Commercial Aviation:

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

GAO-10-785: Published: Jul 14, 2010. Publicly Released: Jul 14, 2010.

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Gerald Dillingham, Ph.D.
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dillinghamg@gao.gov

 

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To supplement fare revenues, airlines are increasingly charging fees for optional passenger services, notably for checked baggage, for which separate charges did not previously exist. While air fares are subject to a 7.5 percent excise tax that funds the Airport and Airway Trust Fund, which helps fund the Federal Aviation Administration (FAA), many new optional fees are not. As requested, this report addresses (1) the nature, relationship to cost, and disclosure of airline fees, (2) the potential impact of such fees on the Airport and Airway Trust Fund, (3) checked and mishandled baggage issues; and (4) the process, if any, for refunding government-imposed taxes and fees when passengers do not use nonrefundable tickets. To perform this work, GAO analyzed financial data; reviewed applicable laws and regulations; and interviewed airline and government officials.

Airlines have imposed a variety of fees on a range of optional services, such as checked and 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 $3 billion in 2009--a small but growing amount of total revenues. 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. The Department of Transportation (DOT) does not currently require disclosure of airline-imposed optional fees, apart from those for checked bags, but recently issued a Notice of Proposed Rulemaking (NPRM) considering different forms of disclosure of such fees. Meanwhile, a system is being tested to fully disclose all of the fees to consumers searching for fares, but airlines are not likely to disclose them unless compelled to do so. Airlines' increasing reliance on fees reduces the proportion of their total revenue that is taxed to fund FAA. The Internal Revenue Service (IRS) has determined that many of these fees, including checked baggage fees, are not related to the "transportation of a person"--the basis for imposing the 7.5 percent excise tax. According to GAO's calculations, the checked baggage fee (the largest and only measurable untaxed fee) if taxed in fiscal year 2009 would have accounted for about 2 percent of total Trust Fund revenues but is likely to grow in future years given recent trends. Since DOT guidance requires airlines to report separately only revenues from baggage fees and reservation change and cancellation fees, GAO was unable to estimate potential collections from other untaxed fees. 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. Despite the introduction of fees, airlines have not substantially changed their baggage service or compensation methods. Checked baggage fees have also led to greater amounts of carry-on baggage, resulting in greater competition for limited overhead storage space. According to IRS, aviation excise taxes on unused nonrefundable tickets are not refundable, but if an airline refunds the ticket, a proportionate amount of tax may be refunded. In contrast, consumers with unused nonrefundable tickets with expired or lost value are entitled to a full refund of the September 11th Security Fee, but few consumers request a refund because airlines are not required to inform consumers of this. According to the Department of Homeland Security (DHS), applicable statutes and regulations authorize the refund of its customs and immigration inspection fees if services aren't rendered, but DHS has not issued any policy or guidance that makes this clear. The Department of Agriculture's (USDA) statutes and regulations are unclear as to whether its fee is refundableon unused nonrefundable tickets. If Congress wants to tax currently untaxed airline fees, it would need to amend the Internal Revenue Code. GAO recommends that DOT require airlines to consistently disclose optional fees and notify passengers of any refundable government fees; USDA determine whether its fee is refundable on unused nonrefundable tickets; and DHS issue guidance on the refundability of its fees. USDA and DHS agreed with the recommendations and DOT did not comment on them.

Matter for Congressional Consideration

  1. Status: Open

    Comments: Congress has not yet taken action regarding this matter.

    Matter: If Congress determines that the benefit of added revenue to the Airport and Airway Trust Fund from taxation of optional airline service fees, such as baggage fees, is of importance, then it may wish to consider amending the Internal Revenue Code to make mandatory the taxation of certain or all airline imposed fees and to require that the revenue be deposited in the Airport and Airway Trust Fund.

Recommendations for Executive Action

  1. Status: Open

    Comments: In commenting on a draft of this report, the department neither agreed nor disagreed with GAO's recommendations.

    Recommendation: To improve the transparency of information on airline-imposed fees and government-imposed taxes and fees for consumers and improve airlines' reporting of fee revenues to the Department of Transportation, the Secretary of Transportation should improve the disclosure of baggage fees and policies to passengers, in accordance with DOT guidance, by requiring that U.S. airlines and foreign airlines that fly within or to or from the United States disclose baggage fees and policies along with fare information such that this information can be consistently disclosed across all distribution channels used by the airline.

