While the federal government is deeply involved in many aspects of air travel, it is not involved in the creation or distribution of airline tickets. Instead, such matters are left to the airline industry. There are a variety of sources and types of airline ticket stock. For example, when airlines issue tickets directly to passengers, they use individualized ticket stock bearing their corporate name. However, the vast majority of U.S. travel agencies obtain their ticket stock from ARC—an airline-owned corporation created, among other things, to accredit U.S. agencies and to facilitate the distribution of airline ticket stock to the agencies. In 1998, there were 32,694 ARC-accredited retail travel agencies. In 1998, ARC issued 1.1 billion pieces of ticket stock to U.S. travel agencies. The ticket stock is blank except for the inscription of a unique identifying number and has no value until it is made into a ticket. Over 90 percent of the ticket stock ARC issued in 1998 was in automated form. Travel agents imprint this stock by computer with data—such as flight dates, flight numbers, and fares—generated from the airlines’ computer reservation systems. According to ARC, a typical ticket is composed of six to seven pieces of ticket stock—the airline auditor’s record, an agent’s record, several flight coupons (one for each segment of a traveler’s journey), a charge form, and the passenger’s receipt. When combined together, these pieces of stock form an airline ticket. International suppliers, including the International Air Transport Association, issue similar ticket stock. Figure 1 illustrates ARC’s automated ticket stock. Definitive information on the amount and value of ticket stock stolen annually does not exist. However, from 1989 through 1998, subscribing airlines and other worldwide suppliers of ticket stock reported 11.3 million pieces of stolen ticket stock for inclusion in ARINC’s database—an annual average of about 1.1 million. ARC reported the majority of these losses—8.2 million pieces (72 percent). Although the amount of stolen ARC ticket stock is sizeable, it represents less than one-hundredth of 1 percent of the over 9.2 billion pieces of ticket stock that ARC issued to travel agencies during the period. International ticket stock suppliers, including the International Air Transport Association, were the second largest source of the reported losses. They reported 2.8 million pieces of stolen ticket stock (25 percent). Eleven U.S. airlines reported the remaining 350,000 pieces of stolen ticket stock (3 percent). ARINC’s database cannot be analyzed by year, and given the predominance of ARC ticket stock losses and the absence of other information sources, we relied on the data supplied by ARC for annual information. However, ARC’s database only tracks 27 percent of the stolen stock it reported to ARINC. During 1989 through 1998, ARC’s annual status reports identified 2.2 million pieces of stolen ARC ticket stock—an annual average of about 220,000. After peaking in 1995, as shown in figure 2, the amount of ARC ticket stock reported stolen has declined considerably. ARC attributes the decline to (1) the more stringent security rules that it established in April 1996, (2) its increased fraud prevention activities, (3) increased awareness by travel agency personnel of the problem, and related to this, (4) the agents’ increased compliance with ARC’s required security measures. In 1997 and 1998, about 97 airlines voluntarily reported to ARC that 8,330 tickets were created from stolen ARC ticket stock and used for travel on their airlines. The tickets had a total face value of about $10.5 million and an average value of about $1,260. Using this average, we estimate that the 447,000 pieces of ARC ticket stock identified as stolen in ARC’s status reports for 1997 and 1998 could be valued at as much as $302 million—$186 million for the stock stolen in 1997 and $116 million for 1998. The $302 million represents the “worst-case” scenario and therefore is likely to overstate the potential loss from stolen ARC ticket stock. This is because, while travel agents normally use six to seven pieces of ticket stock to create an airline ticket, we assumed that individuals creating fraudulent tickets would, wherever possible, try to minimize the amount of stock used for each ticket so as to maximize the number of tickets they could create. For example, according to ARC, individuals creating tickets with stolen stock could use—for a direct, one-way trip—as few as two pieces of stock (one for the flight and one for the passenger’s receipt) to create an airline ticket. As a result, rather than using six to seven pieces of ticket stock to create an airline ticket—as in the case of a typical ticket—we assumed that only two pieces would be needed and used.Likewise, we assumed that all of the stolen ticket stock would be used. This is extremely unlikely because, during 1997 and 1998, officials from the four airlines we contacted said that their airlines had confiscated over 1,900 pieces of stolen ARC ticket stock before the stock could be used. The airlines bear the financial risk for most situations involving stolen ticket stock, but their losses are small relative to their total annual revenue and represent only a small portion of their total losses from all airline-related fraud. In contrast, losses incurred by travel agencies held liable for not adequately safeguarding ARC ticket stock can result in serious financial hardships. Of the 447,000 pieces of ticket stock stolen in 1997 and 1998, we estimate that the potential financial risk to the airlines and travel agencies would be about $151 million each. In actual practice, however, travel agencies would likely incur significantly smaller losses because airlines frequently settle for far less than the amounts that travel agencies owe. U.S. tax officials believe that the financial consequences to the federal government from the use of stolen ticket stock are minor and of limited interest for auditing purposes compared with higher-risk tax issues, such as the depreciation of airline assets. Airlines incur the financial burden for stolen ticket stock under a wide range of scenarios. For example, the airlines are liable for losses resulting from the use of their own stolen ticket stock. From 1989 through 1998, 11 U.S. airlines reported the loss of 350,000 pieces of their own blank ticket stock to ARINC’s database. The actual value of the airlines’ losses is not known because the database does not include information on the value of used ticket stock. In addition to losses from the use of their own stolen ticket stock, airlines bear the financial burden for much of the ARC stock that is reported stolen. For example, airlines bear the cost of crimes committed by travel agencies against the airline industry, including missing stock from terminated agencies and travel agency “bust-outs.” Bust-outs involve the fraudulent acquisition or retention of ARC ticket stock by a travel agency. For example, according to ARC officials, because it is relatively easy to obtain ARC’s accreditation as a travel agency, some persons set up agencies solely to acquire and flee with ARC ticket stock. Moreover, according to ARC officials, travel agencies sometimes file for bankruptcy or otherwise discontinue their operations without paying for the tickets they have sold and without returning their remaining inventory of ARC ticket stock. In 1997 and 1998, ARC reported 33 travel agency terminations and bust-outs involving 150,000 pieces of ARC ticket stock. These losses represent about 34 percent of ARC’s total ticket stock losses during this period. In many cases, airlines also suffer losses from crimes perpetrated against travel agencies. For example, ARC holds travel agencies harmless for the use of ARC ticket stock that is stolen during an armed robbery. In 1997 and 1998, about 23,000 pieces of ARC ticket stock were stolen in 29 armed robberies of travel agencies. In addition, if the agency followed ARC’s ticket security procedures, ARC holds travel agencies harmless for ticket stock that is (1) stolen in burglaries, daytime thefts, and other thefts or (2) reported missing. In 1997 and 1998, 232 travel agencies reported the loss of about 274,000 pieces of ARC ticket stock from these types of crimes. ARC determined that 81 of these agencies, which had reported a total of about 45,000 pieces of stolen ticket stock, had followed ARC’s security procedures, and thus the airlines were responsible. Taken together, the airlines are responsible for the use of 217,000 pieces of ARC ticket stock stolen in 1997 and 1998. In the unlikely event that all of this stock is used, we estimate that the airline industry could incur about $151.3 million in losses—$94.7 million for ticket stock losses in 1997 and $56.6 million for losses in 1998. Figure 3 summarizes, by year and type of incident, the airlines’ potential losses resulting from this stolen ticket stock. In addition to the losses for which they are responsible under ARC’s policy, airlines frequently assume a large portion of a travel agency’s financial liability. For example, according to representatives of 15 travel agencies held liable for ARC stock stolen in burglaries in 1997, their agencies were able to negotiate 33 settlements with 12 airlines. Ten of the 12 airlines agreed to forgive 90 percent of the amount owed by the agencies in 21 of the 33 settlements. For 10 of the 12 other settlements, airlines agreed to forgive 67 percent to 85 percent of the total amount owed by the agencies. The remaining two settlements were for 50 percent and 25 percent of the amounts owed. Many of the airlines also agreed to waive the travel agencies’ liability for the future use of the remaining stolen ticket stock—a factor that is likely to increase the airlines’ future losses.