Another Big US Airline Subsidy? $30 Billion in Net Operating Loss Carry Forwards Mean Airlines Pay Little Tax

While the airline industry claims to be heavily taxed – and they are, such as the 7.5% excise tax on domestic tickets – they are also subsidized through the tax code.

I’ve written in the past about the fuel tax subsidies that Delta receives from the state of Georgia, and the subsidies it received from Pennsylvania for its oil refinery. And that’s entirely apart from the pension liabilities that US Airways, Delta, and United offloaded onto the federal government.

One feature of the US tax code is the ability to write off net operating losses in one year against taxes owed in another. The American Recovery and Reinvestment Act (‘stimulus’) changed this from merely being carry forwards to offering carry back as up to 5 years as well.

At the end of 2013 Delta had $15 billion in net operating loss carry forwards. United had over $10 billion accrued.

State tax rules vary and may cap writeoffs.

Is it a subsidy to write off past losses in future years (or to take current losses and seek a refund based on previous year taxes paid)? I suppose that depends on your point of view, it seems reasonably fair to me to offer — that you effectively don’t pay taxes on the basis of single year performance but net performance over a period of years. But those accrued losses mean that in a given year an airline won’t pay tax on its profits, while other airlines will, making it possible to accumulate capital at a faster rate.

At a 35% tax rate airline industry accumulated net operating losses of about $30 billion are worth over $10 billion in tax savings.

Another reason that sorting through ‘fairness’ as it relates to international airline competition is a nearly impossible thicket, and US airlines should shut up about subsidies.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. That’s an unfair characterization. Every US company is able to capitalize on NOL carry forwards, and even individuals can do so up to limits. Your take on the matter is clear, but if you want to get the point across without hyperbole, stick to comparing airline industry-specific subsidies. By the logic you’re using, you could argue that the US taxing an airline at less than 100% of their profits is a “subsidy.”

  2. I run my own business and am a sole operator – why doesn’t the IRS offer ME a deal like this … ?
    “don’t pay taxes on the basis of a single year performance but net performance over a period of years. ”

    Wow ! Who is scratching who’s back ?

    Am sick of smoke and mirrors and red herrings like “lets all discuss the AA cookies” – talk about fiddling while Rome burns!

    Blogs seem fixated on moaning about trivia such as these things instead of discussing and tackling the REAL issues of cartels, monopolies and subsidies !!!

  3. Wow, that’s a big loss carry forward! What I want to know is how much is Ginnybakes subsidizing AA?

  4. Man, Gary, you are really in the pocket of the Gulf carriers.

    You decry the fact that the carriers you mentioned off-loaded their pension liabilities on the Federal Government, but you failed to mention it was a result of their bankruptcy proceedings.

    I think I will start believing in the stuff you right once you start taking a look at how the Gulf carriers really treat their employees. Then, perhaps, your screeds will be far less sanctimonious.

  5. @COLIN I have written extensively (including in a piece linked above) about the liquidation of pensions in bankruptcy, I didn’t repeat that here because it seems obvious that’s how pensions generally get liquidated. I’ve also written on both sides of whether bankruptcy itself is or isn’t a subsidy (in the case of American AIrlines it seems like it was, even though the purpose of the bankruptcy code is to ensure that creditors get as much of what’s owed as possible, because American could have fulfilled all obligations to creditors by liquidating yet was still allowed to offload obligations).

    The ME3 certainly receive their subsidies, Qatar Airways especially, my point is that this isn’t something unique to those carriers and the big US airlines simply want government protection. United, Delta, and American are terrible hypocrites on this.

  6. @Guy I don’t suggest that it’s a subsidy, I ask the question, I actually don’t think it’s clear here especially since the rules on these were changed in recent years and the magnitude of the loss carry forwards so large. It’s ambiguous. Hardly the black and white ME3 subsidized/US3 unsubsidized dichotomy that United/Delta/American present.

