Airlines Seen Rolling Back Fare Boost as U.S. Taxes Return

Southwest Airlines Co. (LUV) may lead U.S. carriers in rolling back a fare increase as federal ticket taxes and fees are restored, ending a two-week industry windfall.

Collections must resume by midnight Aug. 8, the Internal Revenue Service said today in Washington. Carriers probably will wait to drop prices to extend gains from the temporary boost, with Southwest, the biggest discount operator, likely to be the first to act, according to travel website FareCompare.com.

“I wouldn’t be shopping for tickets this weekend,” FareCompare.com Chief Executive Officer Rick Seaney said in an interview. “There’s no incentive to do something right now until someone dips their toe in first. But it’s coming.”

Airlines boosted fares after the Federal Aviation Administration’s revenue-raising authority lapsed July 22, halting collection of a 7.5 percent sales tax on domestic tickets and a fee of $3.70 a flight segment. Increasing base fares by the same amount produced more revenue for airlines without consumers seeing a difference.

“Leaving fares unchanged would translate into a healthy 10 percent fare increase, but rarely has the industry raised fares by this magnitude in a single effort,” Jamie Baker, a JPMorgan Chase & Co. (JPM) analyst in New York, wrote in a note to clients. He also said Southwest will be the first to cut prices.

“We have not announced any changes and we can’t comment on future fares,” said Brandy King, a Southwest spokeswoman.

Senate Action

The U.S. Senate approved legislation today extending the FAA’s funding authority through mid-September. While that law would permit the IRS to retroactively collect taxes from passengers who bought tickets over the past two weeks, the IRS said it wouldn’t attempt to do so.

Passengers who purchased fares that included taxes before collections were suspended won’t be eligible for a refund, the IRS said. Delta Air Lines Inc. (DAL), Southwest, US Airways Group Inc. (LCC) and JetBlue Airways Corp. (JBLU) were among the carriers that had said they would grant refunds once the IRS issued guidelines. The industry collected about $28 million a day from the increase, or about $400 million total during the standoff in Congress over funding the FAA, Baker estimated. The agency has been operating on a series of short-term extensions since its last multiyear authorization expired in September 2007.

Lag Time

A lag time between when the taxes return and when airlines rescind the equivalent fare increase could result in unwary consumers paying both, said Seaney, the CEO of Dallas-based FareCompare.com.

Demand for travel doesn’t appear to be strong enough to support what would amount to a $40 or $50 price increase for domestic tickets if airlines attempt to keep their higher prices in place once the taxes resume, Seaney said. The first airline to roll back the fare increase probably will force all the others to do the same, he said.

“We’re getting toward the end of summer when things slow down anyway,” Seaney said. “The airlines are probing two things: the appetite of the consumer and the appetite of the competition.”

Southwest said yesterday that it’s slowing planned capacity growth through 2012 to reduce operating costs after a series of price increases appeared to discourage travel.

“We think we pushed fares about as much as we should right now to be productive,” CEO Gary Kelly said on a conference call. The Dallas-based airline boosted prices at least seven times in the first quarter, an unprecedented number, he said.

AMR Corp. (AMR)’s American Airlines began trying to raise fares today, boosting round-trip prices by $4 to $10 on many domestic routes plus Alaska, Hawaii and Canada, and US Airways and Air Canada started matching on some flights, Seaney said. Carriers typically drop fare increases when others don’t follow.

To contact the reporters on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net; Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net.

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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