Travelers are big losers as TSA taxes rise

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A looming increase in passenger security taxes for US travelers could create formidable challenges for the country’s low-fare carriers as the traffic stimulation strategy that serves as the backbone of their business model could face serious setbacks due to overall higher fares crimping demand.

Under the recently forged bi-partisan budget deal, the taxes, which help fund the Transportation Security Administration’s (TSA) aviation security costs, are rising from $2.50 to $5.60 for a one-way flight.  The total tax for a round trip flight will reach $11.20.

Even though the tax hikes are a governmental mandate set to take effect in July, the end result is higher travel costs for passengers. Once the overall costs of travel rises, demand ultimately begins to falter, explains long-time industry consultant Robert Mann.

He says the tax increases “hurt the appearance” of low fares more dramatically as the taxes on a $60 fare seem more pronounced than a much higher ticket price of $600. Since low-fare carriers tend to leverage cheaper ticket prices to stimulate demand, a rise in fares hampers their ability to execute that strategy. “My guess is Ben Baldanza is not thrilled about this,” Mann quips.

Baldanza is the chief of ultra low cost carrier Spirit Airlines, whose business model during the last two-to-three years has rested on entering large US metro markets and charging rock bottom fares to attract a customer base who might not otherwise afford air travel. The carrier then charges for various add-ons including printed boarding passes at the airport and all food and beverages.

Baldanza aired his frustration over decision by US lawmakers to raise security feed in an editorial for Time magazine published prior to President Obama signing the bill. He described the proposed increase in TSA fees as “yet another tax increase on Congress’s ‘go to’ punching bag – namely our national airline industry”. Echoing Mann’s assessment, Baldanza declared the tax hike is “a huge price increase to hit consumers when your average fare is less than $80. Moreover, the fee is grossly regressive: a customer paying $59 for a short-haul domestic flight pays the same tax as an expense-account traveler flying to Dubai on a $15,000 first-class ticket.”

Larger network carriers also face negative effects from rising TSA taxes as Mann explains the increases further hinders airlines’ ability to “raise prices that accrue directly to the carrier”.

Delta Air Lines CEO Richard Anderson recently remarked that the increase in TSA collections from passengers is “an important takeaway for our business model. It’s a sales tax and the sales tax will have to be paid by consumers”.

For the moment it seems the TSA is the only winner under the new fee structure. Crafters of the budget deal estimate that the rise in taxes would raise the portion of TSA’s costs covered by security fees from 30% to 43% and save $12.6 billion over ten years.

Not surprisingly, trade group Airlines for America (A4A) has repeatedly questioned TSA’s efficiency as various threats of an increase in the agency’s passenger tax have emerged during the last year. A4A contends TSA’s budget and staffing have increased by 19% and 13.5%, respectively, from fiscal 2007 to fiscal 2013. But during the same timeframe the number of passengers processed by the agency has fallen by 11%.

During March 2012 when a proposal was floated to increase the security tax from $2.50 to $5, A4A warned additional tax increases “would discourage business travel and tourism”. The association countered TSA should improve its efficiency and “not add more taxes to customers who are already overburdened”. Apparently, Congress failed to receive the message, and passengers should brace for a heavier burden beginning in July.

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