Is Qantas robbing Peter to pay Paul?

Courtesy APP

Courtesy APP

Qantas thinks it has found a way to respond to the pressure to reduce airfares in light of the hefty fall in the oil price. (See A conscionable call as oil price plummets: Will airlines reduce airfares? Jan 26, 2015). Logically, and to be expected, fuel surcharge should go down. So Qantas will axe fuel surcharges for international flights.

BUT, a big but that is. Indications are that airfares currently being reviewed will not go down. This means, no passing on fuel cost savings back to the consumer, and suggests that the basic fare excluding the fuel surcharge has gone up. Out one pocket, back into the other. The reason, as given in a statement that Qantas issued: “While global fuel prices have fallen in recent months, international air fares are extremely competitive and are significantly lower than when surcharges were first introduced 10 years ago.” So what’s the big deal?

Qantas chief executive Alan Joyce said: “If you look at the trends in global aviation over the past decade, costs and competition have been increasing while fares and airline margins have been falling. The dynamics of this market have seen Qantas International post significant losses in the past two years.”

Mr Joyce’s argument is not quite convincing.

First, if Qantas’ airfares had been competitive, it was only responding to market forces. If it had not done so, it might not survive the competition by Virgin Australia and other carriers such as Singapore Airlines (SIA), Emirates Airlines and Etihad Airways. With pressure particularly from Virgin, it had no choice but to be competitive. It was not a matter of philanthropy.

Second, if Qantas could not offer competitive rates, then Mr Joyce would have a bigger problem in hand and should ask why not. Qantas’ losses over the years cannot be attributed completely to external forces; some soul searching would help.

Third, it cannot be fait accompli that the savings from the favourable oil price is compensation for past losses, although one can accept that as a blessing for some relief. However, one may agree with Mr Joyce that “lower fuel prices can help put the industry on a more sustainable footing.” But, as he put it, it must “ultimately benefit customers.”

Fourth, Qantas has chosen to conveniently compare its current structure with one than years ago. Consider how with improved technology and efficiency, many products today cost much less than when they were first introduced in the market.

If there is one thing that Qantas may be doing right in restructuring its fares, it is incorporating the fuel surcharge as part of the cost of a ticket rather than showing it as a different fee under the guise that it is not germane to the cost. Airlines such as Ryanair and Air Canada have been fined by watchdog authorities in their respective region of operations for misleading the public in advertising fares that do not reflect the actual bottom-line cost of an air ticket. The Australian Competition and Consumer Commission (ACCC) has said it is investigating cases of misleading representations by Australian carriers. It stated in a statement: “Under the Competition and Consumer Act 2010 businesses must not make misleading, deceptive or false representations about the price of goods or services. This includes when making representations about the reasons for rising fuel costs.”

What Qantas has done is following in the footsteps of rival Virgin Australia which has taken the lead to incorporate the fuel surcharge in the fare of the ticket. So much about Qantas being competitive, or merely responding to the competition. But Virgin has said upfront it would not get rid of the fuel surcharge altogether; instead, it will incorporate it into the fare like any other expense. However it is packaged, it should show a lower bottom-line because the oil price has fallen by as much as 55 per cent since June last year. By the same principle, the Qantas new fare may and should show a similar reduced bottom-line. But Qantas also said its other costs had risen. It is up to the ACCC to decide if any reduced amount in the overall cost of a ticket is a fair reflection of the current situation.

Herein lies the trick if you consider how the fuel surcharge came about. Most, if not all, airlines have used that to deflate the cost of the ticket, arguing that the surcharge it is a different fee for something it has no or little control over. The clever accounting practice provides some shelter for the airlines in a climate of soaring oil prices, as it legitimises raising the surcharge as the oil price climbs. But in the current unprecedented oil price plunge, airlines face the pressure of obliging a similar reduction. It would not be as apparent in the old-fashioned package.

While American carriers stand united on not passing any savings from the falling oil price to the consumer – so much about competition in the US – will the rest of the world follow the initiative of the Australian carriers? Malaysian budget carrier AirAsia had announced it too would remove the surcharge. Emirates is considering a similar move. Qatar Airways said it would reduce the cost of its ticket without committing on the issue of fuel surcharge. The question remains: How honest are these and other airlines in repackaging the new cost, or is it just a stopgap measure to disguise the impact? Every which way, the consumer can only hope it is fair with some help from the thriving competition and intervention by watchdog authorities such as the ACCC.

This article was first published in Aspire Aviation.


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.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: