How You Can Save $31 Off Airfare on Average Before Dec 31
Have you noticed airfare just dropped over the last couple days? Well, you can thank the Coronavirus Aid Relief and Economic Security Act of 2020 (CARES Act). I will show you what this means for your new airfare bookings. You can save $31.63 on average thanks to the CARES Act!
According to Section 3201 of the CARES Act, federal excises taxes will be suspended until January 1st, 2021. What does that include? View From The Wing has a breakdown:
- The 7.5% excise tax on domestic airfare (Code US or US1 on ITA Fare breakdown)
- $9.50 USD each way arrival and departure tax for travel between Hawaii and the Continental U.S. (Code US or US2)
- $18.90 USD each way tax for travel between Puerto Rico and the Continental U.S. (Code US or US2)
- $4.30 USD per domestic flight segment fee (Code ZP)
Savings on Airfare, But...
It’s important to note that the above taxes have been suspended for new bookings made between March 28th and December 31st, 2020, meaning you can take advantage of the savings on airfare bookings for travel during most of 2021 as well (assuming you book towards the end of the year when airlines opens up their schedules until around October 2021). You just have to purchase your airline tickets by December 31st, 2020 in order to avoid paying the federal excise taxes.
Let’s see this in action. I found a screenshot of price breakdown of a ticket from San Francisco to Boston via Finance Buzz (left) and compared it against an ITA search today for the same itinerary (right):
As you can see, the following lines have disappeared from the price breakdown:
- US Transportation Tax (US)
- US Flight Segment Tax (ZP)
While the September 11th Security Fee (interestingly renamed ‘United States Passenger Civil Aviation Security Service Fee US Minor Outlying Islands’) (AY) and US Passenger Facility Charge (XF) remain intact.
We will use an example of the average airfare ticket cost to work out an average savings here. According to Business Insider, the average round-trip itinerary costs $359. So we our example ticket will have a base fare of $307 + tax. The total price prior to March 28th would have been $307 (base fare) + $23.03 (US) + $8.6 (ZP) + $11.2 (AY) + $9 (XF) for a total of $358.83. As of March 28th, the same ticket now costs $307 (base fare) + $11.2 (AY) + $9 (XF) for $327.2, or a savings of $31.63 on average!
Now, this of course assumes airlines will not raise their base fares as a response to the CARES Act, offsetting the suspension of federal excise taxes in order to rake in more cash from travelers. Would airlines do this? Plausibly. No one is booking travel these days anyways despite deep discounts to lure travelers to fly (which I am not okay with).
Effects on Valuation of Miles and Points
However, there is a flip side to this. Generally speaking, one only needs to pay the Security 11th Security Fee ($5.60) when booking award tickets; other taxes are included in the cost of redemption bookings. Which means as the cash price of tickets decrease while mileage redemption costs remain unchanged (so far that is the case), your miles and points are in fact, devalued.
Let’s work out an example. We will assume the redemption rate is 25,000 miles + $11.2 (AY) for the above example (on any airline, that does not matter), and that price does not change. An award redemption ticket purchased before March 28th has a value of $358.83 / 25,000 = ~1.44 cents per mile. comparing to a ticket purchased post March 28th with value of $327.2 / 25,000 = ~1.31 cents per mile. As you can see, now your miles and points are worth less than before.
Bottom Line
It is good that the federal excise taxes will be suspended for the next few months. While the chances are low, airlines can also just raise the base fares to offset the elimination of federal excise taxes, thus screwing the little guy even more. Would I book all my travel now? No – the Coronavirus pandemic is still a very fluid situation and until the dusts have settled, I’m going to try to get as much refund from airlines as possible, instead of booking new airfares.
