Taxes & their impact

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Sorry for straying from the standard interview info. I found this on the SWA website & found the info interesting.

The "Plane" Truth About Your Fare

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-- An example in the cost of government associated with your ticket --


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There is No Small Tax
"It's just a small tax," you say? Let's just take one "small" tax Southwest Airlines pays to the federal government: the federal fuel tax of 4.3 cents per gallon. This tax is not seen on your ticket and can be considered an indirect tax.

Unlike the automobile industry, which is subject to taxes at the gas pump for roads, airlines were required to pay an excise tax, which today is 7.5% of the ticket price, to help pay for our "roads" in the sky. But, in 1993, the federal government imposed a new tax on the airline industry in the form of a fuel tax of 4.3 cents per gallon, above and beyond the federal excise tax of 7.5%.

Does a federal fuel tax mean anything to you? After all, it's just 4.3 cents per gallon…right? Southwest Airlines purchases approximately one billion gallons of fuel a year. A 4.3 cents per gallon federal fuel tax means $43 million in Southwest Airlines' revenues goes to Uncle Sam-on top of all our other taxes.

Let us look at a further example of this point. Southwest Airlines' average fare is $84.00 one way. To pay the federal fuel tax alone, Southwest Airlines would have to take the total gross ticket revenue at an average fare of $84.00 from 511,905 passengers. Said another way…Southwest Airlines has to make 5,688* flights at an average load factor of 67% to pay the federal fuel tax! That is on top of what we pay for the actual fuel itself!

Just think how much lower our fares could be for you if we didn't have the "small" 4.3 cents per gallon federal fuel tax, and all the other taxes and fees on air travel.

*This figure was achieved by taking the average number of seats available in December 2003 (135) and determining the average load factor for each flight in 2003 (67%) to find the average number of people onboard per flight (90.45). Total fuel tax is $43 million divided by the average fare of $84 (2003)=511,905 passengers are required to generate $43 million. 511,905 total passengers divided by 90 persons per flight on average = 5,688 flight departures.

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There is No Small Tax


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The airline industry is subject to taxation at federal, state, and local levels. Your ticket is comprised not only of the fare Southwest Airlines charges from one destination to another, but also includes taxes imposed directly on your purchase. Take a look at the fare breakout the next time you travel and see what percentage of your total fare goes to the government.

Each time you fly you are subject to four different government imposed aviation taxes or fees.

Federal Excise Tax - It's 7.5% of the base price you pay for an airline ticket. The money goes to pay for operation of the air traffic control system and airport infrastructure.


Federal Flight Segment Tax (Fee) - An additional $3.10 fee (adjusted upward annually for inflation) for each flight segment (takeoff and landing) on your itinerary. The money also goes to the Aviation Trust Fund to pay for Federal Aviation Administration (FAA) and airport activities.


Federal Security Fee - A new $2.50 fee on each passenger "enplanement," up to $10.00 on a roundtrip, to pay for new federally controlled security measures. (Airlines pay yet another new security tax directly to the U.S. Government to further defray the costs of the government's war on terrorism.)


Passenger Facility Charges (PFC) - Congress permits local airports to assess PFC's of up to $4.50 from each airline passenger. But, the law forces the airline to be the tax collector. It is collected for each airport on your itinerary with a PFC. The airports authorized to collect PFC's are required to utilize the fees for airport projects.
The above direct taxes are added to your ticket. Indirect charges for federal fuel excise taxes, federal and state income and payroll taxes, and state and local property and transaction taxes and fees are not "seen" on your ticket, but are embedded operating costs reflected in your total fare.

Excessive taxation on the airline industry translates to higher fares for the traveling public. When imposed on low-fare carriers such as Southwest Airlines, the "flat" rate taxes or fees (those not related to price), like the segment tax and security fee, are particularly onerous to our Customers and can result in a disproportionate tax burden on low-fare airlines and our value conscious Customers.

In effect, the total tax burden on air travel is frequently higher than the "sin taxes" on alcohol and tobacco. Has government declared that the Freedom to Fly is a "sin?"
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Part II

Laura Wright
Vice President - Finance and Treasurer
Southwest Airlines


"But It's Just A Few Dollars"
Frequently, the federal government, state legislatures, cities and airports impose new costs on airlines in the form of taxes, "user fees," "passenger facility charges," or airport expenses. The various governments insist there will be no harm to Southwest for two reasons:

on a per passenger basis the amount will usually be "just a few dollars;" and
we will just "pass on" such higher costs to our Customers, so Southwest is not affected.
However, over time and cumulatively over 59 airports in 30 states, the total amount of money easily reaches into the hundreds of millions of dollars. We asked Laura Wright, our Vice President-Finance and Treasurer to discuss this growing problem.