  7. As I’ve often posted on FT when people bemoan how air fares have risen, for most of their operating years, the legacy airlines in the US have been losing money on their operations since the cost of flying a seat was not recovered by the price charged. Someone had to make up the accumulated losses. In many cases it was employees who took pay cuts or freezes and in some cases lost full pension benefits. In others it was investors, bankers (well, who gives a s*#t about them), suppliers and leaseholders who lost out during bankruptcy restructuring. So now to complain that the airlines are taking advantage of what the US corporate tax structure permits any company, not just airlines, cannot be called a subsidy just to one industry. But if you must use that term then among those who have subsidized our MileageRun fares in the past is the US government.

    BTW you forgot to mention the hundreds of millions the US carriers got from Washington to off set the 9.11 shut down.

  8. Keep beating this drum, Gary, as loudly and frequently as you can. Your points need to be heard.

    Even as a lawyer, I’m mystified by the hair-splitting that defends US carriers. The big picture is that many governments, including our own, subsidize their own countries’ carriers in manifold direct and/or indirect ways. To single out the ME carriers and deny that US carriers don’t play the same game is to defend US carriers’ near-oligopoly against competition from foreign airlines that often offer better service, products and/or prices.

  9. There can be endless debates about whether the airlines — or anyone else in America — is paying their fare share of taxes. Heck, if you’re in a higher percentage personal tax bracket, you’re arguably “subsidizing” your fellow citizens in lower tax brackets.

    Regardless, pay less than one’s “fair share” of taxes (which, of course, would be in the eye of the beholder) is something totally different than the government continuously writing you blank checks (euphemistically called “equity”) to open an airline and operate it with heavy losses. Along with, of course, all the other financial shenanigans that are necessary to sustain a premium ultra long haul airline network that seems to only be economically “feasible” in small, autocratic Middle Eastern nations. Equating this stuff with exploiting loopholes in the US tax code is simply absurd.

  10. Pretty hard to consider NOLs a “subsidy.” They took a loss in prior years…let them recoup that before having to pay tax.

    If you really want to further put it to airlines, why don’t you write to Congress and suggest they make the cost of free liquor to “fat cats” in first class non-deductible for the carriers. Heck…why not make all expenses non-deductible?

  11. I say bring on the competition. I’m tired of US airlines hiding all of their available seats so they can charge me $70 per flight segment to sit in an aisle or a window seat. The more competition the better. I’m all for everyone making a profit but some of the recent tactics they are employing are just outrageous especially for families who can’t afford all of the extra charges.

  12. @Gary I’m all for opening the US to more and more ME3 competition. But the NOL carry forward extension had NOTHING to do with the airlines. NOTHING. It was about helping to recapitalize the US banking system and ensure that past tax bills didn’t make US banks more insolvent than they already were. I consulted with then-Senator Arlen Specter’s staff on aspects of ARRA.

  13. With 27+ years as a CPA The NOL is not a tax “savings” remember that you have to LOSE this $15 Billion first before the company can tax roll the loss forward or backwards. Second companies this size pay a flat income tax rate of 34% on the first $1.00 of income an individual has graduated tax rates from 0% to 39.6% The NOL’s can not usually be carry backed for state purposes (MA does not allow Carrybacks, RI only allows if the Fed CB is the same

    These losses can only be deducted IF the company has PROFITS in future years or in past years. After 20 years on the federal side they expire.

    Next Problem is that NOL in PRE- Merger is reduced when two companies merger. This is so that Company X does not acquire Company Y just for it’s NOL losses.

    The Last problem is Market Value. What is the company worth for it’s stock with a $30 Billon loss then the company had expenses that exceeded income and thus net assets decreased by that amount. Who wants to pay the same price for a company with $30 billon in losses?

  14. @Guy (first post) has it right–you’ve drunk a few too many Kochs.

    I wonder, does Scott Walker’s endorsement of spending public taxpayer funds to subsidize the privately-held local NBA franchise make your head explode, or do you have some rationalization for that too?!

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