Is the revamped tax code a "gift for hard-working Americans" as President Trump declared, or just a gift for corporations already reaping record profits? For now, travel executives seem way more excited than the general public.
The tax bill that Congress passed Wednesday might not be a hit with the general public — statistical analysis site FiveThirtyEight calls it historically unpopular — but corporate America sounds pleased as punch.
Travel industry executives, some of whom have been vocal advocates for years for changes to the U.S. tax code, belong in that satisfied group.
In recent days, Skift reached out to multiple companies to ask for a reaction to the tax legislation. We also searched earnings call transcripts, regulatory filings, television interviews, and other sources to get a sense of the impact industry players expect — and how they might use the extra cash in hand as a result of the changes to the tax code.
It’s not clear when President Donald Trump will sign the bill, which lowers the corporate tax rate from 35 percent to 21 percent, but the White House held an event Wednesday afternoon to celebrate its passage by the House and Senate.
The Immediate Reaction
The bill’s passage was touted as a victory for Republicans, and those in the travel industry who offered comments on Wednesday seemed to count it as a win for their companies as well.
“We applaud the passage of the tax reform legislation which is aimed at reenergizing the economy through tax cuts for businesses and individuals,” David Kong, President and CEO of Best Western Hotels & Resorts, said in a statement. “As taxes decrease, small business owners will have more resources to reinvest in their businesses, resulting in a stronger economy overall. With key indicators such as the stock market on the rise, the travel and tourism industry will be one of many sectors to see a direct benefit.”
In a statement, Hilton Hotels and Resorts said the tax changes were positive for hotel owners and builders.
“As each new property brings with it potential economic activity and local employment, we choose to be optimistic about what this can mean for our industry,” the statement said.
Several other hotel companies pointed to an enthusiastic statement from the American Hotel & Lodging Association.
“Our industry is proud to support legislation that will reform U.S. tax policies and create a pro-growth tax environment,” said the association’s president and CEO, Katherine Lugar. “Tax reform will enable hoteliers to expand their businesses, create more jobs, and help keep our economy strong. Tax cuts will contribute to the overall economic growth of our nation and strengthen our economy.”
A handful of companies — some with direct links to travel — made quick moves Wednesday to demonstrate that their tax savings would benefit American workers. Bloomberg reported that Comcast, which owns Universal Parks & Resorts, would give $1,000 bonuses to 100,000 workers and invest more than $50 billion in infrastructure. Likewise, aerospace company Boeing said it would devote $300 million to employee training, workplace improvements, and corporate giving.
Don’t Spend It All in One Place
Critics say the bill is a gift to the super rich and already-profitable corporations that comes at the expense of the working class. And they question who the corporate tax breaks will actually help.
“There is a reason so few executives have said the tax bill will lead to more jobs, investments, and higher wages — because it will actually lead to share buybacks, corporate bonuses, and dividends,” Democratic Senator Chuck Schumer said in a statement, according to CNBC.
Before the bill passed, Barclays analyst Felicia Hendrix wrote in a note to investors that she believed that merely the expectation of tax changes had already helped stock prices and company valuations, “but could have a further positive impact once investors can home in on the specific upside that can come from generally higher corporate profits, capital spending and economic growth.”
In recent months, the leaders of several publicly traded companies have sketched out some of their ideas for how to spend a tax cut windfall.
“It’s not really going to change the way we allocate capital,” Hilton president and CEO Chris Nassetta told CNBC earlier this month. “Tax reform, in reducing our tax rates, is going to drive more free cash flow, and the largest part of that free cash flow increase is going to go back to our shareholders.”
In a CNBC interview in August, Walt Disney Co. chairman and CEO Bob Iger named a couple of things the company would do if it did not have to pay “an unusually high corporate tax rate.” Disney’s effective income tax rate in 2016 was 34.2 percent.
“It would give us the ability…to return more capital to investors and invest more in our businesses,” he said. “And even create more jobs, which we’ve been doing in the United States. More capital would give us the ability to expand even more.”
During a third-quarter earnings call in November, Marriott CEO Arne Sorenson said the company has plenty of money to make investments even without any tax changes.
“Obviously, we have not been capital constrained in current times before tax reform,” he said.
Marriott CFO Leeny Oberg said the typical practice is to figure out investments that make sense and then return anything that’s left over to shareholders. Marriott would do the same after tax reform.
