CHARLOTTE, N.C. ( TheStreet) -- In a somewhat incomprehensible move late last week, Congress accidentally moved to temporarily cut taxation on airlines, perhaps the most heavily taxed U.S. industry. The move was typical Congress. Some senators held up an extension of the Federal Aviation's Administration's authorization because of local, minimally-related concerns. This keeps the FAA from collecting taxes amounting to about $25 to $50 per round-trip, or $25 million a day, in tax revenue.
This gives airlines what must be assumed to be a temporary tax reprieve. For some reason, a wide spectrum of media decided that in response, airlines should immediately cut back on ticket pricing and turn over all the benefits of reduced taxation to the public. We live in a great country, one in which reporters, bloggers, columnists and editors take it upon themselves to determine how airlines should distribute revenues. The prevailing wisdom, it seems, is that airlines make too much money and that airline travel should be provided free of charge. This convoluted economic theory enables media, hungry to "aggregate eyeballs," to appear to share the financial pain of its customers. The truth is that the airline industry is economically fragile, extraordinarily sensitive to exogenous factors it cannot possibly control such as weather, the economy, terrorism and, most importantly at the moment, high fuel prices. It desperately needs to collect more revenue, not less revenue. The current earnings season shows just how much rising fuel prices can unsettle airline economics. During the quarter, American ( AMR - Get Report) lost $286 million after its fuel costs rose by $525 million from the same quarter a year earlier. US Airways' ( LCC) saw its fuel costs rose by $424 million, reducing its profit to $106 million. Delta ( DAL - Get Report) reported a profit of $198 million, down from $467 million last year, as fuel prices rose by $1 billion. Delta is considered a successful airline. Its profit as a percentage of revenue was roughly equivalent to 0%. In recent weeks, airlines have tried repeatedly to raise fares. But that is extraordinarily difficult in this intensely competitive business. Once a carrier posts new fares, it must then wait to see if competitors match. If there is no match, fare increases generally cannot be implemented without resulting in a loss of passengers. So most attempts to raise fares are withdrawn.
Last week saw an unusual sequence of events. At midnight on Friday, July 22, the government stopped collecting FAA ticket taxes, worth about $25 million daily. Then, to offset the uncollected taxes, American and US Airways raised fares to keep ticket prices the same as they had been. Then something strange happened: JetBlue ( JBLU) and Southwest ( LUV - Get Report) both raised their fares, too. These are the nation's two main low-fare carriers, and often they do not go along with fare increases. This time they did! That enabled Delta and United ( UAL - Get Report) to raise fares too. As a result, for a change, airlines get a brief tax holiday and an opportunity to recoup some of the money they have lost to fuel price increases. In a sense, this benefits consumers by diminishing the likelihood of future, perhaps higher, fare increases, while not having any impact on ticket prices. But let's look at an alternative approach. When the tax collection stopped, all of the carriers could have immediately reduced ticket prices. Then, when the tax collection started again, some might have tried to increase ticket prices. Who is to say whether the effort would have succeeded or failed? Odds are it would have failed. Only one thing is absolutely certain. If that scenario had occurred, and if the airlines had somehow succeeded, we could have had more stories expressing outrage that airlines raised ticket prices as soon as the tax came back. -- Written by Ted Reed in Charlotte, N.C. >To contact the writer of this article, click here: