Tuesday, December 2, 2014

Airline Fuel Surcharges: Time to review ...

With the price of oil dropping like a stone, and airlines posting magnificent profits, is it not about time that we talked about “Fuel Surcharges”?

Airlines introduced these insidious fees in February 2004/5 at a time that the oil price increased from about $50 to $75 in a very shortperiod. The general idea, at least the one proposed to the US regulatory authorities, was that it would be too complex to refile the thousands of airfares so quickly, and that a surcharge could be introduced to combat the huge expenses that such fluctuations in fuel caused.

Fair enough, one might argue, but a surcharge is inherently a temporary measure.

Airlines, like other users of commodities, have means to hedge their exposure to oil cost fluctuations, and should use them to understand their costs accurately. Once the fuel prices had “stabilised”, or at least once the airlines had been given time to get their house in order, the cost of fuel should have been incorporated into the cost of flying, and the “surcharge” abolished. The price of jet fuel has, in fact, declined by 23.3% in North America in the past twelve months, and globally by 27% (source: IATA fuel price analysis/November 28, 2014), yet this farcical “surcharge” remains stubbornly in place.

For carriers, while the price of fuel appeared to be inexorably climbing, folks accepted the additional fee, even though one wondered what the actual airfare included if it did not incorporate the price of gas; now, however, the charge sticks out like a sore thumb, and has absolutely no place as a separate fee on top of the fare.

The fuel surcharge now has become an interesting way for the carriers to play games; corporate discounts, agency performance payments and other marketing strategies are all based on the “airfare”; low airfares allow carriers to place disgraceful advertisements that imply travel at rates that are often only half of the final price. They are, in short, a major player in the airline industry’s arsenal of deceptive sales tactics.

Now, however, with the price of oil reducing to rates that are even forcing gas stations to reduce their pump prices, the airlines should be forced to explain why the surcharge should remain in place, and what the precise financial levels that cause the surcharge are.

Surcharges are, or should be, temporary; they are imposed in response to a specific and rapidly changing economic environment over which they had no control. Now, however, they do have control of their pricing, and at least should let the public know the price that fuel should reach that will trigger its removal.