposes.
To identify the nature and scope of airline-imposed fees, we developed
a list of fees based on research of travel and 17 airline Web Sites
and corroborated the data in interviews with officials from airlines.
[Footnote 56] In interviewing the airline officials, we used a semi-
structured interview instrument, which asked questions pertaining to
airline-imposed fees and how fee amounts were set. We correlated and
assembled the results of the interviews so that airline proprietary
information was not disclosed. To assess what is required in the
disclosure of airline-imposed fees, we analyzed applicable laws and
regulations and interviewed officials from DOT's Office of Aviation
Enforcement and Proceedings, which establishes laws and guidance
related to full disclosure advertisement rules. To assess travel
industry efforts to improve fee disclosure and policies, we
interviewed officials from the Air Transport Association,
International Air Transport Association, Airline Reporting
Corporation, Airline Tariff Publishing Company, Sabre, Travelport,
Amadeus, Interactive Travel Services Association, Business Travel
Coalition, American Society of Travel Agents, and Flyers Rights
Organization.
To assess the potential impact of such fees on the Airport and Airway
Trust Fund, we reviewed existing tax laws and regulations and spoke
with IRS officials about the applicability of the excise taxes imposed
on amounts paid for air transportation of persons to the airline-
imposed fees we identified. We then calculated the potential impact in
the most recent complete fiscal year (2009), on the Airport and Airway
Trust Fund if revenues from baggage fees--revenues that airlines are
required by DOT to report separately and that are not currently taxed--
had been taxed at the 7.5 percent excise tax applied to fare revenues.
We did not calculate the impact on the Trust Fund of taxing revenues
from reservation change and cancellation fees, which are also reported
separately, because these revenues are currently subject to the 7.5
percent excise tax. In addition, we were unable to calculate the
impact on the Trust Fund if revenues from other currently untaxed fees
had been taxed as these fee revenues are not required by DOT to be
reported separately and some airlines in our sample did not provide
this information to us when we requested it. We also spoke with IRS
officials regarding what actions could be taken that would make
currently untaxed fees subject to the 7.5 percent excise tax.
To examine issues with checked baggage, we reviewed data reported by
airlines to DOT, and subsequently published in DOT's Air Travel
Consumer Report. To assess the reliability of this data we interviewed
DOT personnel regarding quality control procedures, and subsequently
determined that the data were reliable for our purposes. We also
interviewed DOT officials from BTS and the Office of Aviation
Enforcement and Proceedings, DHS's Transportation Security
Administration (TSA), airlines, trade associations, and other interest
groups about compensation for mishandled baggage. We reviewed
regulations and policies regarding checked baggage liability and
disclosure requirements. We also conducted a content analysis of the
results of an open-ended question on a survey conducted by the
Association of Flight Attendants in February 2010 on the impacts of
carry-on baggage. Our analysis enumerated the percentage of the 800
respondents that reported on excessive carry-on baggage and its
implications on boarding processes and in-cabin injuries. We reviewed
the methodology and data collection instrument used by the Association
of Flight Attendants in gathering this information, and determined
that the data collected from the 800 open-ended responses was
sufficiently reliable for our use. We also conducted an analysis of
the contract of carriage of the 17 airlines in our sample. These
contracts of carriage were accessed on each airline Web Site and
information was corroborated in our interviews with airline officials.
To identify mechanisms for refunding government-imposed fees and
taxes, we reviewed relevant agencies' statutes and guidance and
interviewed officials from IRS, DHS Customs and Border Protection,
Immigration and Customs Enforcement, TSA, and the USDA who are
responsible for federal taxes and fees applied to airline tickets. We
also interviewed airlines and trade associations on the process for
refunding eligible government-imposed taxes and fees. We conducted
this performance audit from October 2009 through July 2010 in
accordance with Generally Accepted Government Auditing Standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Sample of Airline-Imposed Fees for Optional Services:
Table 3: Domestic Checked Baggage Fees of 17 U.S. Airlines as of July
1, 2010:
Airline: Air Tran;
First bag (airport/online): $15;
Second bag (airport/online): $25;
Additional bags (each): 3+: $50;
Overweight bags: 51-70 lbs: $49; 71-100 lbs: $79;
Oversized bags: $49-$79.
Airline: Alaska[A];
First bag (airport/online): $20;
Second bag (airport/online): $20;
Additional bags (each): 3: $20; 4+: $50;
Overweight bags: 51-100 lbs: $50;
Oversized bags: $50-$75.
Airline: Allegiant;
First bag (airport/online): $35/$15-$30;
Second bag (airport/online): $35/$25-$35;
Additional bags (each): $35/$50;
Overweight bags: 51-74 lbs: $50; 75+ lbs: $100;
Oversized bags: $35.
Airline: American;
First bag (airport/online): $25;
Second bag (airport/online): $35;
Additional bags (each): 3-5: $100; 6+: $200;
Overweight bags: 51-70 lbs: $50; 71-100 lbs: $100;
Oversized bags: $150.
Airline: Continental;
First bag (airport/online): $25/$23;
Second bag (airport/online): $35/$32;
Additional bags (each): 3+: $100;
Overweight bags: 51-70 lbs: $50;
Oversized bags: $100.
Airline: Delta;
First bag (airport/online): $25/$23;
Second bag (airport/online): $35/$32;
Additional bags (each): 3: $125; 4-10 $200;
Overweight bags: 51-70 lbs: $90; 71-100 lbs: $175;
Oversized bags: $175-$300.
Airline: Frontier;
First bag (airport/online): $20;
Second bag (airport/online): $30;
Additional bags (each): 3+: $50;
Overweight bags: 51+ lbs: $75;
Oversized bags: $75.
Airline: Hawaiian;
First bag (airport/online): $25/$23; inter-island: $10;
Second bag (airport/online): $35/$32; inter-island: $17;
Additional bags (each): 3-6: $125; 7+: $200; inter-island: $25;
Overweight bags: 51-70 lbs: $50; inter-island: $25;
Oversized bags: $100; inter-island: $25.
Airline: Jet Blue;
First bag (airport/online): $0;
Second bag (airport/online): $30;
Additional bags (each): 3: $75;
Overweight bags: 51-70 lbs: $50; 71-100 lbs: $100;
Oversized bags: $75.
Airline: Midwest;
First bag (airport/online): $20;
Second bag (airport/online): $30;
Additional bags (each): 3+: $50;
Overweight bags: 51-100 lbs: $75;
Oversized bags: $75.
Airline: Southwest;
First bag (airport/online): $0;
Second bag (airport/online): $0;
Additional bags (each): 3-9: $50; 10+: $110;
Overweight bags: 51-100 lbs: $50;
Oversized bags: $50.
Airline: Spirit[B];
First bag (airport/online): $25/$19;
Second bag (airport/online): $25;
Additional bags (each): 3-5: $100;
Overweight bags: 51-70 lbs: $50; 71-99 lbs: $100;
Oversized bags: $100-$150.
Airline: Sun Country;
First bag (airport/online): $25/$20;
Second bag (airport/online): $35/$30;
Additional bags (each): $75;
Overweight bags: 51-100 lbs: $75;
Oversized bags: $75.
Airline: United[C];
First bag (airport/online): $25;
Second bag (airport/online): $35;
Additional bags (each): 3+: $100;
Overweight bags: 51-100 lbs: $100;
Oversized bags: $100.
Airline: USA3000;
First bag (airport/online): $25/$15;
Second bag (airport/online): $25;
Additional bags (each): $25;
Overweight bags: 51-70 lbs: $25;
Oversized bags: $25-$50.
Airline: US Airways;
First bag (airport/online): $25/$23;
Second bag (airport/online): $35/$32;
Additional bags (each): 3-9: $100;
Overweight bags: 51-70 lbs: $50; 71-100 lbs: $100;
Oversized bags: $100.
Airline: Virgin America;
First bag (airport/online): $25;
Second bag (airport/online): $25;
Additional bags (each): 3-10: $25;
Overweight bags: 1st
