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Airline Tax Breaks

Danielle
Posts: 21,330
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7/31/2011 6:08:36 PM
Posted: 5 years ago
The government removed a 7.5% tax on airline tickets by defunding the FAA, costing 4k employees their jobs. You would assume that while some airlines would increase their ticket prices by 7.5% (making customers pay the same price they already were before the tax break), some would simply let passengers keep the money that would have gone to the tax in order to keep their prices low and remain competitive.

Well it seems as if only 3 "major" airlines have opted for the latter: Alaska, Hawaiian and Spirit... and I say "major" because they are certainly not among the biggest. Almost every other major airline (Delta, Continental, American, etc.) kept the ticket price the same as it would have been if the government tax was still imposed, resulting in ~ 30M profit per day. Why then should we assume that removing taxes would lower costs in other industries if that hasn't been the case here?

I suppose the response would be that if people scaled back on flying, that the airlines would cut prices, right? Well why wouldn't airlines, like oil companies, raise prices to make up for lost business? Various oil executives have publicly stated that if we stop driving less, and thus use less fuel, they will have to raise prices to remain profitable... so why wouldn't it be the same here? If people fly less, they will have to raise prices to make money. Even if they cut corners (awesome for safety!) and fired people (yay for the economy!), they will still have to raise prices, right? What am I missing?
President of DDO
innomen
Posts: 10,052
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7/31/2011 6:18:39 PM
Posted: 5 years ago
At 7/31/2011 6:08:36 PM, Danielle wrote:
The government removed a 7.5% tax on airline tickets by defunding the FAA, costing 4k employees their jobs. You would assume that while some airlines would increase their ticket prices by 7.5% (making customers pay the same price they already were before the tax break), some would simply let passengers keep the money that would have gone to the tax in order to keep their prices low and remain competitive.

Well it seems as if only 3 "major" airlines have opted for the latter: Alaska, Hawaiian and Spirit... and I say "major" because they are certainly not among the biggest. Almost every other major airline (Delta, Continental, American, etc.) kept the ticket price the same as it would have been if the government tax was still imposed, resulting in ~ 30M profit per day. Why then should we assume that removing taxes would lower costs in other industries if that hasn't been the case here?

I suppose the response would be that if people scaled back on flying, that the airlines would cut prices, right? Well why wouldn't airlines, like oil companies, raise prices to make up for lost business? Various oil executives have publicly stated that if we stop driving less, and thus use less fuel, they will have to raise prices to remain profitable... so why wouldn't it be the same here? If people fly less, they will have to raise prices to make money. Even if they cut corners (awesome for safety!) and fired people (yay for the economy!), they will still have to raise prices, right? What am I missing?

It will take a major player like United or Delta to make the move, then the others will copy. otherwise there is a certain tacit price compliance within the market; I see this with the paper market a lot. They do it because they can.

OreEle brought this up in an earlier thread, and Ragnar gave some reasons.
TheAtheistAllegiance
Posts: 1,251
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8/1/2011 4:33:14 PM
Posted: 5 years ago
If demand is scaled back, then companies will generally have to become more efficient in order to survive. The reason that might not happen with the gas and oil industries is because the demand is so inelastic due to everyone using cars to complete their everyday tasks, which gives those companies almost any leverage they want when it comes to raising prices. I imagine flying, however, has much more elastic demand, so hiking prices will probably bring in even less business, thus less profit, and eventually bankruptcy.