Yes for Taxing Profit From Airline Unbundled Pricing

When the lawmakers start talking about taxing (instead of banning or regulating) airline unbundled prices – we know the prices are now mainstream and here to stay.   Gone are the days of  customer backlash against paying for extras. There is much less resistance from customers not because they embraced the fees because  they clearly see the value they get but because their reference price has budged from $0.

While SouthWest continues to make its strategy “Fees don’t fly with us”, rest of the airlines brought in $769 million in baggage fees alone just in one quarter. Since the baggage infrastructure costs are sunk and the marginal cost is $0, most of these fee revenue flow directly to their profit.

The question is should these extra fees be taxed by the Government? (quotes are from WSJ article)

House Transportation Committee Chairman James Oberstar (D., Minn.) called the fees a “backdoor price increase” in airfares, with consumers now paying for many items that until three years ago were included in the price of a ticket. Passengers are paying for meals, for pillows, for blankets, for headphones, for beverages, to check the luggage.

The airlines justified these fees with a cost argument that is mostly fixed cost allocation rather than true marginal costs. Now they are pointing out the “cost allocation confusion” in lawmaker’s case for taxing these fees:

Spirit Airlines Inc. President Ben Baldanza defended the “a la carte” fee model, saying it gives passengers a choice of what services to pay for. Taxing the fee revenue would hurt industry and consumers, he said. “Such taxes would surely harm competition, raise costs and slow the industry’s recovery from a decade of losses,” he said. He added the ancillary fees shouldn’t be taxed because such services “do not use the infrastructure that the tax is intended to pay for.”

Cost is irrelevant to pricing. Yes, tax is a type of price (more precisely price is a type of tax – hence the economic term tariffs).  Since practicing unbundled pricing generates value to the airlines and  they depend on the existence of public infrastructure and security processes to provide these services. For instance the baggage screening  and airport security processes enable the airlines to provide baggage service to its customers and charge for the service. Since they are using common resources the public (Government) must be  able to get a share of this value created.

So yes, unbundled pricing must be subject to taxation.