This is the accessible text file for GAO report number GAO-04-406R 
entitled 'Summary Analysis of Federal Commercial Aviation Taxes and 
Fees' which was released on March 31, 2004.

This text file was formatted by the U.S. General Accounting Office 
(GAO) to be accessible to users with visual impairments, as part of a 
longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov.

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately.

March 12, 2004:

The Honorable John McCain:

Chairman:

The Honorable Ernest Hollings:

Ranking Member:

Committee on Commerce, Science, and Transportation:

United States Senate:

The Honorable Trent Lott:

Chairman:

The Honorable John D. Rockefeller, IV:

Ranking Member:

Subcommittee on Aviation:

Committee on Commerce, Science, and Transportation:

United States Senate:

Subject: Summary Analysis of Federal Commercial Aviation Taxes and 
Fees:

For 2001 through the third quarter of 2003, the U.S. airline industry 
reported operating losses of $20.7 billion. A number of factors--
including the economic slowdown, a shift in business travel buying 
behavior, and the aftermath of the September 11, 2001, terrorist 
attacks--contributed to these losses by reducing passenger and cargo 
volumes and depressing fares. To improve their financial position, many 
airlines cut costs by various means, notably by reducing labor 
expenditures and by decreasing capacity through cutting flight 
frequencies, using smaller aircraft, or eliminating service to some 
communities. Carriers have also reduced some airfares to encourage 
travel. Despite these efforts, several airlines filed for bankruptcy 
protection. It remains to be seen when the industry will emerge from 
this downturn.

In response to the industry's financial condition, Congress has 
provided several forms of financial relief. In September 2001, Congress 
passed the Air Transportation Safety and System Stabilization 
Act,[Footnote 1] which authorized payments of up to $4.5 billion in 
pretax cash assistance to reimburse air carriers for losses incurred as 
a direct result of the 4-day government shut-down of air traffic and 
incremental losses stemming from the terrorist attacks and also 
authorized up to $10 billion in loan guarantees to help airlines gain 
emergency access to capital.[Footnote 2] In January 2002, Congress 
appropriated $100 million for new or modified cockpit doors on 
commercial aircraft to improve security of the flight deck.[Footnote 3] 
In the fiscal year 2003 supplemental appropriations act, Congress 
appropriated $2.4 billion in security cost relief for 
airlines.[Footnote 4]

To provide information to Congress for its continuing deliberations 
about whether and, if so, how to provide additional help to the airline 
industry, you asked us to review the payments of major commercial 
aviation taxes and fees over the last 5 years. The federal government 
levies or approves various taxes and fees on the commercial aviation 
industry. These taxes and fees generally are levied as a percentage of 
the base ticket price or are assessed at a flat rate per occurrence 
(e.g., per departure or passenger enplanement). The revenues from these 
taxes and fees support various aspects of the civil aviation system--
including operation of the air traffic control system, modernization of 
airport facilities, and support of aviation security related 
activities. As requested, we focused on the following research 
questions: (1) What are the major commercial aviation taxes and fees, 
how much is collected annually, and how are the proceeds used? (2) How 
did changes in aviation tax and fee collections compare with changes in 
the industry's operating revenues and expenses from 1998 through 2002? 
(3) How has the total amount of aviation taxes and fees paid varied 
among carriers? (4) In the two instances since 1996 when an aviation 
tax or fee was not collected, how did airfares change?

To answer these questions, we obtained and analyzed aviation tax and 
fee collection data for 1998 through 2002 from several federal agencies 
responsible for collecting and tracking the data, along with payment 
data from 12 airlines; analyzed Department of Transportation (DOT) data 
on the industry's operating revenues, expenses, and fares; reviewed the 
results of studies examining variations in the amount of taxes and fees 
paid by carriers and passengers; and analyzed fare changes in several 
markets after taxes lapsed or fees were suspended. This report 
addresses only certain of the taxes and fees paid by commercial 
passenger airlines and their customers. It excludes, for example, all 
corporate taxes and some fees that are paid to airports (e.g., landing 
fees). In addition, this report does not address non-U.S. commercial 
aviation taxes and fees. All dollar figures related to the analysis of 
taxes and fees are expressed in constant 2002 dollars. For more 
information on our scope and methodology and the steps we took to 
ensure data reliability, see pages 10 to 11. We conducted our review 
from February 2003 through February 2004 in accordance with generally 
accepted government auditing standards.

