When you book an airline ticket, you’re typically on the hook for all kinds of taxes and fees. Some are government imposed fees, while others are carrier imposed.
During this week’s Airlines Confidential podcast (which is always worth a listen), Scott McCartney made an interesting observation regarding how some airlines are using increasingly questionable tactics to avoid the federal excise tax on airfare. So I wanted to talk about that in a bit more detail in this post, as he raises a good point.
Basics of the 7.5% federal excise tax on airfare
Airline tickets in the United States are subject to a federal excise tax of 7.5%. The important thing to understand is that this excise tax is exclusively charged on the base fare of the ticket, and the same tax doesn’t apply to any optional add-ons.
As you’d expect, airlines use this to their advantage in all kinds of ways. It’s one of the many reasons that airlines like ancillary fees, since those aren’t taxed in the same way. So while airfare is taxed at 7.5%, baggage fees aren’t taxed. Given how low margin the industry is, that difference can add up.
While ultra low cost carriers have historically been heavily focused on ancillaries, they get creative beyond that, in order to skirt these fees. Airlines like Allegiant, Frontier, and Spirit, all have carrier usage charges, which make up a large portion of the airfare. The airlines claim that this is a fee to book tickets through the website, and you can save money by booking at the airport.
The only reason they have these fees is to avoid having to pay federal excise tax on that portion of the airfare. That’s because those fees are technically optional, and they can be avoided by booking your ticket at the airport (go figure these airlines do everything they can to make it hard to book at the airport). For example, a $22 carrier usage surcharge puts an extra $1.65 in the carrier’s pocket, which isn’t nothing.
Now, some will argue that the consumer pays these taxes, so why should the airline care? Well, that’s sort of true. Yes, the consumer pays the federal excise tax, but airlines have to market all-in fares. The demand for airfare is elastic, and consumers don’t care what percent of a fare goes to the airline vs. what percent goes to the government.
How Frontier and Spirit are taking this to the extreme
Both Frontier and Spirit completely overhauled their business models recently, to much more closely reflect what other airlines offer. While both airlines still have a basic economy product, there are now fare bundles that include a lot more things.
For example, Frontier has a “business bundle,” which is basically the carrier’s version of business class. This includes a seat at the front of the cabin with a blocked middle, and all kinds of priority services. Spirit even has a “Go Big bundle,” which is basically like business class, with a first class style seat, free alcoholic drinks, and more.
What’s interesting is how the airlines are continuing to avoid most of the federal excise tax on these fares. Want to book a one-way ticket on Spirit from Baltimore to Los Angeles, with the “Go Big” bundle? That costs $319.
It’s interesting to then look at the fare breakdown. The airline considers the flight to cost $84.56, and as a result, the federal excise tax on the entire ticket is just $6.34. Meanwhile everything else, including the $190 “fee” for the product you’re actually buying, is considered an optional purchase.
The same is true at Frontier. Take a one-way ticket from Denver to Baltimore, with the “Business Bundle.” That costs $178 one-way.
When you look at the breakdown, you’ll see that the fare is just $28.73, and as a result, the federal excise tax on the entire ticket is just $2.15.
Just to compare this to how legacy carriers would approach this, if you booked a first class ticket on American from Miami to Orlando for $271.48, that would include $17.89 in federal excise taxes, reflecting the $238.49 base fare.
Should the government crack down on this?
In the Airlines Confidential podcast, McCartney argues that what airlines like Spirit are doing is crossing the line, and will no doubt draw attention from regulators, and cause some changes. After all, the government is missing out on billions of dollars in tax revenue. I don’t disagree with McCartney, but I’m also not sure I totally agree.
Based on how the rules are written, I don’t necessarily think Frontier or Spirit are being unreasonable by arguing that people are buying fare bundles, because in fairness, they are fare bundles.
Let me take it a step further — I think this is less unreasonable than carriers like Frontier and Spirit having passenger usage charges, which can only be avoided by booking your ticket at the airport, with the sole intent being to avoid that 7.5% federal excise tax.
To me this raises an interesting question — why haven’t legacy carriers taken a similar approach to Frontier and Spirit? For example, if you take a look at a Delta Comfort+ fare (the carrier’s extra legroom economy), the airline doesn’t claim that you’re purchasing an upgraded bundle, but rather the entire fare is subjected to the federal excise tax.
One thing I absolutely do agree with McCartney on is that we’re overdue for some reform when it comes to the federal excise tax that airlines pay. Now, I’m not saying I want higher taxes on airfare, though I would rather see airlines not be incentivized to sell things as add-ons.
Personally, I’d much rather see the federal excise tax percentage lowered, but charged to all airline ticket related purchases, regardless of whether it’s technically base fare or add-ons. The rules were written at a time when airlines didn’t nickel-and-dime for everything, and I think they should be updated to reflect the new reality.
Bottom line
The United States has a 7.5% federal excise tax on airfare, which doesn’t apply to any optional add-ons. This has given airlines a huge incentive to lean into ancillaries, rather than having a higher base fare. Ultra low cost carriers have been the most aggressive about this, historically.
What’s interesting is that even with carriers like Frontier and Spirit essentially reversing their business models, they’re keeping the same tactics for avoiding federal excise taxes. Want to book a ticket in what’s essentially Spirit first class? Well, the airline claims that the basic economy fare is a base fare, and everything else is an ancillary, and therefore not taxed.
What do you think — should the federal excise tax on airfare be reformed? Are Frontier and Spirit acting unethically?
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