Oil Price Sinks, But Airlines Aren't Lowering The Fuel Surcharge

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Includes: AAL, RYAAY, UAL, VBHLF
by: Aspire Aviation

Summary

Technically, the fuel surcharge should move in tandem with the rise and fall of the oil price.

Today, the price of oil has sunk below US$30 per barrel, yet the airlines are not in any hurry to pass at least part of the savings back to their customers.

It seems airlines are viewing the low fuel cost as a well-deserved bonus after years of soaring oil costs. No one should begrudge an airline raking back what it lost, but in fairness, it can't have the cake and eat it.

However you see it, it is clear that the fuel surcharge is a product of accounting wizardry aimed at protecting the revenue of the airlines at a time when it was not foreseeable that the trend would reverse or fall to the extent it has today.

By David Leo

The oil price plummets, but airlines are not lowering the fuel surcharge. Why not? The call is really not the consumer's to make as airlines rake in the savings on the back of an improved economy and increased demand for seats.

Still, it is only reasonable to expect some measure of adjustment downward of the fuel surcharge purely on the rationale behind its introduction. Then, it was almost a plea for support as the airlines faced soaring fuel prices, lest they go bust. The argument centered on the volatility of the oil price as something beyond an airline's control, and that this redefined cost component should therefore rightly be separately passed on to the consumer - at least a part of it, if not totally. For crying out loud, what costs are not eventually computed in some measure in the fare of an air ticket? So technically, the fuel surcharge should move in tandem with the rise and fall of the oil price.

Ever since then, airlines had on several occasions raised the fuel surcharge (and on rare occasions, reduced it) as the price of oil spiraled upward to reach new heights, at one time well over US$150 per barrel. Today, the price of oil has sunk below US$30 per barrel, yet the airlines are not in any hurry to pass at least part of the savings back to their customers. It would be the conscionable thing to do.

It seems airlines are viewing the low fuel cost as a well-deserved bonus after years of soaring oil costs. No one should begrudge an airline raking back what it lost, but in fairness, it can't have the cake and eat it. Last year, American carriers reported record profits, largely attributed to the low fuel price and increased demand, but none saw it reasonable to pass on the savings or part of it back to their customers as they rewarded their shareholders handsomely.

There is the old argument that the fuel surcharge addresses only a modicum of any increase in the oil price, so the customer cannot expect to be rewarded with a reduction when the price of oil falls. The volatility of fuel price is such that it does not make sense to make frequent "yo-yo" adjustments. Besides, there is always a time lag for any benefit arising from the falling fuel price to be realized. The truth of the matter is that the current low level has persisted long enough for a review of the surcharge. All indications are that the price of oil is not heading upward anytime soon.

Even then, some airlines are reporting hedging losses as the excuse for not reducing the fuel surcharge. Without belaboring the toss of it being a calculated risk of doing business, internally driven, one may also ask: "What about hedging gains?"

However you see it, it is clear that the fuel surcharge is a product of accounting wizardry aimed at protecting the revenue of the airlines at a time when it was not foreseeable that the trend would reverse or fall to the extent it has today. The point of contention is long past the introduction of the surcharge; the issue at hand today is one of fair implementation. The problem is that except in Japan, where the surcharge is regulated, elsewhere this is left very much to the device of individual airlines, which are finding it hard to give back.

Sure, some airlines are not forgetting their customers. Benefiting from the windfall of a falling fuel price, American carriers have said they will be reinvesting the surplus in improving their product. United Airlines (NYSE:UAL), for one, has reintroduced snacks on its domestic services. American Airlines (NASDAQ:AAL), which reported saving US$1.1 billion on fuel last year and is expecting US$2 billion this year, said the airline intends to "elevate the customer experience" with free snacks in economy and improved amenity kits in premium classes. There will also be more entertainment programs on board.

Still, there can be no better time than now for airlines to review the fuel surcharge - not just the quantum, but the principle of how it is being charged. So far, Australian flag carrier Qantas and rival Virgin Australia (OTCPK:VBHLF) are the only known legacy carriers that are removing the fuel surcharge as separate from the ticket fare. Other carriers that are said to be not levying a fuel surcharge include budget carrier Ryanair (NASDAQ:RYAAY). This will be in line with the concern expressed by regulators in the European Union and North America that airlines may otherwise be misleading their customers or misrepresenting the actual cost of the airfare.

But for many airlines, the protection afforded by the fuel surcharge is too good to let go of. In fact, this practice has ballooned into a basket of other ambiguous surcharges that, by the airlines' argument, are strictly outside the cost of an airfare, although as far as the customer is concerned, they add to the bottom line. Too often, the passenger is ignorant of what the various surcharges are really for. For example, the all-embracing "international surcharge", which, according to Lufthansa (OTCQX:DLAKF) spokesman Boris Ogursky, "covers costs beyond our control such as air traffic control fees, emissions trading scheme payments and so on". Note the all-embracing "and so on".

In 2012, the US Department of Transportation ruled that "when a cost component is described as a fuel surcharge - that amount must actually reflect a reasonable estimate of the per-passenger fuel costs incurred by the carrier". But are airlines playing by the rule? Are they robbing Peter to pay Paul? Worse, the fuel surcharge has provided a runaway model for several other self-imposed surcharges by the airlines, often triggered by someone taking the lead in keeping up with the Joneses. It is indeed high time for a review.

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