Summary:

On October 31, 2003, we briefed your Committee staff on the preliminary 
results of this work. This report summarizes the information presented 
in that briefing. Enclosure I contains the finalized slides from that 
briefing. Enclosure II contains 2002 tax and fee payment data for 10 of 
the air carriers in this study.[Footnote 5]

In summary:

In 2002, the collections from 13 major commercial aviation taxes and 
fees--including the ticket tax and passenger fee for security--totaled 
about $12.6 billion. These collections finance aviation infrastructure, 
including air traffic control, and services provided to the industry, 
such as security inspections. Collections did not cover all government 
aviation expenditures in 2002. For example, the taxes covered about 92 
percent of the Federal Aviation Administration's (FAA) 2002 budget; the 
general fund covered the remainder.

For 1998 through 2002, tax and fee collections rose in absolute terms 
and as a percentage of industry revenues and expenses. Collections of 
taxes and fees rose more than 15 percent during this period. 
Particularly after 2000, when industry revenues and expenses fell 
significantly, taxes and fees increased as a percentage of revenues and 
expenses. Similarly, because base airfares declined from 1998 through 
2002, taxes and fees in 2002 accounted for a larger share of carriers' 
average annual airfares.

The total amount of taxes and fees paid by carriers in 2002 varied, 
largely based on passenger volume and the type of service provided. 
Additionally, according to a recent study by a team of researchers from 
the Global Airline Industry Program of the Massachusetts Institute of 
Technology (MIT) and from Daniel Webster College,[Footnote 6] the share 
of taxes and fees included in the final ticket price in the second 
quarter of 2002 varied by carrier type (e.g., low cost), trip length, 
and ticket price. This study (henceforth the "MIT study") found that 
taxes and fees paid directly by air travelers added 15.5 percent, on 
average, to the cost of tickets sold during that quarter.

During the 1996 ticket tax lapse and 2003 security fee holiday, 
carriers generally raised "base" airfares (i.e., airfares net of taxes 
and fees) compared with what they were in periods before the absence of 
the tax or fee. The effect of this to consumers was to maintain or 
increase gross fares. These fare increases were more moderate in 
markets where a low-cost carrier (e.g., Southwest) was operating and 
among leisure travelers.

Taxes and Fees Offset Some Federal Costs to Provide Aviation 
Infrastructure and Services:

The 13 major commercial aviation taxes and fees fall into three main 
groups--transportation taxes, user fees, and passenger facility charges 
(PFC)--each of which is used to finance aviation infrastructure (e.g., 
airports, air traffic control) or services provided to the industry 
(e.g., security inspections, customs inspections). (See table 1.) Some 
of these taxes and fees apply only to the international portions of 
trips. (See slides 6 to 7.):

Table 1: Major Commercial Aviation Taxes and Fees and 2002 
Collections:

Type: Taxes; 
Specific charges: 
* Passenger ticket; 
* Passenger segment; 
* Waybill (cargo); 
* International departure/arrival; 
* Fuel (commercial aviation jet); 
* Rural airports; 
Purpose: 
Finance the Airport and Airway Trust Fund,[A] which funds the Airport 
Improvement Program (AIP) and significant portions of FAA operations, 
including air traffic control and other items; 
FY 2002 Collections ($ billions): $8.6.

Type: Fees[B]; 
Specific charges: 
* Animal and Plant Health Inspection Service (APHIS) passenger 
inspection; 
* APHIS aircraft inspection; 
* Customs inspection; 
* Immigration and Naturalization Service (INS) inspection; 
* Passenger fee for security[C]; 
* Air carrier fee for security[C]; 
Purpose: 
Finance inspections and other services provided to the industry; 
FY 2002 Collections ($ billions): $2.1.

Type: PFCs[D]; 
Specific charges: 
* Local tax assessed with federal approval; 
Purpose: 
Fund FAA-approved airport-related projects; 
FY 2002 Collections ($ billions): $1.9. 

Source: GAO.

Note: Charges shown underscored apply only to the international 
portions of trips. In this review, all taxes and fees except PFCs are 
reported on a fiscal-year basis. The passenger segment and 
international departures/arrivals taxes are indexed to inflation and 
increased slightly in January 2004.

