Time for AA to drop Fuel Surcharges

 
Old Oct 20, 08, 5:13 pm
  #16  
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Originally Posted by WingedWorldExplorer View Post
JJ (TAM) and UA have dropped their QY fuel surcharges to $ 60-$ 65 , but American Airlines is still at $ 250.
That's a worthless (no pun intended) comparison. Airlines can simultaneously raise fares and lower surcharges. The proper view looks at total ticket price all in. If AA is $200 per ticket higher, then Revenue Management wants it that way. If the OP doesn't think AA is worth it he's free to buy tickets on another airline.
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Old Oct 20, 08, 5:20 pm
  #17  
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Originally Posted by Dave Noble View Post
I disagree. If the price of fuel has dropped , then the fuel surcharges should be dropped. If the fares are too low, then the actual base fares can be raised, not use fuel as a pretence

Dave
The flaw in your logic is the implicit assumption that AA's fuel surcharges were sufficient to cover the fuel increases when oil was $147/bbl. That may not have been the case. Perhaps, just maybe, the fuel surcharges are sufficient to cover $70/bbl to $80/bbl oil.

How could the surcharges be insufficient? Perhaps AA raised them as high as the market would bear and could increase them no further. Even if that level was far below the level required for profitability.
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Old Oct 20, 08, 5:32 pm
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Originally Posted by brp View Post
But what matters here- the price of a barrel of oil on the open market, or what AA are actually paying for the fuel? Others here know all the right places to look for this information, and I don't...but I have a strong suspicion that AA are not "reaping the benefits" of the recent drops in their fuel charges. If they're still paying a lot, does the reduction in the open market price still mandate that they drop prices? Perhaps not.

Cheers.
all i can remember w/ regard to fuel prices were the discussions here (on the AA board) that usually resulted in the following comment:

"WN is profitable b/c of fuel priced hedging. AA does not have this in place, so they are losing money as fuel prices go up."

now you (people on this thread) are telling me that AA might not be making money b/c they ARE using hedging (incorrectly).

either AA is a bunch of f-ing morons, or the facts here are getting distorted to justify raises (fees/fares) when prices are going up and keeping raises (fees/fares) in place when fares go down.

which is it?
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Old Oct 20, 08, 5:33 pm
  #19  
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Originally Posted by FWAAA View Post
The flaw in your logic is the implicit assumption that AA's fuel surcharges were sufficient to cover the fuel increases when oil was $147/bbl. That may not have been the case. Perhaps, just maybe, the fuel surcharges are sufficient to cover $70/bbl to $80/bbl oil.

How could the surcharges be insufficient? Perhaps AA raised them as high as the market would bear and could increase them no further. Even if that level was far below the level required for profitability.
There is no flaw. Set the fares based on what is required to be profitable and don't use fuel fines as a way of hiding the fare away as if it was a tax.

AA could easily get rid of the fines by setting prices according to the going rate of the cost of operating the flight.

Fuel fines are a great scam for the airline and ensure that companies who get discounts effectively get a smaller discount and anyone with a discount coupon gets screwed too

Dave
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Old Oct 20, 08, 5:39 pm
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I really could care less what they charge for fuel surcharges. The bottom line is that the US Government should require all air carriers to quote "All In" pricing - all taxes, fees, surcharges, etc. I think it's worked quite well in Australia and the EU.
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Old Oct 20, 08, 5:44 pm
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Originally Posted by brp View Post
But what matters here- the price of a barrel of oil on the open market, or what AA are actually paying for the fuel? Others here know all the right places to look for this information, and I don't...but I have a strong suspicion that AA are not "reaping the benefits" of the recent drops in their fuel charges. If they're still paying a lot, does the reduction in the open market price still mandate that they drop prices? Perhaps not.

Cheers.
Correct. It will take time for lower oil prices to work their way down to the consumer (at the corporate as well as individual level)...and oil producers are working hard to set a floor that is much higher than the current prices.

I don't think it's reasonable to simply drop fuel surcharges for several reasons:

1) Despite significant recent drops, the price of Jet-A is actually down only about 1% from a year ago. http://www.iata.org/whatwedo/economi...itor/index.htm

2) After taking a beating on operating costs this year, it's reasonable to expect the business would want to recoup those losses while and where possible so they can end the year without a loss to investors--this would be good, since it will encourage people to buy more shares. Which is important because...

3) We all know AA desperately needs to recapitalize its fleet. Just where do you suppose they're going to get the money for all those new planes if they suddenly cut a revenue stream that might actually turn a profit for a change?

4) Does anyone really know what crude oil and refined fuels are going to cost 3, 6 or 12 months from now? Keeping the surcharges is a short-term hedge against that possibility until AA can lock in hedges at lower prices than they've already contracted for. This is good because...

