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Imposed Fees and the Refundability of Government-Imposed Taxes and 
Fees Could Benefit Consumers' which was released on July 14, 2010. 

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Before the Subcommittee on Aviation, Committee on Transportation and 
Infrastructure, House of Representatives: 

United States Government Accountability Office: 

For Release on Delivery: 
Expected at 2:00 p.m. EDT:
Wednesday, July 14, 2010: 

Commercial Aviation: 

Better Information about Airline-Imposed Fees and the Refundability of 
Government-Imposed Taxes and Fees Could Benefit Consumers: 

Statement of Gerald L. Dillingham, Ph.D. 
Director, Physical Infrastructure Team: 


[End of section] 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss various issues affecting 
airline passengers, including airline-imposed fees, mishandled 
baggage, and the refundability of various government-imposed taxes and 
fees to passengers. The U.S. passenger airline industry has been under 
tremendous financial pressure over the last decade, first from 
security threats that inhibited air travel, then from volatile fuel 
costs, and more recently from falling demand due to an economic 
recession. Only recently has air traffic begun to recover. In response 
to these pressures, passenger airlines have adapted their business 
models. In 2008, for example, many airlines introduced fees for a 
variety of passenger services, most notably for a first or second 
checked bag, for which separate charges did not previously exist. Fees 
represent an important source of revenues to U.S. passenger airlines, 
which collectively posted operating losses of $4.4 billion during 
calendar years 2008 and 2009. During that same period, airlines 
reported approximately $7.9 billion in revenues from baggage fees and 
reservation change and cancellation fees--the two largest sources of 
fee revenues. The revenues from baggage and many other fees are not 
subject to the 7.5 percent excise tax on amounts paid for domestic air 
transportation, which, via the Airport and Airway Trust Fund, is used 
to help fund the Federal Aviation Administration (FAA), including its 
operation and development of the air traffic control system and 
oversight of aviation safety. In addition, charging separate fees for 
checked baggage raises questions about whether the quality of checked 
baggage service has improved since the fees were introduced. Other 
government fees on airline tickets help pay for other government 
services, such as for security, immigration, customs, and agricultural 
inspections. However, with the exception of fees for security 
services, it is not clear if and how these various government-imposed 
fees are refundable to passengers who do not use their nonrefundable 
tickets. However, the refundability of these fees is not always clear 
or communicated to airlines or consumers. 

My statement today summarizes our most recent report on these issues, 
which is being released publicly at this hearing today.[Footnote 1] In 
this report we examined (1) the nature and scope of the fees airlines 
charge to passengers, including the fees' relationship to the costs of 
the services provided and the transparency of the fees; (2) the 
potential impact of such fees on revenues used to help fund FAA; (3) 
changes in the numbers of checked and mishandled bags, the amount of 
compensation paid to passengers for mishandled bags, and other related 
consumer issues; and (4) the process, if any, for refunding government-
imposed taxes and fees to passengers who do not use their 
nonrefundable tickets. We have previously reported on issues related 
to these objectives.[Footnote 2] 

To address these issues, we developed a list of airline fees based on 
research of travel and 17 airline Web Sites and corroborated the data 
with airline officials;[Footnote 3] analyzed Department of 
Transportation (DOT) financial and operating data; reviewed applicable 
laws, regulations, guidance, and past studies; and interviewed 
officials from the airline industry, trade associations, consumer 
groups, global distribution systems, DOT, and the Internal Revenue 
Service (IRS). More detail on scope and methodology is available in 
the full report, which we completed in accordance with the Generally 
Accepted Government Auditing Standards. 


Increasingly, airlines are charging fees to supplement fare revenues. 
Some fees, such as those for unaccompanied minors, reservation changes 
or cancellation, and oversized or overweight baggage, have existed for 
years. Other fees are new, including those introduced since 2008 for 
services that did not previously entail separate charges, such as fees 
for a first and second checked bag, early boarding, seat selection, 
and meals. New services, such as Wi-Fi access, also generate fee 
revenue. Information on many airlines' fees for services is available 
through the airlines' Web Sites but not through the global 
distribution systems[Footnote 4] that make fare information available 
to online (e.g., Expedia and Travelocity) and traditional brick-and-
mortar travel agencies. 