[A] For more information about the status of the trust fund, see U.S. 
General Accounting Office, Airport and Airway Trust Fund: Financial 
Outlook Is Positive, but the Trust Fund's Balance Would Be Affected If 
Taxes Were Suspended, GAO-03-979 (Washington, D.C.: Sept. 15, 2003).

[B] The Customs Service and parts of APHIS and INS are now incorporated 
into the Department of Homeland Security (DHS). We did not analyze 
payments of the overflight fees since primarily operators of non-U.S. 
aircraft pay this fee, which partially funds the Essential Air Service 
program.

[C] In P.L. 108-11, Congress suspended collection of these fees from 
June 1, 2003, through September 30, 2003; the fees were reinstated on 
October 1, 2003.

[D] PFCs are not federal fees; however, we included them in this 
analysis because similar analyses (e.g., those done by the Air 
Transport Association and MIT) have included them, and PFCs are a 
significant source of funds for aviation infrastructure. As of February 
1, 2004, 312 locations were collecting PFCs.

[End of table]

In fiscal year 2002, collections of these taxes and fees totaled nearly 
$12.6 billion ($1.3 billion of which comprised security fee payments 
from U.S. and foreign carriers); however, these funds did not equal all 
government expenditures for aviation-related infrastructure and 
services. For example, security fee collections equaled about 22 
percent of the Transportation Security Administration's (TSA) $5.8 
billion budget authority, most of which was directed to aviation 
security. Trust fund collections (ticket tax, fuel tax, etc.) covered 
91.6 percent of FAA's $13.5 billion budget authority.[Footnote 7] 
Security fees collected were required to be credited against 
appropriations and returned to the general fund of the U.S. Treasury as 
offsetting collections. (See slides 8 to 9.):

Tax and Fee Collections Rose Although the Airline Industry Experienced 
Revenue and Expense Declines after 2000:

From 1998 through 2002, collections of 13 commercial aviation taxes and 
fees increased, although the airline industry's revenues and expenses 
decreased after 2000; as a result, taxes and fees rose as a percentage 
of the industry's revenues and expenses. Tax and fee collections 
increased from about $10.9 billion in 1998 to about $12.6 billion in 
2002 (15.6 percent). However, as the aviation industry responded to a 
unique combination of challenges--terrorist attacks on U.S. soil, an 
economic recession, wars in Afghanistan and Iraq, and the outbreak of 
severe acute respiratory syndrome (SARS) in Asia--revenues declined 
and, to a lesser extent, expenses decreased. Total revenues dropped 
20.8 percent between 2000 and 2002 as passenger traffic and fares 
decreased. As revenues plummeted, carriers attempted drastic expense 
reductions. Industry expenses decreased nearly 10 percent between 2000 
and 2002. Because of these decreases in revenues and expenses, taxes 
and fees rose from 8.9 to 11.8 percent of the industry's revenues and 
from 9.7 to 10.9 percent of the industry's expenses between 1998 and 
2002. Taxes and fees also increased as a percentage of the carriers' 
average domestic fares during this period for 10 of the airlines we 
studied, primarily because carriers reduced their fares. (See slides 10 
to 16.):

The Air Transport Association (ATA), the industry trade group that 
represents 26 cargo and passenger carriers, argues that taxes and fees 
have risen significantly over time. ATA's analysis suggests that taxes 
and fees increased 76 percent between 1992 and 2002. ATA estimated that 
the tax and fee share of a $200 single-connection, domestic round-trip 
ticket--where the maximum possible PFC was levied--would have increased 
from $29 in 1992 (15 percent) to $51 in 2002 (25.6 percent). ATA 
officials characterized the level of federal aviation taxes and fees as 
a significant encumbrance on the financial performance of the industry, 
in large part because the industry at present lacks the pricing power 
to pass on such taxes and fees to consumers.[Footnote 8] Our analysis 
of this issue as well as current levels of taxation follows. (See slide 
17.):

Tax and Fee Payments Vary by Passenger Volume, Service, and Fares:

The total amount of taxes and fees paid by carriers varies, largely 
based on passenger volume and the type of service provided. For 
example, our analysis of 2002 payments by 10 airlines showed that 
airlines enplaning more passengers generally remitted more taxes and 
fees to the government. Variations in carriers' tax and fee payments 
are also attributable to other service factors, such as how many 
segments are flown, whether international service is provided, or how 
much cargo is transported. (See slides 19 and 32 to 41.):