“The answer will continue to be that we want to invest in our business to grow and strengthen our platform, strengthen our brands, and add a lot more distribution, and do everything we can to make our equation for the customer the most powerful one in the industry,” Oberg said. “And from that standpoint, we would look at it exactly the same way, and then continue to return capital to shareholders.”
Sorenson said there “clearly” have not been enough of the kinds of investments Oberg referred to, because the company expects to return $3.5 billion to shareholders this year.
“That tells you that there is that much extra capacity which is being produced by our company that we don’t need to invest in our system,” he said.
Sorenson said he does ultimately expect any additional cash to help the economy once it goes back to shareholders.
“That’s likely to go principally to American shareholders, which gets the dollars back into the American economy, and the American economy should benefit from that,” he told analysts. “And that growth, in turn, should create jobs and should create more capital investment in the U.S. economy.”
“And more demand for our hotels,” Oberg added.
“Hopefully,” Sorenson said.
Travel Bump Coming?
There is some hope that companies working with more cash will send more employees out on the road.
On the other hand, it’s not clear that families will feel enough of a benefit to devote extra money to leisure travel. The biggest individual tax cuts will go to higher earners — who can afford to travel without a tax break. The Tax Policy Center estimates that the average household will get a tax cut of $1,610 in 2018, according to NPR. That number is far lower for those making less than $75,000; is a household likely to spend its extra $870 on a family trip?
Still, some in the travel industry have said they would expect to see a tax-related lift.
“Domestic business travel has already been showing some bounce because of an optimistic business environment, and the president’s stated goal with his tax package is to jolt the private sector even more,” David Huether, senior vice president for research at the U.S. Travel Association. “If he’s right, then it’s reasonable to expect some of that benefit to show up in our measurements for the domestic travel economy both on the business and leisure side.”
Before the bill passed, Association of Corporate Travel Executives executive director Greeley Koch offered a cautiously worded statement.
“U.S. tax reform may have the potential to encourage businesses to invest more money in their operations, resulting in more jobs,” he said. “Depending on the make-up of these new positions, there is further potential to see an attendant increase in business travel, including travel by those tasked with launching a new facility.”
Beyond the Corporate Tax Rate
The corporate tax rate gets the headlines, but another provision affects companies with operations overseas — a common situation with travel businesses. The U.S. slaps a 35 percent charge on repatriating cash generated from overseas.
Much of that cash parked overseas has been spent on international deals in the interim. So a tax law change may tempt these companies to bring their cash back to invest in the U.S., changing the nation’s market dynamics.
Among online travel companies, Priceline Group might benefit the most, given the vastness of its size and that about 80 percent of its business occurs outside of the U.S. In 2016, the company generated approximately $13 billion in international earnings.
Earlier this year, CEO Glenn Fogel said in a statement: “We would welcome potential tax reforms that would allow us to repatriate cash earned by our non-U.S. companies into the U.S. without penalty.”
Congress is not currently planning on dropping the “penalty” — only lowering it.
The final version of the tax bill had a tax rate on the deemed repatriation of currently deferred foreign profits of 15.5 percent for cash and cash-equivalent earnings and 8 percent for other profits. Those are significant drops from today’s 35 percent repatriation tax rate. But the drops may not be enough for Priceline.
Working backwards from its other regulatory filings, one can estimate the company’s average tax rate overseas has averaged about 17 percent, according Matthew Gardner, a senior fellow at the think tank The Institute on Taxation and Economic Policy in Washington, D.C.
That’s only an estimate, given that we don’t know how much tax its home state of Connecticut would have levied — an amount that the company could have deducted from its federal liability.
The Fine Print
Many news stories have focused on the tax bill lowering the corporate tax rate from 35 percent to 20 percent. But in practice, corporate taxes are often effectively lower than the headline rate.
Companies often don’t have to pay a 35 percent federal income tax rate because credits, deductions, and loopholes can trim their bills.
The U.S. Treasury examined the 2007-2011 tax bills of profitable companies (of all types, not just in travel) with more than $10 million in assets and found that they paid an average of 22 percent of their profit in taxes.
Priceline, Expedia, TripAdvisor, Fareportal, and Airbnb appear to fit this description, though spokespeople from the companies declined to speak about the tax bill or their taxes.
While tax liability statements are public record in regulatory financial filings, determining the actual amount paid to Treasury can be tricky.
A case in point: In 2016, Priceline had a loss on its U.S. operations and paid no U.S. corporate tax.
In 2015, the company paid $88.2 million in U.S. federal income tax on a U.S.-based profit of $35.4 million. But a wrinkle in how companies could account for federal and state taxes on stock-based compensation in years prior to 2017 meant that the Priceline Group probably only paid about $4 million in federal corporation tax, according an estimate by the think tank The Institute on Taxation and Economic Policy.
In short, Priceline Group’s effective federal income tax rate in 2015 was 14.8 percent — significantly below the 35 percent headline rate.
The estimated low payment was not a one-off and is representative of its average payment since 2008, the think tank said.
Expedia Inc.’s effective federal corporate tax rate in recent years has been less than the 35 percent on average, too, because it also took advantage of the same accounting method Priceline Group did.
The three largest legacy U.S. airlines – American Airlines, Delta Air Lines and United Airlines — haven’t paid significant taxes in years, because though the overall industry has been profitable since about 2010, the previous decade had been so rough that the major carriers still have “net operating loss carryforwards” they use to avoid tax bills. Guidelines permit corporations to deduct previous massive losses from future tax bills.
However, in recent years, major airlines have warned investors this benefit eventually will end. Delta said Dec. 14 it had long expected to pay cash taxes by 2019. But tax reform has a couple of benefits for Delta, CFO Paul Jacobson, told investors. First, the airline expects tax code changes could help Delta push its first cash tax payment into 2020, rather than 2019. And second, it’ll pay significantly less in taxes than expected.
If tax reform passes, he said, “our book tax rate would go from 35 percent to approximately 22-24 percent, including state taxes.” In addition, he noted, “we would see [earnings per share] go up by $1 to $1.25 per share, and while that is non-cash in the short term, it certainly translates to cash over the longer term.”
Like most corporations, Delta does not expect to pay book taxes. If the book rate goes to 22 percent, he said, Delta will pay roughly 12 percent in cash taxes.
“Anything that can be done on tax reform is beneficial to Delta in terms of cash generation, which goes back into that model of reinvesting in the business, redeploying in the balance sheet and allocating capital in a balanced way,” Jacobson said.
Other airlines are similarly bullish. At Allegiant Travel Co.’s investor day on Nov. 30, CEO Maury Gallagher declined to talk specifics — “I can’t read the newspaper anymore, so I’m not keeping up with a lot of stuff” — but said tax reform is a “win” for the company. Allegiant, which has been profitable and does not have carry-forwards, has been paying cash taxes “in the mid-20s,” he said.
Southwest is another consistently profitable U.S. airline, and like Allegiant it has much to gain, even short-term. Its CEO, Gary Kelly, has been among the more outspoken proponents of tax reform, writing every member of Congress to express his support.
“We’re pleased,” he said in a video interview for The Street. “It would certainly be a benefit for the transportation industry, and certainly for Southwest Airlines. The airline industry in particular is in need of that kind of tax burden relief.”
Cruise Lines Dodge a Tax Hike
Major cruise companies, which are based in the United States but incorporated in other countries, pay almost nothing in U.S. income tax thanks to exemptions for shipping companies.
A proposal to remove that exemption and tax cruise lines for the time they spent in U.S. waters was included in the Senate version of the bill, but removed after Alaska lawmakers complained it would disproportionately affect their state.
Neither cruise operators nor their industry group, Cruise Lines International Association, had much to say about the proposal.
“We’re pleased with how things worked out on the tax bill,” said Rob Zeiger, chief communications officer for Royal Caribbean Cruises, in an email.
He added that the company could see a bigger-picture benefit from the legislation.
“A strong economy is a strong driver for our business,” Zeiger said. “When the economy is strong, more people have more money to spend on a vacation experience. So if the tax bill contributes to an expanding economy, that’s a good thing.”
Carnival Corp. chief communications officer Roger Frizzell also struck an upbeat, if measured, tone: “We are hopeful that the proposed tax reductions will help stimulate consumer spending on vacations and travel.”
Skift editors Deanna Ting, Dan Peltier, Andrew Sheivachman, and senior research analyst Rebecca Stone contributed to this report.
Photo credit: President Donald Trump speaks during an event to mark the passage of the tax bill on December 20, 2017. Andrew Harrer / Bloomberg