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Flying Higher

News for entrepreneurs on the go.

Travel costs are heading skyward: Federal laws passed by Congress last summer increased taxes on international airline tickets and could inflate costs for travelers buying tickets for domestic flights or redeeming frequent-flier miles.

"The total impact of this new tax package means that over the next five years, taxes on air travel will increase from $30 billion to $34 billion," says David A. Fuscus of the Air Transport Association. But just how much of that tax will get passed on to consumers remains to be seen.

One price hike business travelers will see immediately is on international travel. Under the new law, which took effect in October 1997, the international departure tax doubles from $6 to $12. In addition, an international arrival tax of $12 was created--resulting in a total increase of $18 per international round-trip ticket. "Excise taxes are more problematic," says Fuscus. "The straight excise tax does decrease, but now we have the addition of a head tax."

As of October 1997, the 10 percent tax rate on airline tickets was reduced to 9 percent and will eventually drop to 7.5 percent by 2000. The bad news: A flight segment tax now applies to each leg of a traveler's domestic trip--starting at $1 per leg and increasing to $3 per leg by 2002.

The third part of the travel tax--and the one that has caused the greatest stir throughout the industry--applies to frequent-flier miles. Companies that purchase frequent-flier miles from airlines, such as credit card companies, as well as businesses that partner with the airlines, such as hotels, will now be taxed at 7.5 percent on the transactions.

Some airlines, wanting to keep their relationships with frequent-flier program partners secure, may simply absorb the taxes and pass the costs on to consumers. In this case, consumers who belong to frequent-flier programs (52 million in North America alone, according to InsideFlyer magazine), may feel the sting through award "redemption" fees. Where frequent-flier partners are asked to cover the new tax, diminished program availability may become a problem.

"What some partners of [frequent-flier] programs--and so far it's been primarily car-rental companies--are likely to do is reduce the number of programs they participate in," explains Randy Petersen, editor and publisher of InsideFlyer.

For business travelers, this may simply require developing new travel-planning strategies. Says Petersen, "Consumers, if they're really playing the miles game, may have to change car-rental companies."

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This article was originally published in the February 1998 print edition of Entrepreneur with the headline: Flying Higher.

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