The amount of taxes and fees also varies according to carrier type 
(e.g., low cost), the total amount of airfares, and trip length. A 
study by the Global Airline Industry Program at MIT found that, as a 
percentage of ticket prices, taxes and fees were higher for passengers 
who purchased tickets on low-cost carriers (e.g., Southwest) or who 
purchased lower-priced tickets in general. According to the study, the 
average tax share for tickets purchased on low-cost carriers was 17.1 
percent (based on a total average fare of $198.17--i.e., tax-and fee-
inclusive), compared with 14.6 percent (based on a total average fare 
of $335.67) for tickets purchased on six major carriers. By fare group, 
the average tax share for fares up to $200 was 22.3 percent, while the 
average tax share for fares from $200.01 to $400 was 16.4 percent. 
Thereafter, according to the study, the tax share decreased as fares 
increased. (See slides 20 to 22.):

Further, in contrast to ATA's widely disseminated estimate that the tax 
share of a final $200 fare is 25.6 percent (or $51),[Footnote 9] the 
MIT study estimated that the actual average tax share for tickets 
purchased during the second quarter of 2002 was 15.5 percent, or $44.88 
of the average domestic fare of $289.96. (See slide 23.) To gain some 
perspective on how the effective tax rate may have changed over time, 
the study estimated that the overall effective tax rate in the second 
quarter of 1993 (when the only taxes and fees applied to airline 
tickets were the federal ticket tax and any applicable passenger 
facility charges) was 10.9 percent, significantly less than the overall 
estimated 15.5 percent in effect in the second quarter of 2002. This 
significant increase in the effective tax rate was due primarily to a 
sharp decline in the price of the average round-trip domestic base 
fare, which dropped from $389.57 (adjusted to 2002 prices) in 1993 to 
$289.96 in 2002. The average amount charged for taxes and fees in 1993 
was $42.44 (adjusted to 2002 prices) versus $44.88 in 2002, a real 
increase of 5.7 percent.

When the Ticket Tax and Security Fee Were Not Collected, Carriers 
Raised Certain Fares:

In the two instances since 1996 in which Congress allowed the ticket 
tax to lapse and suspended the security fees, carriers generally raised 
"base" airfares (i.e., airfares net of taxes and fees), compared with 
what they were in periods before the absence of the tax or fee. To 
passengers, the final gross ticket price was generally the same or 
higher compared with prior periods. These fare increases were more 
moderate in markets containing a low-cost carrier than in markets where 
one was not present. Although we do not know the precise reasons for 
these fare increases, it may be that carriers were, in part, attempting 
to "capture" at least some of the revenue associated with the absent 
tax or fee that would normally have been remitted to the government. 
Carriers alter their fares in response to many factors, and more 
rigorous analysis would be needed to isolate the effect of each factor. 
Therefore, we cannot exclude other exogenous factors from accounting 
for these changes in base fares. That is, it is possible that the fare 
changes that occurred in these two instances may have been the result 
of factors other than the absence of a tax or fee and the presence or 
absence of low-cost carriers, such as changing economic and competitive 
conditions in those markets.[Footnote 10]

Our summary analysis of airfare changes in four markets[Footnote 11] 
when the 10-percent passenger ticket tax was allowed to lapse for about 
8 months in 1996 indicated that carriers generally increased their 
average base fares, compared with fares in effect in prior periods. To 
consumers, the average gross fares would appear to have stayed the same 
or increased.[Footnote 12] For example, in the New York-Chicago and 
Billings-Minneapolis/St. Paul markets, where no low-cost carriers were 
operating, carriers raised their average base fares by as much as 52 
percent over the average fares they had charged in the same period 
during the previous year. By comparison, in two markets with service 
from low-cost carriers, the average base fare increases were less than 
in the markets without a low-cost carrier. For example, in the Las 
Vegas-Los Angeles market, in which a low-cost carrier competed against 
two network airlines, all carriers raised their average base fares at 
some point during the tax lapse, but no one raised them over 15 
percent. Similarly, the presence of a low-cost carrier in the Los 
Angeles-San Francisco market appeared to moderate the extent of the 
increases in average base fares. After the tax was reinstated, most 
carriers increased these average base fares in these four markets 
(compared with the average base fares in effect during the fourth 
quarter of 1995), but not to the same extent as when the tax initially 
lapsed.[Footnote 13] (See slides 25 to 29.) In addition, when the tax 
had lapsed, carriers generally raised average fares more (in both 
absolute and relative terms) on "business" passengers than they did on 
"leisure" passengers.[Footnote 14]