We'd all like to be flying AA this time next year...right?

cheers!
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Old Oct 20, 08, 5:46 pm
  #22  
 
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Originally Posted by Dave Noble View Post

Fuel fines are a great scam for the airline and ensure that companies who get discounts effectively get a smaller discount and anyone with a discount coupon gets screwed too

Dave
I think you've hit the nail on the head right there.

And don't forget awards. It's getting out of hand (not on AA) when the fuel surcharge is added on awards. That's just wrong. Food is also getting expensive. Why not add a meal surcharge as well?

I don't think anyone is looking to fly AA at a discount, and I do want AA to be profitable. But just have the guts to charge an appropriate fare and don't hide behind oil prices.

Last edited by justforfun; Oct 20, 08 at 5:52 pm
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Old Oct 20, 08, 5:47 pm
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can i assume that from this may post by one of our most knowledgeable contributors that AA does not hedge?

Originally Posted by FWAAA View Post
Incidentally, WN reports that $2.6 billion of their $3.1 billion of cash is tied up in connection with their fuel hedging. We often read posters complaining that AA didn't have the foresight to hedge - which is complete nonsense. What AA lacked was the free cash that hedging requires.
so, aa is paying market price - no more no less, right?

now FWAAA was very clear (in this thread) that the increased fares/fees might have only accounted for oil at $70/$80 and that AA continued to lose (despite increases fees/fares) on fuel at $140.

regardless, please move away from hedging (presumably at costs higher than current prices) is costing AA money arguments.
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Old Oct 20, 08, 5:50 pm
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Originally Posted by lurcher View Post
AA's fuel hedging has it likely paying more than the current daily spot price - such is the risk of doing this. It will take them weeks/months to get out from under these to where they are paying sufficiently lower rates again. Only then would it make sense for them to drop the surcharges.
Michael
There is a differnce between futures contracts and options...when talking about fuel on FT, they seem to get blended into one
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Old Oct 20, 08, 6:35 pm
  #25  
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Irrespective of the details, this is bad PR for AA. Other carriers are reducing the surcharges. The problem with surcharges is that they work both ways. It's difficult to implement them based on the notion that the surcharge covers a cost that is beyond the carrier's control, and then stubbornly refuse to reduce them when the perceived cost is going down.

Neither I nor anyone else in this forum knows the details of AA's fuel purchasing strategies. I also agree that carriers must make money to survive. But I have always been an advocate of better pricing, and I think the nickel and diming of services, together with fuel surcharges is a losing strategy in the minds of the customers.
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Old Oct 20, 08, 6:41 pm
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Originally Posted by FWAAA View Post
I disagree. It's time for AA to make some money. For the first nine months of 2008, AA has lost over a half billion dollars (excluding special items) and has produced negative cash from operations. I want AA to survive - actually thrive - so that my status and accumulated miles are worth something. With premium revenue tanking, now's not the time to drop any fees, IMO. YMMV.
Then price the flight to break even or make money. Don't add 'fuel surcharges' to do ti.
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Old Oct 20, 08, 7:23 pm
  #27  
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WOW--check out the graph of the price of jet fuel as reported by the Energy Information Administration ("Official Energy Statistics from the U.S. Government") at http://tonto.eia.doe.gov/dnav/pet/hist/rjetnyhD.htm

Pretty amazing price reduction -- the price now (at $2.35/gallon) is about where it was in August 2005 (not adjusted for inflation!), August 2006 and September 2007.
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Old Oct 20, 08, 7:36 pm
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Originally Posted by brp View Post
But what matters here- the price of a barrel of oil on the open market, or what AA are actually paying for the fuel? Others here know all the right places to look for this information, and I don't...but I have a strong suspicion that AA are not "reaping the benefits" of the recent drops in their fuel charges. If they're still paying a lot, does the reduction in the open market price still mandate that they drop prices? Perhaps not.

Cheers.
Perhaps. Perhaps not. But I believe that competition will hopefully force them to do it. As was mentioned before, they chose to use fuel surcharges and not raise their fares. I belive that they will be forced to reduce the surcharges as competition does. I can't believe that people will say "hey, you've lost $ because of bad decisions so I will pay more to help you out"

They chose this strategy. Now they have to live with it.
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Old Oct 20, 08, 7:43 pm
  #29  
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Originally Posted by Dave Noble View Post
I disagree. If the price of fuel has dropped , then the fuel surcharges should be dropped. If the fares are too low, then the actual base fares can be raised, not use fuel as a pretence

Dave
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Old Oct 20, 08, 7:54 pm
  #30  
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Right on. A Surcharge is a temporary remedy. AA's average fuel cost ( I am sure ) was lagging the spot price on the way UP ( and lagginng on the way down due to hedges) However, pattern should be symmetrical. If AA thinks that demand is somewhat inelastic and wants to protect profit margins, it should just raise base fares ( and hope they do not loose market share to TAM and UA. A surcharge is for a specific - sudden and temporary increase in 1 element of "Cost-of-Goods Sold". Its either a component of permanent cost structure or its not - choose and set your regular prices accordingly.
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