The impact of infrastructure-related taxes and fees on airline fares in the US and the European Union

Abstract

The purpose of this thesis is to estimate the impact of infrastructure-related add-on taxes and fees on the direct cost of air travel in the United States and the European Union. Its scope includes domestic travel in the United States and both domestic and intra-EU international travel within the European Union. For the United States, we work with over 4 million passenger records from the Department of Transportation 10% Ticket Samples to conclude that the effective tax rate (ETR) on the average base fare (BF) was 15.5% in the second quarter of 2002. The incidence is much heavier on the least expensive tickets because three out of the four add-on taxes and fees are based on the passenger's itinerary and are independent of the BF. Comparative analyses indicate that the ETR was 10.9% in 1993 and 16.1% in 2004, but a large portion of the ETR increase over the years is due to a significant decline in the yields achieved by the airlines. We also show that passengers traveling on low cost carriers are expected to face a higher ETR than those traveling on traditional network airliners or the "legacy carriers". Other analyses are performed to demonstrate that there was a statistically significant decrease in the number of segments per ticket from 2002 to 2004 and that the ETR would increase by 2.2% to 2.6% as a result of the new security fee policy proposed by the Bush Administration in 2005. Turning to the European side, our preliminary estimation shows that the average ETR was 12.5% in 2004 based on an analysis of over 300,000 ticket records provided by a Global Distribution System company.

(cont.) However, the ETR, in fact, varies greatly among the 15 European Union countries investigated, ranging from 6.6% to 24.4%, because of the complex and diverse taxation rules in place in Europe and because of the differences in average ticket prices. Finally, a simple analysis shows that the actual European ETR may be significantly higher than the ETR in the United States if the differences in charging schemes for the cost of air transportation infrastructure are taken into consideration.