When Congress gave the industry a temporary holiday from security fees 
by suspending collection of the fees from June 1 through September 30, 
2003, carriers also increased their base fares, which would be 
consistent with them capturing the tax.[Footnote 15] In an analysis of 
week-over-week changes in fares offered by seven carriers in each of 
their 20 largest passenger markets, Harrell Associates--an industry 
consulting firm that specializes in airfare benchmarking--found that, 
when carriers were no longer required to add the security fee on top of 
their fares, carriers raised base "business fares" they offered by the 
amount of the security surcharge in over 80 percent of those 
markets.[Footnote 16] After the security fee was reimposed beginning in 
October 2003, carriers generally did not restore those base fares to 
their prior lower levels. For example, if an airline charged a base 
"business fare" of $447 for a one-way flight between point A and point 
C over point B the week before the holiday, raised that fare to $452 
for the same ticket once the holiday began, and left the fare at $452 
when the holiday was over, it would appear to have captured the $5 
security surcharge. Harrell Associates' data indicate that carriers 
were able to effectively capture the security fee on business fares, 
but not to the same degree on leisure fares, in most markets. We 
interpret this as an indication that, because of greater competition 
for leisure passengers, airlines were forced to relinquish potential 
revenue on some routes. (See slide 30.):

Concluding Observations:

The commercial aviation taxes and fees we reviewed were all enacted to 
support the infrastructure and operation of the nation's aviation 
system. With the cyclical nature of the industry, these taxes have in 
recent years risen higher than in prior years as a percentage of 
airline revenues and expenses. This has certainly been the case since 
September 11, 2001, when the terrorist attacks and the ongoing economic 
downturn jeopardized the viability of the industry. Additional security 
fees and requirements were imposed on the industry, although they were 
offset by the government's assumption of many aviation security 
responsibilities as well as the security fee holiday and other 
governmental assistance. Furthermore, even though total collections of 
these taxes and fees have risen since 1998, the collections do not 
always cover the government's costs of providing aviation-related 
services. Indications are that the 2003 security fee "holiday" was 
financially positive for carriers, because they appear to have been 
able to retain revenues--on some fares--that would have ordinarily been 
remitted to the government. However, the overall effect of the holiday 
was limited by the amount of revenues carriers were able to retain--
since carriers, for competitive reasons, may not have been able to 
capture the potential revenue from the fee on some routes.

Scope and Methodology:

To identify major commercial aviation taxes and fees, how the proceeds 
are used, and the amount of annual collections, we reviewed 
Congressional Research Service and ATA studies of aviation taxes and 
fees as well as DOT, Office of Management and Budget, and agency data 
on collections. We also examined laws and regulations implementing the 
taxes and fees. To determine how changes in tax and fee collections 
compare with changes in industry revenues and expenses, we analyzed 
data from ATA and various federal agencies that collect these fees, in 
addition to DOT data on industry revenues and expenses. To determine 
how tax and fee payments vary among carriers, we analyzed tax and fee 
payment data from eight major and four low-cost carriers (AirTran, 
Alaska, America West, American, ATA Airlines, Continental, Delta, 
JetBlue, Northwest, Southwest, United, and US Airways) from 1998 to 
2002.[Footnote 17] We also reviewed the results of a recent study from 
MIT's Global Airline Industry Program. To determine how airfares 
changed when a tax or fee was not collected, we analyzed changes in 
average quarterly base airfares charged by individual carriers in 13 
markets for the quarters before, during, and after the 1996 lapse of 
the passenger ticket tax, including the four markets illustrated in the 
briefing--Billings-Minneapolis/St. Paul, Las Vegas-Los Angeles, New 
York-Chicago, and Los Angeles-San Francisco. We judgmentally selected 
these markets to illustrate differences in competition in business and 
leisure markets, with and without the competitive presence of low-cost 
airlines and to include a small community and a dominated 
market.[Footnote 18] The results from these markets cannot be 
generalized to the industry as a whole. We also reviewed trade 
literature to determine whether there had been any analyses of airfare 
changes relating to the 2003 security fee holiday. As a result of this 
review, we obtained and reviewed data from Harrell Associates related 
to their analysis of week-over-week airfare changes at the onset and 
conclusion of the 2003 security fee holiday. Because of data reporting 
delays, this was the only available analysis of fare changes related to 
the security fee holiday.