    Agency Affected: Department of Transportation

  2. Status: Closed - Implemented

    Comments: In 2010, we reported that airlines have imposed a variety of fees for optional services, such as checked and 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. However, we found that the fees are not fully disclosed through all ticket distribution channels used by consumers, making it hard for consumers to compare prices when shopping for air travel. Therefore, we recommended that the Department of Transportation require airlines to disclose all optional fees through all distribution channels used by the airline. In 2011, the Department issued a rule that requires airlines to disclose their baggage and other fees on their website and that the airline and travel agent disclose to consumers where they can go to find these fees on their websites. In May 2014, the Department proposed a rule requiring airlines to disclose all fee information to all ticket agents. Together, these two rules, once in place, will allow consumers to compare the entire cost of air travel across airlines.

    Recommendation: To improve the transparency of information on airline-imposed fees and government-imposed taxes and fees for consumers and improve airlines' reporting of fee revenues to the Department of Transportation, the Secretary of Transportation should require U.S. airlines and foreign airlines that fly within or to or from the United States to disclose all airline-imposed optional fees that it deems important to passengers to know and further require that this information be consistently disclosed across all distribution channels used by the airline.

    Agency Affected: Department of Transportation

  3. Status: Closed - Implemented

    Comments: In 2010, we found that consumers are entitled to a refund of their customs and immigration fee and possibly their agriculture air passenger inspection fee on unused nonrefundable airline tickets. However, we found that the Department of Homeland Security had not provided guidance to airlines regarding the refundability of the customs and immigration fee and that USDA had not clarified or provided guidance in regards whether the agriculture inspection fee was refundable. In response to our report and its recommendations, both Departments issued guidance that these fees are refundable on unused nonrefundable tickets. We also recommended that the Department of Transportation ensure that airlines disclose to passengers that these two government fees are refundable. In 2011, the Department issued rules requiring airlines to provide prompt refunds to passengers, including fees where those refunds are due. In May 2014, the Department proposed rules the same rules apply to large ticket agents. Once in place, this new rule will provide consumers with better information about their rights and ensure that consumers are given refunds to which they are entitled

    Recommendation: To improve the transparency of information on airline-imposed fees and government-imposed taxes and fees for consumers and improve airlines' reporting of fee revenues to the Department of Transportation, the Secretary of Transportation should require that U.S. passenger airlines and foreign airlines that fly within or to or from the United States consistently disclose to passengers, applicable government-imposed fees on unused nonrefundable tickets that may be eligible for refunds once these determinations are made by relevant agencies.

    Agency Affected: Department of Transportation

  4. Status: Open

    Comments: In commenting on a draft of this report, the department neither agreed nor disagreed with GAO's recommendations.

    Recommendation: To improve the transparency of information on airline-imposed fees and government-imposed taxes and fees for consumers and improve airlines' reporting of fee revenues to the Department of Transportation, the Secretary of Transportation should require U.S. passenger airlines to report to DOT all optional fees paid by passengers related to their trip in a separate account, exclusive of baggage fees and reservation change and cancellation fees.

    Agency Affected: Department of Transportation

  5. Status: Closed - Implemented

    Comments: We found that the Department of Homeland Security's (DHS) Customs and Border Patrol's relevant statutes and regulations authorize the agency, via the airlines, to refund its customs and immigration fees on unused nonrefundable tickets. However, DHS has not issued any policy or guidance that clarifies this. We recommended that DHS issue guidance to airlines collecting these fees. In response, DHS issued guidance in October 2010 regarding the refundability of these fees and the refund process. DHS also provided the guidance to the Air Transport Association of America and the International Air Transport Association to distribute to its member airlines. As a result, the ambiguity regarding the refund of customs and immigration fees has been clarified.

    Recommendation: To eliminate the ambiguity regarding the refund of government-imposed fees to purchasers of unused nonrefundable tickets, the Secretary of Homeland Security should issue guidance regarding the refundability of the customs and immigration inspection fees to U.S. and foreign airlines collecting these fees.

    Agency Affected: Department of Homeland Security

  6. Status: Closed - Implemented

    Comments: We found that the US Department of Agriculture's (USDA) relevant statutes and regulations are unclear whether they authorize the agency, via the airlines, to refund its animal and plant health inspection fee on unused nonrefundable tickets. We thus recommended that USDA determine whether its fee is refundable and convey this to airlines collecting these fees. In response, USDA determined that its fee is refundable on nonrefundable tickets and notified the Department of Transportation to this effect. As a result, the ambiguity regarding the refund of the animal and plant health inspection fee has been clarified.

    Recommendation: To eliminate the ambiguity regarding government-imposed fees that are eligible for refund to purchasers of unused nonrefundable tickets, the Secretary of Agriculture should determine whether a passenger is eligible for a refund of the animal and plant heath inspection fee and convey this determination to U.S. and foreign airlines collecting these fees.

    Agency Affected: Department of Agriculture

 

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