Airport user taxes are popular because they are easy to implement. But since they have the effect of ... [+]
When taking about how the pandemic has affected the airline industry, the first thoughts tend to go to airlines and all the people directly employed by them. Every flight starts and ends at an airport, and these small cities also generate a lot of employment. Airports have been hurt by the travel weakness as well. One way for many airports around the world to fund themselves is with direct user taxes. These are simple to administer and airport managers like them because of their ease and effectiveness. London’s Heathrow airport has quietly added a new, supposedly temporary, 8.90 GBP charge per departing passenger staring in April. This will be added to every ticket from Heathrow, and has been dubbed a “pandemic tax.”
Talk about a bad idea for the time! This kind of tax is loved by airports and hated by airlines for good reasons. Airline passenger traffic is highly price elastic, meaning that small increases in prices result in large drops in travel demand. At a time when travel is still weak, and leisure and business travel going forward is still uncertain, another tax that raises air fares is kicking an industry when it’s down, and will actually make the airport’s problem worse as fewer passengers transit.
Passenger Facility Charges (PFCs) In The U.S. and Canada
The Federal Aviation Administration (FAA) authorizes airports in the U.S. to charge up to $4.50 per passenger, added to the ticket price, and for a round-trip connecting passenger this could be charged four times. As of February 2021, 371 U.S. airports use a PFC and 361 of these (97.3%) charge at the maximum rate. Of these 371, 202 are classified as “non-hub” and 74 additional are classified as “small”.
Airport managers tend to think that PFCs are “free”, as they are collected by the airlines and added to each ticket. Airlines know that when the PFC is added or raised, sales immediately drop since that’s what happens in price-elastic markets. Whenever an airport wants to levy or increase a PFC, the airlines serving the airport almost universally oppose it because they understand the long-term effect of what looks like a good idea in the short-term. In Canada, this charge is called an AIF — Airport Improvement Fee — and is as high as $40 per passenger in some airports.
PFCs Hurt Families and Small Cities
Since PFCs and AIFs are charged per ticket, families traveling together pay for each person and even when capped at $4.50, that can mean up to $72 added to the tickets for a family of four traveling if they connect. Plus, smaller city travelers often need to connect into a hub for their ultimate destination meaning that they pay two times each way, versus large hub customers who can fly nonstop. Yet, the connecting customer makes the airport more money because those people buy things and eat while connecting, and the airport benefits from that. The local passenger just goes through security and gets on the plane. This is regressive in the sense that it charges those who are more valuable more tax. Airlines for America, the industry’s lobby group, also points out that over $7B (yes, billion) of the Aviation Trust Fund has not been tapped and this could fund the same things as a PFC.
Heathrow Model Not Right For The U.S.
Why be so concerned about a new tax on departing Heathrow passengers? Airports around the world face many of the same issues and will be watching to see how effective this tax is in generating revenue, and some will be watching to see how much traffic is lost or diverted to alternative connecting points that don't charge the tax. There is often a “lemming” approach to these kind of taxes, and in the U.S. the effort will likely be to increase the current $4.50 cap in order to raise the tax. One hundred out of the 100 largest airports in the U.S. currently collect a PFC, so the only way to get more would be to raise the cap. Higher taxes mean fewer passengers, and fewer passengers means fewer flights. As vaccine rollouts are looking more promising and summer 2021 may prove to be somewhat robust for air travel, enacting this tax in the U.S. would hurt the economy, cause more unemployment, and forestall an increasingly likely near-term recovery.
A Better Answer
Rather than raise taxes that will have the effect of reducing passengers, airports should proactively work to attract more customers. This could be done by ensuring that physical resources are fully utilized, lower-cost carriers are given access to generate traffic with lower fares, and lower user fees to encourage more flights through cost-efficient facilities. Airports make money from people using the airport, so more people should be the goal, not more money from each person. Being creative with parking, ride share, and concessions can all be leveraged with a larger passenger base using the facility. There are airport managers who understand this and act this way, but unfortunately there are others who take the easy way and add a passenger-killing user tax. Keep prices low and more people will fly!
