Commercial Aviation:

Better Information about Airline-Imposed Fees and the Refundability of Government-Imposed Taxes and Fees Could Benefit Consumers

GAO-10-885T: Published: Jul 14, 2010. Publicly Released: Jul 14, 2010.

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Gerald L. Dillingham
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This testimony discusses various issues affecting airline passengers, including airline-imposed fees, mishandled baggage, and the refundability of various government-imposed taxes and fees to passengers. The U.S. passenger airline industry has been under tremendous financial pressure over the last decade, first from security threats that inhibited air travel, then from volatile fuel costs, and more recently from falling demand due to an economic recession. Only recently has air traffic begun to recover. In response to these pressures, passenger airlines have adapted their business models. In 2008, for example, many airlines introduced fees for a variety of passenger services, most notably for a first or second checked bag, for which separate charges did not previously exist. Fees represent an important source of revenues to U.S. passenger airlines, which collectively posted operating losses of $4.4 billion during calendar years 2008 and 2009. During that same period, airlines reported approximately $7.9 billion in revenues from baggage fees and reservation change and cancellation fees--the two largest sources of fee revenues. The revenues from baggage and many other fees are not subject to the 7.5 percent excise tax on amounts paid for domestic air transportation, which, via the Airport and Airway Trust Fund, is used to help fund the Federal Aviation Administration (FAA), including its operation and development of the air traffic control system and oversight of aviation safety. In addition, charging separate fees for checked baggage raises questions about whether the quality of checked baggage service has improved since the fees were introduced. Other government fees on airline tickets help pay for other government services, such as for security, immigration, customs, and agricultural inspections. However, with the exception of fees for security services, it is not clear if and how these various government-imposed fees are refundable to passengers who do not use their nonrefundable tickets. However, the refundability of these fees is not always clear or communicated to airlines or consumers. This testimony summarizes our most recent report on these issues, which is being released. In this report we examined (1) the nature and scope of the fees airlines charge to passengers, including the fees' relationship to the costs of the services provided and the transparency of the fees; (2) the potential impact of such fees on revenues used to help fund FAA; (3) changes in the numbers of checked and mishandled bags, the amount of compensation paid to passengers for mishandled bags, and other related consumer issues; and (4) the process, if any, for refunding government-imposed taxes and fees to passengers who do not use their nonrefundable tickets. We have previously reported on issues related to these objectives.

We found the following: (1) Fees for optional services are based on costs and other factors and are not fully disclosed to passengers at the time of booking. Airlines have imposed a variety of fees on a range of optional services, such as checked and, most recently, carry-on bags; meals; blankets; early boarding; and seat selection. (2) Airlines' increasing reliance on fee revenues reduces the proportion of total passenger revenue that is taxed to help fund FAA. The IRS has determined that many airline-imposed fees are not related to the transportation of a person--the basis for imposing the 7.5 percent excise tax on domestic air transportation--according to applicable Treasury regulations and IRS guidance--and, thus, only a proportion of the total fee revenue is subject to taxation. (3) The imposition of checked baggage fees has contributed to declines in the amount of checked baggage and the rate of mishandled bags per thousand passengers as well as an increase in the amount of carry-on baggage. Since airlines first imposed checked baggage fees, the number of checked bags per passenger has declined, contributing to a decline in the rate of mishandled bags. However, it is unknown whether baggage fees have had an effect on the rate of mishandled bags per thousand passengers as this information is not available.

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