We performed various tests of reliability to each set of data analyzed. 
For data obtained from airlines or their trade association, since these 
data are proprietary, we were unable to independently verify them 
because we have no authority to require access to the underlying data. 
However, we applied logical tests to the data and found no obvious 
errors of completeness or accuracy. For data obtained from federal 
agencies (including data on airfares reported by individual carriers to 
DOT), we discussed their quality assurance policies and procedures with 
relevant officials. Along with our use of corroborating evidence, we 
believe that the data we used were sufficiently reliable.

Comments:

We provided a draft of this report to DOT and the Department of 
Homeland Security (DHS) for their review and comment. DOT and DHS 
provided some technical and clarifying comments that we incorporated 
where appropriate. We also provided selected portions of a draft of 
this report to the Internal Revenue Service, airlines, and other groups 
cited to verify the presentation of factual material. We incorporated 
their technical clarifications as appropriate.

Unless you publicly announce the contents of this report earlier, we 
plan no further distribution of this report until 30 days from the date 
of this letter. At that time, we will provide copies to relevant 
congressional committees and other interested parties and will make 
copies available to others upon request. In addition, this report will 
be available at no charge on the GAO Web site at http://www.gao.gov. If 
you have any questions about this report, please contact me or Steve 
Martin at 202-512-2834. Other key contributors to this assignment were 
Janet Frisch, Stan Stenersen, Rich Swayze, and Pamela Vines.

Signed by: 

JayEtta Z. Hecker:

Director, Physical Infrastructure Issues:

Enclosures:

Briefing Slides:

[See PDF for slides]

[End of section]

(544066):

FOOTNOTES

[1] P.L. 107-42.

[2] As of December 1, 2003, the Air Transportation Stabilization Board, 
the entity created under P.L. 107-42 to administer the loan guarantee 
program, had approved at least $1.2 billion in loan guarantees for 
seven airlines, including America West, ATA Airlines, and US Airways. 

[3] Department of Defense and Emergency Supplemental Appropriations for 
Recovery from and Response to Terrorist Attacks on the United States 
Act, 2002, P.L. 107-117. The Federal Aviation Administration (FAA) 
distributed $97 million of this amount to U.S. airlines (about $13,000 
per door).

[4] The Emergency Wartime Supplemental Appropriations Act of 2003, P.L. 
108-11 (the act). Under the act, TSA was appropriated about $2.3 
billion to be remitted to U.S. flag carriers in the proportional share 
each carrier had paid or collected as of April 16, 2003, in passenger 
security and air carrier security fees--a pretax reimbursement of 
security costs and foregone revenues. The act also suspended 
collections of both security fees (the September 11 passenger fee for 
security and the aviation security infrastructure fee) for tickets sold 
during the last 4 months of fiscal year 2003; extended the War Risk 
Insurance Program--which provides insurance coverage for aircraft 
operations that are deemed essential to the foreign policy interests of 
the United States when commercial insurance is unavailable on 
reasonable terms--until the end of fiscal year 2004; granted a 26-week 
extension of unemployment benefits for laid-off airline workers; and 
included $100 million to compensate air carriers for costs associated 
with reinforcing flight deck doors and locks. On May 16, 2003, the 
Transportation Security Administration (TSA) distributed $2.3 billion 
to 66 U.S. air carriers. To receive a share of the funds, nine carriers 
were required to sign agreements limiting their top two executives' 
compensation. These nine included the following seven airlines we 
included in this study: American, ATA Airlines, Continental, Delta, 
Northwest, United, and US Airways. We did not include the other two 
carriers--Planet Airways and World Airways--in this study because they 
do not provide scheduled passenger service. The $100 million for 
reinforcing flight deck doors was distributed to 58 carriers on 
September 24, 2003.

[5] Two carriers, JetBlue and Northwest, did not permit us to release 
their data.

