Senator Susan Collins is currently championing a bill that will hike the Passenger Facility Charge (PFC) levied by airports on ticket prices. Supposedly the move would fund improvements to their infrastructure.
The PFC is currently capped at $4.50 per leg of a flight and charged a maximum of twice on a one-way trip, or four times on a round trip, so that the maximum PFC charged is $18 per round-trip. The proposed increase in the PCF would increase the fee to $8.50 on the first segment of both the outbound and inbound trips, boosting the total possible PFC to $26. On a budget flight the PFC could approach a quarter of the cost of a round trip ticket.
More than 20 percent of a typical domestic airfare is already made up of taxes and fees. There are 17 different federal taxes levied on aviation that delivered the government $26 billion in revenue in 2016. The current PFC alone added a record $3.2 billion to ticket prices in 2016, boosted by the record-high number of passengers flying these days.
Monies raised by the PFC on airline fares are collected on behalf of airports and used to fund FAA-approved upgrades to their facilities. The ostensible justification for the hike in the PFC is that it is necessary to fund upgrades to airport infrastructure around the country.
The problem with that argument is that airports already have access to a range of revenue streams to finance new capital expenditure. Airline rents and fees were a record $11.4 billion in 2016, on top of which an additional $9.7 billion was raised from non-airline sources such as parking and sundry retail operations. We should encourage the airports to do more to create non-flight revenue, as the private concessionaires who run airports in the rest of the world do.
Besides airports’ own revenues, passengers already pay into the Airport and Airway Tax Fund (AATF), which assists in funding airport improvements. A domestic passenger ticket tax of 7.5 percent and a $4.10 per passenger segment charge helped to raise $9.9 billion from domestic air travelers for the AATF in 2016, with even frequent flyer awards subject to the 7.5 percent excise. At the beginning of the 2017 financial year the balance of the AATF stood at $14.7 billion.
Advocates for the increase in the PFC have spun the impost as a “user charge” in order to make it more saleable politically. From an economic perspective, hair-splitting about whether the charge constitutes a de facto tax or a user fee is beside the point as far as consumers are concerned. The effect of the charge is to increase the price of air travel in exactly the same way as a tax, so its economic effect on air travelers is identical.
The only difference is from the perspective of airports given that the revenues from the PCF are hypothecated to upgrading their infrastructure subject to the priorities of the FAA. In contrast, tax revenues would be paid into the general fund.
The argument is made that the charge should rise because it hasn’t been indexed to keep up with inflation. Unfortunately there doesn’t appear to be much discipline applied to that position. Overall price levels have risen just over 40 percent since the levy was last increased in April 2001. If the objective were simply to maintain the real value of the levy, that would argue for a lift in the PFC to $6.30 rather than $8.50.
Similarly, the last increase in the PFC on April 2001 was a 50 percent hike from $3 that exceeded the roughly 25 percent increase in the CPI since the charge was last changed in June of 1992. Nor is it entirely clear why inflation should be the relevant benchmark for indexation rather than a measure that tracks costs in the industry and therefore takes into account any ongoing efficiency gains from economies of scale.
More importantly though, no evidence is presented to make the case that $8.50 is the efficient level of the PFC. If the proposed increase in the PFC is in fact a user fee then its proponents should be able to justify an appropriate level having reference to the per passenger cost of each enplanement. Absent that evidence, it is difficult to determine whether ramping up the charge is justified—or simply a revenue grab by airports.
It is also worth noting that most user fees are collected directly from the user in order to help them realize that they are, in fact, paying for a service being provided. The fact that airlines collect it and that it is often unseen when travelers buy a ticket weakens this argument.
Finally, capping the PFC at $4.50 acts to protect consumers from airports exploiting their market power. As air traffic gateways to cities and regional areas, airports have the capacity to price gouge air travelers in the absence of limits on the PFC. Capping the charge operates as a consumer protection measure and is conducive of efficient use of the airport.
If airports had a clear policy argument for an unpopular increase in the PFC they would have made it. It pays to be wary of campaigns to increase government burdens on consumers, particularly when there are businesses on the other end of those policies angling to receive the benefits of the funds they deliver. It is difficult to distinguish the proposal to increase the PFC from an opportunistic attempt by airports to raise additional revenue at the expense of air passengers. In the absence of a well-articulated policy case, lawmakers should err on the side of consumers and shelve any plan to increase the cost of air travel.
Burchell Wilson is a consulting economist with Freshwater Economics.
