Fuel surcharge goes up, up, up

BE prepared for more rounds of fuel surcharge hike even as airlines are reporting improved profits. The culprit, they will tell you, is the rising cost of jet fuel which makes up as much as 27 per cent of an airline’s operating costs.

In less than three months, Singapore Airlines (SIA) has increased its fuel surcharge twice. The latest bout of increase, which also applies to SilkAir flights and effective from end-January, ranges from US$3 to US$27 depending on the flight distance and class travelled. In December, the surcharge was up between US$3 and US$25. SIA spokesman said: “The adjustments will only offer partial relief from the higher operating costs arising from increases in the price of jet fuel.”

The International Air Transport Association (Iata) warned that higher fuel costs would be the biggest challenge faced by airlines this year. The price has hit US$120 per barrel, though still below the peak level of the economic crisis in 2008 when it breached US$150 per barrel before plummeting to US$34 per barrel. The upward trend looks certain to persist in light of the political turmoil spreading across the Middle-East and North Africa.

SIA is not alone in the game. Within as short a period, British Airways too has raised its fuel surcharge twice. Other airlines across the globe – Qantas, Cathay Pacific, Air France, South African Airways and Delta Airlines amongst them – have followed suit.

So, you may say: What’s new? Yet the issue is exactly that it is one that has become too familiar.

The fuel surcharge is a powerful financial and marketing tool adopted by the airline industry. Propagandized and largely accepted as a necessary evil, it legitimizes increasing the cost of air travel any number of times at short notice. The airline is often presented as a victim of unfavourable economic circumstances which the consumer has come to acknowledge as the common enemy. Airlines would have their customers believe it is not the airfare that has gone up, but the fuel surcharge.

In fairness to the airlines, the issue is not the price hike but the packaging. The deception of treating the fuel surcharge outside the cost of an air ticket even if it is unintended is unwarranted. It misleads the customer into making erroneous decisions in price comparisons when a low fare may be compensated by a high fuel surcharge. Ultimately what matters to the consumer is the bottom-line, however that cost is apportioned. Ryanair was fined for misleading the public through its advertisements into believing its fares were the lowest in Europe.

In the United States, while some airlines are introducing fuel surcharges for domestic travel to deal with the rising cost of fuel, others such as American Airlines have opted to raise the base fares instead. However presented, it is a price hike. Some consumers may have been convinced of the transient nature of the fuel surcharge. Airlines will remind them of the rare occasions when they reduced the surcharge. What, then, should prevent airlines from similarly shaving airfares of excessive charging?

The issue is complicated by how the fluctuating fuel price impacts the different airlines in varying degree. Yet when one airline triggers a hike, it sets off a chain reaction across the aviation business in what may appear to be an opportunity not to be missed, however justified. Interestingly, even as the Asia-Pacific region is growing at a faster rate than the rest of the world, a report published by the Civil Aviation Department of Hong Kong in February shows that the majority of the airlines that are raising fuel surcharges are based in Asia.

While many airlines will insist that the fuel surcharge only partially recovers the increased cost of fuel, how the burden is apportioned between the airline and its customer is abstruse. Conversely, when airlines deem it fit to reduce the fuel surcharge when the price of fuel plummets, the consumer never quite knows if he gets a fair share of the benefit. Definitely not in the aftermath of the 2008 economic crisis when many airlines incurred hefty hedging losses as the trend reversed.

It is a fact that in good times an airline’s bottom-line may be boosted by hedging profits. That’s bonus to the airlines when the gamble pays off – though not entirely undeservedly on account of capable management. In times of soaring fuel prices, the fuel surcharge serves as the protector against declining profitability.

Of course, the consumer’s guardian angel against rising costs is competition. However, in an industry where the options are limited and where the players move almost in tandem, it is often the piper that calls the tune. It takes a major financial catastrophe, like the recent economic meltdown that led to a large-scale downgrade and curtail of air travel, to shift the ground somewhat. Besides, frankly, few governments if any want to see their national airlines fold their wings.

Iata chief Giovanni Bisignani warned: “The recovery cycle will pause in 2011. The industry is fragile and balancing on a knife’s edge.” That admonition not only attempts to forestall additional government levies on the airlines but also forebodes further increases in the total cost of an airfare. Mr Bisignani’s concerns will be recognized as being Delphian if the current unrest in Libya and other Middle-Eastern nations causes the fuel price to escalate to new heights.

So, indeed, what’s new when it appears the man-in-the-street can do little but in good faith be resigned to the inevitability of having to pay more to fly? Yet his best safeguard is awareness of what he is paying for, these days when flying comes strapped with a plethora of add-on charges besides the base fare – whether these charges are integral or optional. And, know that the total cost of the ticket may be much more than it is advertised.

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About David Leo
David Leo has more than 30 years of aviation experience, having served in senior management in one of the world's best airlines and airports. He continues to maintain a keen interest in the business, writes freelance and provides consultancy services in the field.

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