Q: Does a tax, fee, or charge of just a few dollars per passenger really matter to Southwest?
A: Yes. In the five calendar quarters since 9/11, Southwest's net profit per passenger was only $2.96. To put that in perspective, the federal sales tax on an average Southwest ticket is $6.25; federal "segment" and security fees add another $5 per segment flown; and 51 of our 59 airports have passenger facility charges of $3 - $4.50. So, government makes a lot more money off our Customers than we do!

Q: $2.96 per passenger seems small, but at least Southwest has lots of passengers and, unlike most airlines, Southwest is still profitable. So, how big a problem could this be?
A: It is a huge problem. The airline industry is in a deep recession. Our costs associated with security and other things, including higher labor costs since 9/11, have soared. Fares are being slashed to stimulate demand, yielding less revenue per passenger. Together, that means our profit margin has gone down. Let me put it this way. In the five calendar quarters since 9/11, the difference between a profit and a loss on the 1,182,484 flights (excludes charters) we have operated comes out to 2.3 passengers! In other words, had we averaged 2.3 fewer passengers on each flight over that 15 month period, we would have lost money.

Q: But if the government is right, higher taxes, fees or airport pfcs don't matter because the Customer pays them, not Southwest. Right?
A: In normal times, this is a subject on which people might disagree. But, in these times, with airlines having to cut fares to stay in business, there can be no debate. We can't pass on higher costs of any kind, be they for taxes, labor, or fuel. We are all consumers so we can all understand. If we as consumers are not willing to buy a good or service at a regular price of $100, we certainly won't buy it at $100 plus taxes and fees. As a percentage of our average fare today, the total amount of all taxes and fees can reach as high as 20% - 35%. To get people to fly, we must lower our base fare (what we get to keep) to offset the higher tax or fee. We cannot afford to lose those 2.3 passengers a flight, representing our profit.

Q: The federal government came to the airline industry's aid after 9/11, reimbursing them for losses associated with the government's shutdown of the entire air transportation system. Didn't this offset the impact of taxes and fees?
A: Not at all. Granted, Southwest got $283 million in loss reimbursement. But, that didn't cover all our losses. At best it only made us close to even, so to speak. Furthermore, the reimbursement was subject to federal and state corporate income tax. Thus, we only got to keep $172.6 million. Then, right after the federal government passed a law to reimburse us, it also enacted two new security taxes: $2.50 per passenger segment plus another tax we pay directly to the TSA every month. Southwest is responsible for generating $16.5 million a month, money that goes to the government that could be going to us. At that level, it takes us only 10.46 months-less than a year-to give back to the government the reimbursement it gave us. At the end of the 10.46 months, the taxes don't go away. Like most taxes they go on indefinitely. So, in less than one year, Southwest will fully repay our "loan" and begin "bailing out" the government!

Q: So what's the bottomline?
A: Every dollar matters. Remember, I said our average net profit per passenger the last 15 months was a mere $2.96? If we got to keep every dollar that currently goes to taxes and fees, obviously our profit per passenger would rise accordingly, along with our profit sharing and the price of Southwest's stock.

Q: Meaning, Southwest would be rich?
A: Not exactly. If we make more money, federal, state, and local governments together still take a huge chunk. The federal corporate income tax rate alone is 35%. So, there is no escape. But, it is inescapable that at the present time, every single dollar of new taxes and fees, regardless of source or need, is a dollar off our bottomline.

Q: Why should people, other than Southwest Employees, care?
A: Because aviation is truly the lifeblood of our modern economy. According to a recent national economic study, aviation represents 10% of all economic activity. The five states that benefit the most in terms of dollars (California, Texas, Florida, New York, and Illinois) are states we serve. (Figures, doesn't it!). Another (Nevada) gets the biggest proportional benefit. There, aviation makes up 19% of everything that happens economically-almost one dollar out of every five. So goes aviation, so goes the economy.

Q: What can we do?
A: Do not hesitate to share this information with your coworkers, families, friends, and Customers. Before we can hope to get the government to understand, more people must understand why-and how much-we matter to them and their daily lives.