The Internal Revenue Code imposes several excise taxes to help fund 
FAA, including a 7.5 percent tax on amounts paid for the 
transportation of a person for domestic air transportation. This tax 
applies to fees such as for peak/holiday travel and unaccompanied 
minors, but does not apply to many other fees, including fees for 
checked baggage. The federal government also imposes fees to help 
other agencies cover their costs for security screening, customs, 
immigration, and agricultural inspections among other things.[Footnote 
5] DOT requires the airlines to include the costs of certain 
government-imposed excise taxes in their advertised fares. In 
addition, DOT requires the airlines to disclose their fees and 
associated policies for checked baggage but not for other optional 
fees; to separately report their revenues from baggage fees and 
reservation change and cancellation fees; and to report the incidence 
of mishandled checked bags as well as compensate passengers for 
damages. Finally, according to DOT, it has the authority to ensure 
passengers are not misled regarding their rights, such as their 
eligibility for refunds of government-imposed taxes and fees. 

Summary of Key Issues: 

* Fees for optional services are based on costs and other factors and 
are not fully disclosed to passengers at the time of booking. Airlines 
have imposed a variety of fees on a range of optional services, such 
as checked and, most recently, carry-on bags; meals; blankets; early 
boarding; and seat selection. According to airline officials, the fees 
are based on a combination of factors, including the cost of providing 
the service, competition, and consumer demand. The fees have 
supplemented airline revenues, providing at least $7.9 billion in 2008 
and 2009 from baggage fees and reservation change and cancellation 
fees alone--the only fees revenues airlines are required to separately 
to DOT. Although small compared with total airline operating revenues, 
fee revenues are growing. In the first calendar quarter of 2010, 
airlines reported $1.3 billion in baggage fees and reservation change 
and cancellation fees--a 13 percent increase from the corresponding 
quarter in 2009. However, information about the fees is not fully 
disclosed through all ticket distribution channels used by consumers, 
making it difficult for them to compare the total cost of flights 
offered by different carriers. Meanwhile, the airlines could fully 
disclose all of their fees to consumers searching for fares, but 
according to global distribution systems representatives, are unlikely 
to do so unless compelled because such disclosure will make airlines 
less competitive as fares displayed would be higher if fees were 
included.[Footnote 6] On June 8, 2010, DOT issued a Notice of Proposed 
Rulemaking that would, among a number of other things, if adopted, 
require U.S. and foreign airlines to disclose all fees for optional 
services, including those for checked baggage, advance seat 
assignments, and seat upgrades through a prominent link on their 
website's homepage.[Footnote 7] DOT also states in the proposed new 
rule that it is considering requiring that U.S. and foreign airlines 
make this fee information available to applicable global distribution 
systems that package fare information for online and traditional 
travel agencies, which combined sell the majority of tickets.[Footnote 

* Airlines' increasing reliance on fee revenues reduces the proportion 
of total passenger revenue that is taxed to help fund FAA. The IRS has 
determined that many airline-imposed fees are not related to the 
transportation of a person--the basis for imposing the 7.5 percent 
excise tax on domestic air transportation[Footnote 9]--according to 
applicable Treasury regulations and IRS guidance[Footnote 10]--and, 
thus, only a proportion of the total fee revenue is subject to 
taxation. These excise tax collections are deposited into the Airport 
and Airway Trust Fund (Trust Fund),[Footnote 11] which is the primary 
source of funding for FAA. Trust Fund revenues have fallen in recent 
years, from about $12 billion in fiscal year 2007 to about $11 billion 
in fiscal year 2009, owing to a variety of factors, including lower 
fares and fewer passengers in 2009 than in 2007. In fiscal year 2009, 
airlines reported nearly $2.5 billion in fee revenue from checked 
baggage (the largest and only measurable untaxed fee).[Footnote 12] If 
baggage fees in that year had been subject to the 7.5 percent excise 
tax, an additional approximately $186 million in excise taxes or less 
than 2 percent of total Trust Fund revenues would have been credited 
to the Trust Fund.[Footnote 13] Although this percentage is relatively 
small, it is likely to grow based on recent trends. In the first 
quarter of 2010, airlines reported a 33 percent increase in revenues 
from baggage fees compared to the corresponding quarter in 2009. Since 
DOT guidance requires airlines to report separately only revenues from 
baggage fees and reservation change and cancellation fees, we were 
unable to estimate potential collections from other untaxed optional 