[6] "The Impact of Infrastructure-Related Taxes and Fees on Domestic 
Airline Fares in the United States," Amedeo Odoni, MIT; Shiro Yamanaka, 
MIT; and Joakim Karlsson, Daniel Webster College, Working Paper, 
December 2003 (under review for publication in the Journal of Air 
Transport Management). This study estimated the effective tax rate on 
airfares. The study defined the effective tax rate as the percentage by 
which the base fare charged for a trip increased as a result of total 
taxes and fees paid directly by air travelers.

[7] FAA's budget authority also included $28 million from overflight 
fees, which comprised less than 1 percent of the agency's total budget 
for 2002.

[8] In response to the financial distress that the airline industry 
experienced in the early 1990s, Congress created the National 
Commission to Ensure a Strong Competitive Airline Industry (the 
Commission) to investigate and study the financial condition of the 
airline industry, the adequacy of competition in the airline industry, 
and legal impediments to a financially strong and competitive airline 
industry (P.L. 102-581, as amended, P.L. 103-13). Among other things, 
Congress directed the Commission specifically to investigate and study 
whether changes were needed in the legal and administrative policies 
that govern the taxes and user fees imposed on U.S. airlines. The 
Commission's August 1993 report included several recommendations to 
lessen the tax burden on the industry, including rolling back the 
ticket tax and cargo waybill tax increases authorized by Congress in 
1990.

[9] The ATA's estimate begins with the total ticket price (including 
taxes and fees) of $200 for a single-connection, domestic round trip; 
to derive the base fare, it then deducts a $4.50 PFC per segment, $2.50 
passenger fee for security per segment, the 7.5 percent passenger 
ticket tax, and the $3.00 domestic passenger segment tax. This estimate 
has been highlighted by ATA in various publications, such as "Airlines 
in Crisis: The Perfect Economic Storm." ATA depicts other tax/fee 
scenarios on its Web site at www.airlines.org.

[10] Although it may appear that carriers succeeded in "capturing" these 
revenues when the taxes or fees were not in effect, the extent to which 
carriers may or may not have done so is uncertain, because the 
carriers' various possible pricing options are not known. In addition, 
analyses of fare changes based on year-over-year analysis of quarterly 
data are less conclusive, because of the large number of factors that 
can influence fare levels over longer periods of time. For additional 
information on airline pricing, see U.S. General Accounting Office, 
Aviation Competition: Restricting Airline Ticketing Rules Unlikely to 
Help Consumers, GAO-01-831 (Washington, D.C.: July 31, 2001).

[11] We actually studied 13 markets, but for illustration purposes, we 
included results from only 4 markets--representing a low-cost, 
business, leisure, and dominated market--in the briefing. The results 
from the remaining nine markets were generally consistent with these 
four.

[12] For purposes of this analysis, "base fares" represent the value of 
the airfare net of the ticket tax. For example, if the total value of a 
ticket were $400, the base fare would be $363.64 ($400 minus the 10-
percent ticket tax, or $36.36). (The current ticket tax rate is 7.5 
percent.)

[13] In addition to not controlling for exogenous factors that could 
have affected fare changes during this period, our use of quarterly 
data in determining what fare changes occurred also make it difficult 
to isolate the effect of the tax on the fare changes observed.

[14] Airline ticket data do not indicate whether passengers are 
traveling for business or leisure purposes. To simplify our analysis, 
we assumed that travelers purchasing cheaper tickets were leisure 
travelers and those who purchased more expensive tickets--often fares 
available at the last minute--were business travelers.

[15] In a final rule on the security fee holiday, TSA interpreted the 
act (P.L. 108-11) to prohibit it from collecting the aviation security 
infrastructure fee (the "air carrier fee for security") from airlines 
and from requiring passengers to pay the September 11 Security Fee (the 
"passenger fee for security") if they purchased air transportation 
during the suspension period.

[16] Carriers included in the analysis are America West, American, 
Continental, Delta, Northwest, United, and US Airways. Domestic 
"business fares" are coach fares offered by carriers with three 
conditions: an advance purchase requirement of less than 3 days, fully 
refundable, and no minimum stay requirement. "Leisure fares" are 
restricted and include a longer advance purchase requirement, a 
required Saturday-night stay, and a financial penalty for changes or 
cancellations.

[17] JetBlue began operating in 2000.

[18] We defined "dominated market" as a city-pair market in which a 
single airline provides more than 50 percent of the available seating 
capacity.