Airlines Say Obama Ticket Fee Plan May Hurt Demand

(Corrects to clarify price increase in 11th paragraph.)

Airline industry officials said an increase in passenger-ticket taxes being considered by President Barack Obama would reduce travel demand and add to what the industry’s chief lobbyist called two decades of burdensome levies on carriers.

Raising taxes paid by airlines means “fewer business trips are taken, tourism suffers,” Nicholas Calio, chief executive officer of the Air Transport Association, told the House aviation subcommittee yesterday. He called the increase in airline taxes since 1990 “breathtaking.”

Obama in his fiscal 2012 budget, to be unveiled Feb. 14, will likely call for a cut of $1.1 billion, or 31 percent, in federal grants for airport construction projects, the American Association of Airport Executives said yesterday.

Obama may suggest that Congress let airports raise their so-called passenger facility charges included in airlines’ ticket prices to as much as $7 a flight segment, from $4.50 now, to recoup the lost revenue, according to four people familiar with the matter. They requested anonymity because the proposal has not yet been made public.

A Federal Aviation Administration funding bill being considered by the Senate would keep the maximum fee at $4.50. The House hasn’t introduced its version after passing legislation last year, when the body was controlled by Democrats, to raise the fee to as much as $7.

Photographer: Richards/AFP/Getty Images

Obama may ask Congress to let airports make up for the $1.1 billion in proposed cuts by raising ticket fees to $7 a flight segment. Close

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Photographer: Richards/AFP/Getty Images

Obama may ask Congress to let airports make up for the $1.1 billion in proposed cuts by raising ticket fees to $7 a flight segment.

The increase would bring in $1.3 billion more for projects annually, the airport group said in testimony. The ATA put the figure at $2 billion.

‘Huge’ Impact

An increase would hit carriers including Southwest Airlines Co. (LUV), Delta Air Lines Inc. (DAL), United Continental Holdings Inc. (UAL) and AMR Corp. (AMR)’s American Airlines, which paid airports $2.8 billion last year in passenger charges, Calio said in his testimony. Passengers paid an average of $4.03 a flight segment in 2010, according to data compiled by Bloomberg Government.

Airlines “can’t capture the entire cost” of a fee increase, said Vaughn Cordle, managing partner of AirlineForecasts LLC in Clifton, Virginia. “The bottom line costs are huge.”

Every $2 billion in fee increases for U.S. airlines results in an average fare rise of about 1.5 percent, which in turn reduces demand by about 1 percent, according to Cordle.

U.S. airline industry profits, which Cordle estimates to be about $3.6 billion this year, would drop by about $1 billion, or 28 percent, due to $2 billion in fee increases, he said.

Spending Freeze

Delta spokeswoman Betsy Talton yesterday referred to a letter Chief Executive Officer Richard Anderson wrote to passengers in the January issue of the company’s in-flight magazine, Sky. Anderson wrote that an increase to $7 would increase ticket prices to an average of $112 per trip for a family of four.

“Increasing the PFC tax would add unnecessary costs for customers and have the very real potential of hampering the industry’s returning demand,” he wrote.

AMR spokesman Sean Collins didn’t immediately comment on the proposed increase in passenger fees. Southwest spokeswoman Beth Harbin declined to comment, referring calls to ATA.

Obama is trying to propose a federal budget that will allow more spending to update the air-traffic control system, a top aviation priority for the administration, while adhering to his call for a five-year freeze on discretionary spending outside of security and national defense.

Jill Zuckman, a spokeswoman for the U.S. Transportation Department, did not return a telephone call to comment.

Congress since 1990 has allowed airports to charge the fees, initially set at $3 for each segment of a flight. Congress in 2000 raised the cap to a maximum of $4.50.

Five Rejections

President George W. Bush tried for five consecutive years to cut the airport grant fund, most recently in 2008. Congress rejected the cuts each time.

While airports back a fee increase, they oppose a cut in airport construction grants. Those grants, now funded at $3.5 billion, “would obviously have an impact” on airports in all parts of the country, Kelly Johnson, first vice chairwoman at the Alexandria, Virginia-based airports group, told the aviation subcommittee yesterday.

To contact the reporter on this story: John Hughes in Washington at jhughes5@bloomberg.net

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net

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