* The imposition of checked baggage fees has contributed to declines 
in the amount of checked baggage and the rate of mishandled bags per 
thousand passengers as well as an increase in the amount of carry-on 
baggage. Since airlines first imposed checked baggage fees, the number 
of checked bags per passenger has declined, contributing to a decline 
in the rate of mishandled bags. However, it is unknown whether baggage 
fees have had an effect on the rate of mishandled bags per thousand 
passengers as this information is not available. Despite the 
introduction of fees, airlines have not significantly changed their 
compensation methods. Checked baggage fees have also led to greater 
amounts of carry-on baggage in the cabin, resulting in greater 
competition for limited overhead storage space. A recent survey of 
flight attendants found that more than half had concerns about the 
amount of carry-on bags, while a third of the attendants noted 
concerns about the safety of crew and passengers due to injuries from 
lifting carry-on bags. 

* Refundability of government taxes and fees is not always clear and 
communication of refund eligibility to the airlines and consumers is 
lacking. The refundability of government taxes and fees on unused 
nonrefundable tickets varies depending upon the tax or fee. According 
to IRS, aviation excise taxes on unused nonrefundable tickets are not 
refundable; however, to the extent that a portion of the ticketed fare 
is refunded, the collected tax attributable to that portion of the 
fare may be refunded to the consumer.[Footnote 14] In contrast, 
consumers with unused nonrefundable tickets are entitled to a full 
refund of the September 11th Security Fee, in accordance with 
Department of Homeland Security (DHS) Transportation Security 
Administration (TSA) guidance, but few consumers request a refund 
because airlines are not required to proactively inform consumers of 
their right to a fee refund. According to Customs and Border Patrol 
(CBP), its applicable statutes and regulations authorize the refund of 
its customs and immigration inspection fees on unused nonrefundable 
tickets; however, CBP has not issued policy or guidance that clarifies 
this interpretation or whether airlines can or must refund fees if 
requested by consumers. The U.S. Department of Agriculture's (USDA) 
applicable statutes and regulations regarding its inspection fee are 
silent on whether the fee is refundable on unused nonrefundable 
tickets, according to the agency. 

Report's Matter for Congressional Consideration and Recommendations: 

In our report, we note that if Congress determines that the benefit of 
added revenue to the Airport and Airway Trust Fund from taxation of 
airline-imposed optional fees is important, then it should consider 
amending the Internal Revenue Code to tax certain or all airline- 
imposed fees and deposit the revenue in the Airport and Airway Trust 
Fund. We also make several recommendations to the Secretary of 
Transportation to improve the disclosure of information on airline- 
imposed fees and government-imposed fees for consumers and to improve 
airlines' reporting of fee revenues to DOT. Among these are 
recommendations for DOT to require that U.S. passenger airlines and 
foreign airlines that fly within or to or from the United States 
disclose optional airline-imposed fees and policies that the agency 
deems important to passengers to know and further require that this 
information be consistently disclosed across all distribution channels 
used by the airline. Similarly, we recommend that DOT require that 
U.S. passenger airlines and foreign airlines that fly within or to or 
from the United States disclose to consumers applicable government-
imposed fees on nonrefundable tickets that may be eligible for refunds 
as these determinations are made by relevant agencies. We also 
recommend that DOT require U.S. passenger airlines to report to DOT 
all revenues from optional fees paid by passengers related to their 
trip in a separate account, exclusive of revenues from baggage fees 
and reservation change and cancellation fees. 

In addition, our report also contains recommendations to the 
Secretaries of Homeland Security and Agriculture to eliminate the 
ambiguity regarding their fees which are eligible for refunds. To DHS, 
we recommend that the department issue guidance to airlines regarding 
the refundability of its customs and immigration inspection fees. To 
USDA, we recommend that the department determine whether its 
inspection fee is refundable and convey this to airlines. 

In commenting on a draft of the report on which this testimony is 
based, DHS and USDA agreed with our recommendations to their 
respective departments. DOT did not agree or disagree with our 

Mr. Chairman, this concludes my statement. I would be pleased to 
respond to any questions you or other Members of the Subcommittee may 

For questions about this testimony, please contact Dr. Gerald L. 
Dillingham at (202) 512-2834 or Contact points 
for our Offices of Congressional Relations and Public Affairs may be 
found on the last page of this testimony. Individuals who made key 
contributions to this testimony include Paul Aussendorf, Assistant 
Director; Amy Bowser; Brian Chung; Lauren Calhoun; Jay Cherlow; 
Elizabeth Eisenstadt; Christopher Jones; and Maureen Luna-Long. 

[End of section] 


[1] GAO, Commercial Aviation: Consumers Could Benefit from Better 
Information about Airline-Imposed Fees and Refundability of Government-
Imposed Taxes and Fees, [hyperlink,] (Washington, D.C.: July 14, 

[2] See GAO, Commercial Aviation: Airline Industry Contraction Due to 
Volatile Fuel Prices and Falling Demand Affects Airports, Passengers, 
and Federal Government Revenues, [hyperlink,] (Washington, D.C.: Apr. 21, 
2009); Federal User Fees: Key Aspects of International Air Passenger 
Inspection Fees Should Be Addressed Regardless of Whether Fees Are 
Consolidated, [hyperlink,] 
(Washington, D.C.: Sept. 24, 2007); and Summary Analysis of Federal 
Commercial Aviation Taxes and Fees, GAO-04-406R (Washington, D.C.: 
Mar. 12, 2004). 

[3] We chose these 17 U.S. passenger airlines based on several 
factors. All 17 airlines reported annual operating revenues of at 
least $20 million and together collected more than 99 percent of the 
checked baggage fees reported to the Bureau of Transportation 
Statistics in 2008 and transported about 77 percent of domestic 
revenue passengers in 2008. 

[4] The three main global distribution systems are Amadeus, Sabre, and 
Travelport, which combined, generated more than $9.6 billion in 
revenue in 2008. 

[5] Immigration inspection fees are divided between two Department of 
Homeland Security agencies--Customs and Border Protection and 
Immigration and Customs Enforcement. Agricultural inspection fees are 
divided between Customs and Border Protection and the U.S. Department 
of Agriculture. According to the interagency agreements, fees are 
intended to be distributed among the agencies according to the cost of 
the activities for which the agencies are responsible. 

[6] To improve travel agencies' ability to provide information on and 
payment for airline-imposed fees, the Airline Tariff Publishing 
Company, which provides fare information to global distribution 
systems has developed a product to distribute fee information. 
Currently, 12 U.S. airlines constituting 79 percent of the operating 
revenues reported by U.S. airlines in 2009 are test filing this 
information with the company, which is allowing global distribution 
systems to access it on a test basis. 

[7] DOT, Enhancing Airline Passenger Protections, Notice of Proposed 
Rulemaking, 75 Fed. Reg. 32318 (proposed June 8, 2010). The comment 
period closes August 9, 2010. In this context, DOT is seeking comment 
on whether this requirement should be limited to disclosure of 
"significant fees" for optional services, including the definition of 
"significant fee" and whether it should be defined as a particular 
dollar amount. Comment is also sought on alternatives to this option. 
DOT is also seeking comment as to whether this provision, proposed 14 
C.F.R. 399.85(c), should apply to ticket agents, as defined in 49 
U.S.C. § 40102. 

[8] DOT, Enhancing Airline Passenger Protections, Notice of Proposed 
Rulemaking, 75 Fed. Reg. 32318 (proposed June 8, 2010). 

[9] 26 U.S.C. § 4261(a). 

[10] IRS guidance includes Revenue Rulings, Private Letter Rulings, 
and other guidance documents. See 26 C.F.R. §§ 49.4261-7, 26 C.F.R. § 
49.4261-8; Priv. Ltr. Rul. 118216-09. 

[11] 26 U.S.C. § 9502. 

[12] Because U.S. airlines charge fees for overweight and oversize 
bags as well as for additional bags, these fees are included in the 
$2.5 billion. In fiscal year 2007, before U.S. airlines began charging 
for first and second checked bags, airlines reported about $457 
million in baggage fee revenues. Revenues from reservation change and 
cancellation fees are already subject to the 7.5 percent excise tax as 
they are considered fees paid for the transportation of persons. 

[13] For this analysis, we are making the simplifying assumption that 
the additional tax due would not have caused any passengers to choose 
not to purchase tickets. Any such reduction in purchases would 
presumably have been small and would have had the effect of making the 
increase in taxes collected a little smaller than our estimate. 

[14] Rev. Rul. 89-109 (1989) 1989-2 CB 232, as applicable to the 7.5 
percent excise tax. 

[End of section] 

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