UPDATE 2-U.S. airlines raise fares as taxes lapse

Mon Jul 25, 2011 4:24pm EDT

* Airlines take advantage of tax authorization's lapse

* For most travelers, ticket prices not likely to change

* Analyst sees benefit as temporary (Adds LaHood comment; Updates shares)

By Karen Jacobs

ATLANTA, July 25 (Reuters) - Many U.S. airlines have raised fares in recent days to take advantage of a lapse in U.S. ticket tax collection after Congress failed last week to fully fund the Federal Aviation Administration budget, but passengers are not likely to notice any price difference.

The expiration of the FAA reauthorization on Friday means some aviation taxes are no longer being collected. These include a 7.5 percent sales tax on U.S. air transportation and a 7.5 percent sales tax on the purchase of air miles, said fare watcher FareCompare.com. Additionally, taxes on jet fuel are also reduced.

"Friday evening we adjusted prices so the bottom line price of a ticket remains the same as it was before prior to the expiration of federal excise taxes, etc.," American Airlines AMR.N spokesman Tim Smith said by email.

JetBlue Airways Corp (JBLU.O) and Southwest Airlines Co (LUV.N) began raising ticket prices by at least 7.5 percent on Friday, according to FareCompare.com. Other airlines, such as Delta Air Lines Inc (DAL.N) and United Continental Holdings Inc (UAL.N), boosted prices on Saturday.

The changes could save consumers of 10 percent to 15 percent of the cost of a ticket, should the FAA-related tax relief be passed along, Rick Seaney, chief executive of FareCompare.com, said on Monday.

U.S. airlines have long complained about taxes and security fees, saying they cannot always pass them along to customers. The Air Transport Association, the top airline lobbying group, said that on a $300 ticket, about $61 goes to taxes and fees.

ATA spokeswoman Jean Medina said consumers are not affected by the latest round of fare hikes because they will pay the same amount for tickets as they did last week.

"This short-term additional revenue for airlines, which does not mean a fare increase for consumers, benefits all stakeholders -- customers, employees and investors -- by temporarily improving tiny industry margins to better cover costs, and enable airlines to invest in their product and service," Medina said.

Transportation Secretary Ray LaHood spoke with the ATA twice on Monday about the pricing, he told reporters in a conference call.

"If this tax is not being collected, I don't believe the airlines should be charging people for this amount of money. I think that is not fair," he said. "I'm going to continue those discussions."

Congress is currently debating raising the country's debt limit, but it still has the time to pass an extension, he said. LaHood, a former member of Congress, said he hoped an extension would be ready for President Barack Obama's signature late Monday or within the next few days.

Ray Neidl, senior aerospace specialist at Maxim Group, said passengers will not notice the latest fare increases because the price they pay for tickets will not change.

"Basically (airlines) are just charging what they think the consumer will pay to fill the seats," Neidl said.

Neidl also said the benefit to airlines would be minimized if Congress reached a deal soon to resolve the partial FAA shutdown.

"It looks to me like it's going to be very temporary," Neidl said. "So whatever effect it has, it's going to be very minor."

Attempts failed on Friday to resolve the dispute over the FAA's funding, due to fighting between the political parties. Members of Congress hope to take up the issue on their return Monday.

Shares of U.S. airlines were down on Monday in response to a growing perception that recent signs of renewed pricing power will fade after the peak summer travel season.

The Arca airline index .XAL was down 2.1 percent at the close of the market on Monday. United Continental was down 5.1 percent at $18.93 and US Airways Group Inc LCC.N was off 4.4 percent at $6.50. Both stocks touched 52-week lows on the New York Stock Exchange on Monday. (Additional reporting by Kyle Peterson and Lisa Lambert; Editing by Richard Chang and Steve Orlofsky)

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