Airlines to Reap $1.3 Billion Fare ‘Windfall’ Amid FAA Limbo

Airlines May See $1.3B ‘Windfall’ in FAA Shutdown
Lost FAA taxes would amount to about $1.3 billion through Sept. 7, when Congress resumes legislative business, said Laura Brown, an agency spokeswoman. Photographer: Keyur Khamar/Bloomberg

U.S. airlines led by United Continental Holdings Inc. may pocket $1.3 billion in higher fares tied to the Federal Aviation Administration’s partial shutdown as Congress deadlocks on the agency’s funding.

The FAA already has been unable to collect $28.6 million a day in aviation taxes since midnight on July 22. Missed receipts may climb by $1 billion if the matter remains unresolved until lawmakers reconvene in September, FAA Administrator Randy Babbitt said. President Barack Obama today urged congressional leaders to reach a resolution this week.

The largest U.S. carriers, including United, Delta Air Lines Inc. and Southwest Airlines Co., stand to reap that much new revenue after raising fares to mirror the suspended taxes and keeping the difference, said Rick Seaney, chief executive officer of Dallas-based ticket researcher

“This is manna from heaven, and a real windfall for the airlines,” Seaney said in an interview. “I don’t expect them to drop the fare increases. Why would they? Total ticket prices are the same and it doesn’t seem to be hurting bookings.”

Congress was set to begin its August recess today without a new FAA funding bill. The expiration of tax-collecting authority last month halted a 7.5 percent sales tax on domestic tickets and a $3.70 fee for each flight segment. Similar, higher fees on international tickets also were suspended, and airlines started saving on jet fuel taxes.

“We don’t know how long it’s going to last, and we can’t sit here with 100 percent conviction that the government won’t make the airlines repay this somehow,” said Hunter Keay, an analyst at Wolfe Trahan & Co. in New York. “All it takes is some law to be passed, an FAA recollection-type bill.”

Tax Estimates

Lost FAA taxes would amount to about $1.3 billion through Sept. 7, when Congress resumes legislative business, said Laura Brown, an agency spokeswoman. That was in line with estimates from JPMorgan Chase & Co.’s Jamie Baker and Helane Becker of Dahlman Rose & Co., who are based in New York.

The additional revenue may boost Delta’s third-quarter earnings by 7 cents a share, Chicago-based United’s by 15 cents and American Airlines parent AMR Corp.’s by 12 cents for each week the FAA is partially idled, Baker wrote in a note to clients last week.

Delta’s excise taxes amount to about $5 million a day, President Ed Bastian told analysts on a July 27 conference call. JetBlue Airways Corp. CEO David Barger said the New York-based airline is seeing a daily benefit of as much as $900,000.

‘Santa Claus’

“It’s like we’ve had a 7.5 percent fare hike for the airlines, and it’s not coming out of your pocket or mine but Uncle Sam’s,” said Tom Parsons, CEO of travel website in Arlington, Texas. “It’s like Santa Claus came in July.”

The gain hasn’t been enough to keep airline stocks from tumbling since July 22, with a 17 percent decline for Hawaiian Holdings Inc. pacing an 8.4 percent drop for the Bloomberg U.S. Airlines Index.

The shares have been under pressure on concern that the weak economy may crimp travel amid oil prices at seasonally high levels. Crude averaged $97.34 a barrel in July, 27 percent more than a year earlier.

Leisure travel demand “unexpectedly and somewhat suddenly lost momentum at the end of June” and is pressuring industry revenue, JetBlue said last week. Atlanta-based Delta deepened its plan for cutting seating capacity after the U.S. Labor Day holiday, to 5 percent from 4 percent.

Obama Urges Resolution

Obama told reporters today before a Cabinet meeting that Congress must stop playing “politics” with the FAA’s funding and resolve their impasse by the end of this week. One item in dispute is possible cuts to rural air service subsidies.

“This is a lose-lose situation that could be easily solved if Congress gets back into town and does its job,” Obama said. “They don’t even have to come back into town. The House and the Senate could, through a procedural agreement, basically do this through unanimous consent and they can have the fights that they want to have when they get back.”

Senate Commerce Committee Chairman Jay Rockefeller, a Democrat from West Virginia, said today at a news conference in Washington that the airlines and their trade group, the Air Transport Association, were “all very silent” about the FAA shutdown and its ramifications.

“They sort of sent a letter saying ‘Oh yes, we’d like to have a clean bill of extension’” a few days ago, Rockefeller said. “But did they work it? No. Did they make phone calls? No. Was there any pressure? No.”

‘Not Right’

The ATA has been in regular contact with senior lawmakers in recent weeks to advocate for a multi-year FAA bill and “we encourage members of Congress to expeditiously resolve their differences and pass a bill that moves the system forward,” said Steve Lott, a spokesman for the Washington-based organization.

Transportation Secretary Ray LaHood said yesterday that the Treasury Department is studying whether the FAA tax revenue could be claimed retroactively. He declined to comment further when asked about the issue on a conference call with reporters.

There has been confusion among consumers and airlines on how to handle refunds for taxes collected before the FAA shutdown for flights taken with the agency’s taxing authority suspended.

Delta and Tempe, Arizona-based US Airways Group Inc. have said they will process refunds for customers who request them and are eligible, and that they were waiting on the Internal Revenue Service to provide guidelines. The IRS said July 27 it asked airlines to repay fliers.

Also unknown is how airlines will react once the taxes are reinstated, said Becker, the Dahlman Rose analyst.

“Do the taxes go back on top of the current fare, or do these fare increases get rolled back and these become taxes again?” she said. “That’s the question people are waiting to see the answer for.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE