Aviation Infrastructure Taxes and Fees in the United States and the European Union

Abstract

The impact of infrastructure-related add-on taxes and fees on the cost of domestic U.S. air travel and of domestic and intraregional EU air travel is estimated. For the United States, an analysis of the Origin and Destination Data Bank 1A Ticket Dollar Value database shows that the average effective tax rate increased from 10.9% in 1993 to 16.1% in 2004. A large portion of the increase is due to a striking 25% decline in the real average base fare. The relative impact of taxes and fees is greatest on the least expensive tickets. The effective tax rate for low-cost carriers is moderately greater than for legacy carriers. For the European Union, a sample of about 335,000 tickets from January 13 and 14, 2004, was used, with the effective tax rate estimated at 12.5%. However, EU taxes and fees do not cover the cost of air navigation services, and thus the 12.5% effective tax rate should not be compared with the 16.1% U.S. rate. A preliminary correction for this difference suggests that the true effective tax rate is higher in the European Union than in the United States. The intra-European Union average of 12.5% also masks large differences among countries (which range from 6.6% for Luxembourg to 24.4% for the United Kingdom). The relative impact of taxes and fees on the least expensive tickets is even greater than in the United States.

Cost of Aviation Infrastructure in the United States

“…It is believed that this is the most complete database assembled to date on these costs. Previous work reported on taxation in the U.S. airline industry (7)(8)(9), but that work covered only a portion of infrastructure funding. Specifically, it was limited to taxes and fees added directly to passenger tickets, and then only for domestic travel within the contiguous United States.…”

“…This is because they are collected by the carriers from consumers on behalf of the government. For domestic passenger travel, these taxes (including PFCs) averaged approximately 16% of the tax-exclusive fare in 2004 and 2005 (7)(8)(9). Note that 62% of airports that collected PFCs in 2004 charged the maximum allowable PFC of $4.50, whereas 38% charged a PFC of $3.00 (10).…”

Analysis of Airports Served by Ultra Low-Cost Carriers

“…One causal factor for this success may be the aggressive pursuit by ULCCs of new aviation markets with negligible existing commercial service. In contrast, legacy carriers have for decades relied on a model of hub-and-spoke connections across the United States, consolidating operations to hub airports with high levels of service while reaching nearly every major population center at primary airports ( 4 ). The rapid growth of low-cost carrier Southwest Airlines in the 1980s and 1990s relied on attracting a loyal cohort of flyers to secondary airports with lower fees, greater reliability, and room to expand operations ( 5 ).…”