Commercial Aviation
Better Information about Airline-Imposed Fees and the Refundability of Government-Imposed Taxes and Fees Could Benefit Consumers Gao ID: GAO-10-885T July 14, 2010This testimony discusses various issues affecting airline passengers, including airline-imposed fees, mishandled baggage, and the refundability of various government-imposed taxes and fees to passengers. The U.S. passenger airline industry has been under tremendous financial pressure over the last decade, first from security threats that inhibited air travel, then from volatile fuel costs, and more recently from falling demand due to an economic recession. Only recently has air traffic begun to recover. In response to these pressures, passenger airlines have adapted their business models. In 2008, for example, many airlines introduced fees for a variety of passenger services, most notably for a first or second checked bag, for which separate charges did not previously exist. 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. 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. The revenues from baggage and many other fees are not subject to the 7.5 percent excise tax on amounts paid for domestic air transportation, which, via the Airport and Airway Trust Fund, is used to help fund the Federal Aviation Administration (FAA), including its operation and development of the air traffic control system and oversight of aviation safety. In addition, charging separate fees for checked baggage raises questions about whether the quality of checked baggage service has improved since the fees were introduced. Other government fees on airline tickets help pay for other government services, such as for security, immigration, customs, and agricultural inspections. However, with the exception of fees for security services, it is not clear if and how these various government-imposed fees are refundable to passengers who do not use their nonrefundable tickets. However, the refundability of these fees is not always clear or communicated to airlines or consumers. This testimony summarizes our most recent report on these issues, which is being released. In this report we examined (1) the nature and scope of the fees airlines charge to passengers, including the fees' relationship to the costs of the services provided and the transparency of the fees; (2) the potential impact of such fees on revenues used to help fund FAA; (3) changes in the numbers of checked and mishandled bags, the amount of compensation paid to passengers for mishandled bags, and other related consumer issues; and (4) the process, if any, for refunding government-imposed taxes and fees to passengers who do not use their nonrefundable tickets. We have previously reported on issues related to these objectives.
We found the following: (1) Fees for optional services are based on costs and other factors and are not fully disclosed to passengers at the time of booking. Airlines have imposed a variety of fees on a range of optional services, such as checked and, most recently, carry-on bags; meals; blankets; early boarding; and seat selection. (2) Airlines' increasing reliance on fee revenues reduces the proportion of total passenger revenue that is taxed to help fund FAA. The IRS has determined that many airline-imposed fees are not related to the transportation of a person--the basis for imposing the 7.5 percent excise tax on domestic air transportation--according to applicable Treasury regulations and IRS guidance--and, thus, only a proportion of the total fee revenue is subject to taxation. (3) The imposition of checked baggage fees has contributed to declines in the amount of checked baggage and the rate of mishandled bags per thousand passengers as well as an increase in the amount of carry-on baggage. 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. However, it is unknown whether baggage fees have had an effect on the rate of mishandled bags per thousand passengers as this information is not available.
GAO-10-885T, Commercial Aviation: Better Information about Airline-Imposed Fees and the Refundability of Government-Imposed Taxes and Fees Could Benefit Consumers
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Testimony:
Before the Subcommittee on Aviation, Committee on Transportation and
Infrastructure, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 2:00 p.m. EDT:
Wednesday, July 14, 2010:
Commercial Aviation:
Better Information about Airline-Imposed Fees and the Refundability of
Government-Imposed Taxes and Fees Could Benefit Consumers:
Statement of Gerald L. Dillingham, Ph.D.
Director, Physical Infrastructure Team:
GAO-10-885T:
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss various issues affecting
airline passengers, including airline-imposed fees, mishandled
baggage, and the refundability of various government-imposed taxes and
fees to passengers. The U.S. passenger airline industry has been under
tremendous financial pressure over the last decade, first from
security threats that inhibited air travel, then from volatile fuel
costs, and more recently from falling demand due to an economic
recession. Only recently has air traffic begun to recover. In response
to these pressures, passenger airlines have adapted their business
models. In 2008, for example, many airlines introduced fees for a
variety of passenger services, most notably for a first or second
checked bag, for which separate charges did not previously exist. 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. 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. The revenues from baggage and many other fees are not
subject to the 7.5 percent excise tax on amounts paid for domestic air
transportation, which, via the Airport and Airway Trust Fund, is used
to help fund the Federal Aviation Administration (FAA), including its
operation and development of the air traffic control system and
oversight of aviation safety. In addition, charging separate fees for
checked baggage raises questions about whether the quality of checked
baggage service has improved since the fees were introduced. Other
government fees on airline tickets help pay for other government
services, such as for security, immigration, customs, and agricultural
inspections. However, with the exception of fees for security
services, it is not clear if and how these various government-imposed
fees are refundable to passengers who do not use their nonrefundable
tickets. However, the refundability of these fees is not always clear
or communicated to airlines or consumers.
My statement today summarizes our most recent report on these issues,
which is being released publicly at this hearing today.[Footnote 1] In
this report we examined (1) the nature and scope of the fees airlines
charge to passengers, including the fees' relationship to the costs of
the services provided and the transparency of the fees; (2) the
potential impact of such fees on revenues used to help fund FAA; (3)
changes in the numbers of checked and mishandled bags, the amount of
compensation paid to passengers for mishandled bags, and other related
consumer issues; and (4) the process, if any, for refunding government-
imposed taxes and fees to passengers who do not use their
nonrefundable tickets. We have previously reported on issues related
to these objectives.[Footnote 2]
To address these issues, we developed a list of airline fees based on
research of travel and 17 airline Web Sites and corroborated the data
with airline officials;[Footnote 3] analyzed Department of
Transportation (DOT) financial and operating data; reviewed applicable
laws, regulations, guidance, and past studies; and interviewed
officials from the airline industry, trade associations, consumer
groups, global distribution systems, DOT, and the Internal Revenue
Service (IRS). More detail on scope and methodology is available in
the full report, which we completed in accordance with the Generally
Accepted Government Auditing Standards.
Background:
Increasingly, airlines are charging fees to supplement fare revenues.
Some fees, such as those for unaccompanied minors, reservation changes
or cancellation, and oversized or overweight baggage, have existed for
years. Other fees are new, including those introduced since 2008 for
services that did not previously entail separate charges, such as fees
for a first and second checked bag, early boarding, seat selection,
and meals. New services, such as Wi-Fi access, also generate fee
revenue. Information on many airlines' fees for services is available
through the airlines' Web Sites but not through the global
distribution systems[Footnote 4] that make fare information available
to online (e.g., Expedia and Travelocity) and traditional brick-and-
mortar travel agencies.
The Internal Revenue Code imposes several excise taxes to help fund
FAA, including a 7.5 percent tax on amounts paid for the
transportation of a person for domestic air transportation. This tax
applies to fees such as for peak/holiday travel and unaccompanied
minors, but does not apply to many other fees, including fees for
checked baggage. The federal government also imposes fees to help
other agencies cover their costs for security screening, customs,
immigration, and agricultural inspections among other things.[Footnote
5] DOT requires the airlines to include the costs of certain
government-imposed excise taxes in their advertised fares. In
addition, DOT requires the airlines to disclose their fees and
associated policies for checked baggage but not for other optional
fees; to separately report their revenues from baggage fees and
reservation change and cancellation fees; and to report the incidence
of mishandled checked bags as well as compensate passengers for
damages. Finally, according to DOT, it has the authority to ensure
passengers are not misled regarding their rights, such as their
eligibility for refunds of government-imposed taxes and fees.
Summary of Key Issues:
* Fees for optional services are based on costs and other factors and
are not fully disclosed to passengers at the time of booking. Airlines
have imposed a variety of fees on a range of optional services, such
as checked and, most recently, 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 $7.9 billion in 2008
and 2009 from baggage fees and reservation change and cancellation
fees alone--the only fees revenues airlines are required to separately
to DOT. Although small compared with total airline operating revenues,
fee revenues are growing. In the first calendar quarter of 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. 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. Meanwhile, the airlines could fully
disclose all of their fees to consumers searching for fares, but
according to global distribution systems representatives, are unlikely
to do so unless compelled because such disclosure will make airlines
less competitive as fares displayed would be higher if fees were
included.[Footnote 6] On June 8, 2010, DOT issued a Notice of Proposed
Rulemaking 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
website's homepage.[Footnote 7] 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 global distribution
systems that package fare information for online and traditional
travel agencies, which combined sell the majority of tickets.[Footnote
8]
* Airlines' increasing reliance on fee revenues reduces the proportion
of total passenger revenue that is taxed to help fund FAA. The IRS has
determined that many airline-imposed fees are not related to the
transportation of a person--the basis for imposing the 7.5 percent
excise tax on domestic air transportation[Footnote 9]--according to
applicable Treasury regulations and IRS guidance[Footnote 10]--and,
thus, only a proportion of the total fee revenue is subject to
taxation. These excise tax collections are deposited into the Airport
and Airway Trust Fund (Trust Fund),[Footnote 11] which is the primary
source of funding for FAA. Trust Fund revenues have fallen in recent
years, from about $12 billion in fiscal year 2007 to about $11 billion
in fiscal year 2009, owing to a variety of factors, including lower
fares and fewer passengers in 2009 than in 2007. In fiscal year 2009,
airlines reported nearly $2.5 billion in fee revenue from checked
baggage (the largest and only measurable untaxed fee).[Footnote 12] If
baggage fees in that year had been subject to the 7.5 percent excise
tax, an additional approximately $186 million in excise taxes or less
than 2 percent of total Trust Fund revenues would have been credited
to the Trust Fund.[Footnote 13] Although this percentage is relatively
small, it is likely to grow based on recent trends. In the first
quarter of 2010, airlines reported a 33 percent increase in revenues
from baggage fees compared to the corresponding quarter in 2009. Since
DOT guidance requires airlines to report separately only revenues from
baggage fees and reservation change and cancellation fees, we were
unable to estimate potential collections from other untaxed optional
fees.
* The imposition of checked baggage fees has contributed to declines
in the amount of checked baggage and the rate of mishandled bags per
thousand passengers as well as an increase in the amount of carry-on
baggage. 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. However, it is unknown whether baggage
fees have had an effect on the rate of mishandled bags per thousand
passengers as this information is not available. Despite the
introduction of fees, airlines have not significantly changed their
compensation methods. Checked baggage fees have also led to greater
amounts of carry-on baggage in the cabin, resulting in greater
competition for limited overhead storage space. A recent survey of
flight attendants found that more than half had concerns about the
amount of carry-on bags, while a third of the attendants noted
concerns about the safety of crew and passengers due to injuries from
lifting carry-on bags.
* Refundability of government taxes and fees is not always clear and
communication of refund eligibility to the airlines and consumers is
lacking. The refundability of government taxes and fees on unused
nonrefundable tickets varies depending upon the tax or fee. According
to IRS, aviation excise taxes on unused nonrefundable tickets are not
refundable; 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 consumer.[Footnote 14] In contrast,
consumers with unused nonrefundable tickets are entitled to a full
refund of the September 11th Security Fee, in accordance with
Department of Homeland Security (DHS) Transportation Security
Administration (TSA) guidance, but few consumers request a refund
because airlines are not required to proactively inform consumers of
their right to a fee refund. According to Customs and Border Patrol
(CBP), its applicable statutes and regulations authorize the refund of
its customs and immigration inspection fees on unused nonrefundable
tickets; however, CBP has not issued policy or guidance that clarifies
this interpretation or whether airlines can or must refund fees if
requested by consumers. The U.S. Department of Agriculture's (USDA)
applicable statutes and regulations regarding its inspection fee are
silent on whether the fee is refundable on unused nonrefundable
tickets, according to the agency.
Report's Matter for Congressional Consideration and Recommendations:
In our report, we note that if Congress determines that the benefit of
added revenue to the Airport and Airway Trust Fund from taxation of
airline-imposed optional fees is important, then it should consider
amending the Internal Revenue Code to tax certain or all airline-
imposed fees and deposit the revenue in the Airport and Airway Trust
Fund. We also make several recommendations to the Secretary of
Transportation to improve the disclosure of information on airline-
imposed fees and government-imposed fees for consumers and to improve
airlines' reporting of fee revenues to DOT. Among these are
recommendations for DOT to require that U.S. passenger airlines and
foreign airlines that fly within or to or from the United States
disclose optional airline-imposed fees and policies that the agency
deems important to passengers to know and further require that this
information be consistently disclosed across all distribution channels
used by the airline. Similarly, we recommend that DOT require that
U.S. passenger airlines and foreign airlines that fly within or to or
from the United States disclose to consumers applicable government-
imposed fees on nonrefundable tickets that may be eligible for refunds
as these determinations are made by relevant agencies. We also
recommend that DOT require U.S. passenger airlines to report to DOT
all revenues from optional fees paid by passengers related to their
trip in a separate account, exclusive of revenues from baggage fees
and reservation change and cancellation fees.
In addition, our report also contains recommendations to the
Secretaries of Homeland Security and Agriculture to eliminate the
ambiguity regarding their fees which are eligible for refunds. To DHS,
we recommend that the department issue guidance to airlines regarding
the refundability of its customs and immigration inspection fees. To
USDA, we recommend that the department determine whether its
inspection fee is refundable and convey this to airlines.
In commenting on a draft of the report on which this testimony is
based, DHS and USDA agreed with our recommendations to their
respective departments. DOT did not agree or disagree with our
recommendations.
Mr. Chairman, this concludes my statement. I would be pleased to
respond to any questions you or other Members of the Subcommittee may
have.
For questions about this testimony, please contact Dr. Gerald L.
Dillingham 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 testimony. Individuals who made key
contributions to this testimony include Paul Aussendorf, Assistant
Director; Amy Bowser; Brian Chung; Lauren Calhoun; Jay Cherlow;
Elizabeth Eisenstadt; Christopher Jones; and Maureen Luna-Long.
[End of section]
Footnotes:
[1] GAO, Commercial Aviation: Consumers Could Benefit from Better
Information about Airline-Imposed Fees and Refundability of Government-
Imposed Taxes and Fees, [hyperlink,
http://www.gao.gov/products/GAO-10-785] (Washington, D.C.: July 14,
2010).
[2] See GAO, Commercial Aviation: Airline Industry Contraction Due to
Volatile Fuel Prices and Falling Demand Affects Airports, Passengers,
and Federal Government Revenues, [hyperlink,
http://www.gao.gov/products/GAO-09-393] (Washington, D.C.: Apr. 21,
2009); Federal User Fees: Key Aspects of International Air Passenger
Inspection Fees Should Be Addressed Regardless of Whether Fees Are
Consolidated, [hyperlink, http://www.gao.gov/products/GAO-07-1131]
(Washington, D.C.: Sept. 24, 2007); and Summary Analysis of Federal
Commercial Aviation Taxes and Fees, GAO-04-406R (Washington, D.C.:
Mar. 12, 2004).
[3] We chose these 17 U.S. passenger airlines based on several
factors. All 17 airlines reported annual operating revenues of at
least $20 million and together collected more than 99 percent of the
checked baggage fees reported to the Bureau of Transportation
Statistics in 2008 and transported about 77 percent of domestic
revenue passengers in 2008.
[4] The three main global distribution systems are Amadeus, Sabre, and
Travelport, which combined, generated more than $9.6 billion in
revenue in 2008.
[5] Immigration inspection fees are divided between two Department of
Homeland Security agencies--Customs and Border Protection and
Immigration and Customs Enforcement. Agricultural inspection fees are
divided between Customs and Border Protection and the U.S. Department
of Agriculture. According to the interagency agreements, fees are
intended to be distributed among the agencies according to the cost of
the activities for which the agencies are responsible.
[6] To improve travel agencies' ability to provide information on and
payment for airline-imposed fees, the Airline Tariff Publishing
Company, which provides fare information to global distribution
systems has developed a product to distribute fee information.
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 the company, which is allowing global distribution
systems to access it on a test basis.
[7] DOT, Enhancing Airline Passenger Protections, Notice of Proposed
Rulemaking, 75 Fed. Reg. 32318 (proposed June 8, 2010). The comment
period closes August 9, 2010. In this context, DOT is seeking comment
on whether this requirement should be limited to disclosure of
"significant fees" for optional services, including the definition of
"significant fee" and whether it should be defined as a particular
dollar amount. Comment is also sought on alternatives to this option.
DOT is also seeking comment as to whether this provision, proposed 14
C.F.R. 399.85(c), should apply to ticket agents, as defined in 49
U.S.C. § 40102.
[8] DOT, Enhancing Airline Passenger Protections, Notice of Proposed
Rulemaking, 75 Fed. Reg. 32318 (proposed June 8, 2010).
[9] 26 U.S.C. § 4261(a).
[10] IRS guidance includes Revenue Rulings, Private Letter Rulings,
and other guidance documents. See 26 C.F.R. §§ 49.4261-7, 26 C.F.R. §
49.4261-8; Priv. Ltr. Rul. 118216-09.
[11] 26 U.S.C. § 9502.
[12] Because U.S. airlines charge fees for overweight and oversize
bags as well as for additional bags, these fees are included in the
$2.5 billion. In fiscal year 2007, before U.S. airlines began charging
for first and second checked bags, airlines reported about $457
million in baggage fee revenues. Revenues from reservation change and
cancellation fees are already subject to the 7.5 percent excise tax as
they are considered fees paid for the transportation of persons.
[13] For this analysis, we are making the simplifying assumption that
the additional tax due would not have caused any passengers to choose
not to purchase tickets. Any such reduction in purchases would
presumably have been small and would have had the effect of making the
increase in taxes collected a little smaller than our estimate.
[14] Rev. Rul. 89-109 (1989) 1989-2 CB 232, as applicable to the 7.5
percent excise tax.
[End of section]
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