Airlines With a Busted (Moral) Compass

What if you could raise prices by 7.5 percent without actually raising your prices?

That would be some corporate hat trick, wouldn't it? But that's exactly what the airline industry, reportedly led by Southwest Airlines, did after Congress failed to pass legislation to keep the Federal Aviation Administration running last month.

No longer bound to collect the 7.5 percent tax that helped pay for the FAA, the airline industry was faced with two choices: effectively lower their fares by 7.5 percent, or keep fares unchanged, pocketing the difference.

And guess what they did? Yep, most of them took the money - roughly $25 million per day - instead of returning it to customers.

Pretty clever. That's what the airlines thought, until passengers realized what was happening and the government urged airlines to give the money back.

Airlines quickly clarified their position, saying they were waiting for guidance from the IRS about how to process tax refunds. Delta Air Lines earlier this week issued a statement saying that travelers who paid for tickets on or before July 22 for travel beginning on or after July 23 and prior to the reinstatement of FAA funding "may" be entitled to a refund of those taxes.

"Nobody is disputing that travelers are owed taxes paid on tickets that were bought before July 22, for travel during the lapse," says Steve Lott, a spokesman for the Air Transport Association. "That is clearly an overpayment of taxes and the traveler is owed a refund from the IRS or the airline. That's quite clear and nobody is questioning that. The only question is the most efficient way for passengers to get their refund."

A JetBlue Airways passenger who contacted me yesterday said he'd received a letter from his airline with vague instructions about how to claim his refund.

"Because we only collect these taxes on behalf of the federal government and remit them on to the IRS (the IRS has these funds), it is appropriate that refunds of these taxes come from the IRS and not JetBlue," the letter said. "You may obtain a refund for federal taxes paid on qualifying flights by submitting a claim directly to the IRS."

The letter offered no information on how to make such a claim, but the IRS just published a Q&A on the topic that is helpful. Even so, only a fraction of air travelers would make such a claim. Airlines will probably keep most of the money.

I asked Southwest, which apparently was the first to put its corporate hand in the cookie jar, if it planned to change the way it prices its fares in light of the public outcry. It didn't respond.

Just because you can, should you?
This kind of perfect-murder problem is faced surprisingly often by businesses, but it hardly ever rises to the level of being denounced by the a cabinet secretary. Almost every day, companies have the opportunity to swap out a cheaper, less reliable ingredient with a quality component, and make a little extra money. They can lower their costs without changing prices. Or, put differently, they have a chance to commit the perfect murder.

There are hundreds of ways of manipulating a price in an unscrupulous way, without a customer knowing it. Some businesses do it, some don't.

The airline tax issue is a litmus test. An ethical business wouldn't dream of taking advantage of an opportunity like this; it would pass along the money directly on to its customers. It wouldn't even be a discussion.

For customers, this is a once-in-a-generation opportunity to see which airlines have working moral compasses and which ones don't. The ones that decided not to keep the money, including Alaska Airlines, Frontier Airlines, Spirit Airlines and Virgin America, made the right call. The others - whether they pocketed the money or punted to the IRS - did not.

Now what?
The big question now is, what happens once the tax returns? Will the airlines that imposed a stealth fare increase raise fares again, or will they start factoring the tax back into their fares?

If they leave their fares unchanged, I think their customers are likely to forgive them for their $25 million-a-day habit. But if they don't, and they raise prices to make up the difference, then passengers - and the government that's so often protective of the airline industry - will not be as understanding.

Neither will I.

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