JerryFF

I heard another one of those discussions on a business/news show about how tough it was to be in the airline business. The main problem, they said, was the rising cost of oil and, hence, jet fuel.

Every business I know or have ever been involved with passes on the cost of doing business to its customers. It's the only way to stay in business. Recently, we hired a local mover and he added a surcharge to his rates for increased fuel costs. All of our local limo services have raised their rates for rides to the airport because of increased fuel costs. Our propane delivery company raised their rates, as did our Culligan delivery. No one was afraid they would lose business to their competitor, because they know if they don't raise their rates, they won't be able to stay in business anyway.

So why don't the airlines just do the same thing? Please don't say it's competition. Other businesses compete - why can't the airlines?

Maybe someone with more insight than I have can offer an answer to this perplexing question.

Randy Petersen

One point among many involves fuel hedging. The truth is that some airlines are just better run than others and there are a few airlines that really have this fuel thing figured out. Regardless (though there is still an impact) of the price of recent fuel, they have some or even most of their fuel pegged at a much lower rate ($64 a barrel) than those airlines who have not properly managed this expense. As a result, those who typically have not done a good job of hedging are more likely, it would seem, to add the fuel surcharge so they can appear to have the same ticket price in the GDS's as the airline who does not feel they need to raise their ticket prices since they have managed this expense better by hedging.

Just one thought.

Remember, in the GDS, whether used by Expedia or Travelocity, or whomever, lowest price appears at the top of the list.

B747-437B

Partly because airline sales take place significantly before the product is delivered, so unless the airline is significantly hedged (which not many are nowadays) the money paid for the fuel being burned next week was paid by the customer some months ago and has been sitting on the books as unearned revenue liability since then.

If airlines priced themselves fuel neutral and charged passengers surcharges at departure time when fuel prices rose, the passengers would scream bloody murder. The fuel surcharge developed as a means of recovering the revenue shortfall on today's tickets by taxing future tickets. This principle holds true if fuel prices either stabilise or go down, but so far the trend has been steadily up, up and away.

Most airlines on 15-30 day pricing cycles are expecting to be hit with a 15% rise in Jet A-1 costs on December 1. Expect to see a rash of fuel surcharge hikes right around that time.

htb

I don't see how any of this explains why airlines can't just calculate their fares to include the cost of fuel.

HTB.

telloh

All airlines can (and do) change fares in an instant, so of course it could be rolled into the fare. But it happens to be legal in the USA to charge a seperate "fuel surcharge" but advertise a bold price that doesn't include it, except with an asterisk. It should be illegal to do that, but letting the consumer interpret and calculate actual prices is part of the Conservative mantra "keeping the government off our backs".

pinkcat

precisely
if the airfare goes up we blame the airline, if the fuel surcharge goes up we blame the government!
some things are the same no matter which side of the Atlantic you are

CPRich

I think there are two flavors of the question here:

1 - why add a fuel surcharge instead of just raising the fare. I think the answers to this are above - "base fares" can be advertised then the fine print can add $$$

2 - regardless of 1, why (for a significant period of time), did the total cost charged cause them to lose money. When every company was losing billions of $$$, why didn't they all just raise fares to make money? I don't see the oil companies selling gasoline cheaper and cheaper to get your business and losing money. I don't see Proctor and Gamble losing money on every bottle of Tide because they are competing against many other detergent companies. What drives an airline industry's market price to be money losing for everything.

I have theories related to high fixed and low marginal costs.

dogcanyon

One explanation that I have read is that they don't have to pay travel agents commission on the fuel surcharge portion. This way, they can effectively raise fares and keep it all themselves.

Kiwi Flyer

yup - and also surcharges raised on common-rated products (eg RTWs) and awards is not insignificant

graraps

Here in Europe this has been, by and large, made illegal.
Commissions was how this story started...Get the fare smaller so that you can pay smaller commissions and keep more money to yourself. In the past 3 years or so, many airlines have gotten rid of TA commissions altogether. The TA is free to add a "service fee" if they so wish, and indeed some airlines also charge "service fees" for selling their tickets (even online) in some markets. I am not actually against this; I think it's a good way of making costs transparent (for example, AF charge £1 per passenger booking when you book online), as different sales channels have different costs.
But all pax get involved in the burning of fuel. So the point of fuel surcharges essentially is a nice and easy way to devalue your miles...The "we're really trying to keep fares down and we'll slap this charge till we see where oil prices go" mentality may be sort-of excusable for carriers on the brink of bankruptcy, but becomes especially insulting when profitable, well-hedged carriers are just taking advantage of this instead of simply solving the issue through calculating slightly higher base fares (for two prime examples of this, see share analysis/AGMs/board statements for BA and AFKL).

For an extreme example of a taking-the-p surcharge, see my recent thread on the MR deals forum, where UX want €200 extra for the fuel on a simple 2-segment roundtrip!

KVS

Lots of reasons, including:

• Marketing: To make base fares appear more attractive.
• Regulatory: Most international fares need to be filed in advance, and be approved by the appropriate regulatory authorities of the corresponding countries. Fuel surcharges are much easier to change than fares.
• Discount Calculations: The fuel surcharge is not discountable. For example, for an Infant ticket (10% of the fare), with an adult fare of $1000 and fuel surcharge of $100:
  • If the fare included the fuel surcharge ($1000 + $200 = $1200), the cost would have been ($1200 x 10%) = $120
  • Under the fuel surcharge system the cost is ($1000 x 10%) + ($200 x 100%) = $300
• Commission Calculations: Commissions are paid only on the base fare, excluding any surcharges.
• Award Tickets: Ability to apply additional charges on zero-base fares.

herzmeh

I think fuel surcharges should be calculated by your weight and amount of crap you bring onboard. Surely my 140 lbs ... with a light carryon is "burning" less fuel than someone's 300 lbs ... and their 4 70lbs steamer trunks in the hold

TJtv

Does it really matter what percentage of the fare is considered a "fuel surcharge"? Airlines(just like every other business in the world) charge a total price that is equal to what a customer is willing to pay. If you want to stay in business you don't set your price based on your costs, you set it based on what the value is to the customer, and what the market will bear. Ideally you price your product differently for each customer based on what the value is to them, so you can extract $$$$$ from someone who places a high value on your product, yet still get some positive revenue from someone who doesn't value your product quite as high.

AA2070

Lets not forget that airlines rarely price their routes in proportion to what it costs them. Example A - I can fly the 4000 miles to London in the winter for the same price as I can fly the 200 miles to New York. Example B - the person who bought their ticket 6 months ago paid 1/8 of what you paid for your walkup ticket.

Also, if one carrier raises their prices, there is no promise that others will do the same. Nobody will book on the carrier that has the higher cost (it has been proven time and time again, even when the product is superior - see AA's MRTC experiment). The carriers who are pricing below cost will absorb all of the business, the carrier who is charging a profitable price will not be making any money, forcing them out of business while the rest of the airlines (who are selling below cost) will go into bankruptcy "protection".

SURGEADDICT

they shouldve raised fares dramatically for Thanksgivign and still can for Christmas. Demand is gonna be high,so why not raise fares?