Photo: SuperFantasticCigarettes are some of the most heavily taxed goods around. According to this source, the average state tax per pack of cigarettes is $1.23, plus an additional $1.01 of federal taxes, as well as any local taxes. With an average price per pack in the United States of $4.82, the combined state and federal taxes make up 46 percent of the price. In Chicago, total taxes per pack are a whopping $4.67 per pack! I don’t know the exact price of cigarettes in Chicago, but taxes must be around two thirds of the total cost.
So what does this have to do with airline tickets? The overall tax rate on airline tickets hasn’t reached cigarette proportions just yet (according to this site, taxes are 16 percent of airline ticket prices), but in some special cases, the tax on plane tickets makes the purchaser wish they were getting the cigarette treatment.
Recently, my friend and co-author Chad Syverson decided to take his parents to Europe. Their itinerary took them from Fargo, North Dakota, to Chicago to London to Munich. Their return trip takes them from Frankfurt to Chicago and finally back to Fargo, roughly 10,000 miles of flying later. All of the flights are on the same airline.
The tickets were remarkably cheap — only $438.82 per passenger round trip. How much of that money goes to the airline? A paltry $138. The rest — over $300 — is taxes. Percentage-wise, that’s even higher than the cigarette taxes in Chicago.
It also makes you wonder how the airline can sell the ticket so cheaply. The fuel costs alone for the extra weight of a passenger and luggage must get close to their revenue on the ticket. It wouldn’t surprise me if it took 100 gallons of fuel to fly one passenger 10,000 miles with numerous takeoffs and landings along the way. (That would still be only one third as much gas as it would take to drive that distance.) Even so, it would mean the airline was pricing below marginal cost, which is a serious no-no in economics.
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“It takes roughly a gallon of jet fuel to move 100 pounds on a domestic flight.” — http://current.newsweek.com/budgettravel/2008/08/overweight_passengers_cost_the.html
So, while it’s only for domestic flights, even if you were to assume 2 to 3 times the distance for your particular trip, you would be looking liberally at, 8 to 12 gallons figuring 200 person round trip plus luggage. This is because most fuel is used during take off and climbing to altitude, which has to be done only once per flight, and doesn’t vary over distance. At about $5/gallon – jet fuel is more expensive than car fuel – that leaves you with $40-60 in fuel costs. (Did the $300 taxes include fuel taxes?) Once aircraft maintance, salaries for crew, etc are accounted for, everything else is profit.
Current airline policy seems to be try to pack the plane full with few empty seat, and sell amenities (drinks, snacks, and in the case of Ryan Air even the use of lavatory). For a transatlantic flight, you could easily need a couple of snacks or meals.
If they aren’t priced too much below the marginal cost, they are also going to be able to expose the passenger to a number of buying opportunities along the way. They can bet that a high percentage of passengers taking 10,000 mile trips will be paying to check luggage, buying “snack packs” and perhaps some cocktails, and so on – all probably high-margin items. Plus they can expose them to advertising in the in-flight magazine and in-flight TV, where empty seats reduce the aggregate number of readers/viewers. As long as they are close to covering their costs on the original seat purchase, and there are enough business class tickets sold in the long flights, the airline’s recreational travel pricing model is probably reasonable for this economy.
Is this a surprise? The airlines business model, excepting Southwest, is a farce. They have lost money for years and I am amazed that they stay in business at all. Through no fault of my own I have participated in the “bailout” of the airlines, what is it, twice now!?! Maybe there should be less airlines overall and more quality to the flying experience. But that is another rant for another day…..
International airline tickets often incorporate a ‘fuel surcharge’ which is paid to the carrier but is not part of the base fare. It is included in the tax and surcharge line (coded as YQ by many carriers in case you can read the detailed breakdown). Many people think that this is a tax, but it is not. Also, note that airport passenger user fees go to airports and not to governments; these are also incorporated in what most people think as the ‘tax’ line.
Air travel is highly taxed, but not that highly.
The cost to fly the plane is nearly fixed, since the passenger and baggage is a tiny amount of weight compared to that of the aircraft. There are a ton of other fixed costs (gates, agents, maintenance). Better to cut prices to get any revenue at all (and keep passengers off your competitor’s planes) and try to survive the drought.
They could be willing to offer that route at such a low price to implement their price discrimination strategy. If they priced their itinerary to end in London, would the price be more or less?
Adding to my previous comment: the cheapest fares in the Fargo-Munich market as of right now are actually a little cheaper, but every single fare I can see includes either $160 or $180 in airline-imposed ‘fuel’ or ‘international’ surcharges (depending on what the carrier calls it).
For example, the lowest fare in the market for May 21 departure, May 25 return is $439 on Lufthansa and United. Base fare is $59 each way, so $118 total. On top of this is a fuel surcharge of $209, so actually $327 goes to the airline. There is a German passenger service charge of 25.92 euros and a US equivalent of $13.50: these go to airports. Finally, the miscellany of taxes charged by the US and German governments make up the rest: a total of only around $60 in tax, or less than 15% of the ticket total price.
(I’m assuming airports are privately owned and not counting their fees as taxes; that may be wrong in some cases. In any case, it doesn’t make that much difference.)
You can understand why the airlines like to perpetuate this misunderstanding. (It’s also related to how corporate contract fares are constructed: discounts on the base fare, not on the fuel surcharges).
You need to look more carefully. I priced our family trip to London for Christmas and got something similar: of the $650 per person, about $300 was the fare and $350 were ‘taxes, fees and surcharges’. But looking more closely, it turns out that about $200 of those surcharges were in fact the airline’s fuel surcharge, i.e. going right into the airline’s pocket. I’d be prepared to bet that your trip to Munich is similar.
The question is why the airlines are doing this (and it’s mostly the European airlines playing this game, or so it seems) — usually the reason is to raise the price of ‘free’ frequent-flyer tickets or corporate negotiated fares. By moving a good chunk of the price into a fuel surcharge, they get to say ‘yes, your fare is free but here are the taxes’ and still charge you 60% of what they would have charged you, even on a ‘free’ ticket.