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.

A conscionable call as oil price plummets: Will airlines reduce airfares?

AS the oil price plummets – some 55 per cent since June last year – the question topmost in the mind of the consumer must be: Will airlines reduce airfares?

Many of them have chosen to be silent on the subject, the excuse being that the historical volatility of the market is such that the trend can turn any time. But it has taken a while, and long enough for some conviction from the airlines, now that analysts are convinced that the cost of fuel is likely to stay low for at least another year.

Travellers on American carriers can stop wishing to share in the bounty, even as US carriers are reporting hefty savings as a consequence. Southwest Airlines estimated it would save US$1.7 billion on fuel in the current year, and Delta Air Lines more than US$2.0 billion. Other airlines that include Untied Airlines and Alaska Airlines are forecasting similar cost reductions. But, say the airlines, fare reduction is not on the card. Instead, shareholders will reap the benefits while the airlines themselves see this as a well deserved windfall and respite to recoup past losses and pare down debts.

Courtesy Getty Images

Courtesy Getty Images

United Airlines spokesperson Megan McCarthy delivered the cold reality of the business when she said: “It has been our position all along that fares are not cost-driven. They are demand-driven.”

That, we all know, is the simple economics of the law of supply and demand. So consumers have themselves to blame. Airlines are enjoying near-full loads that there is no incentive for them to want to lower the fare. In Europe, even budget carriers such as easyJet and Ryanair are looking forward to even higher profits from not only savings on fuel costs but also higher fares. So McCarthy was darn right there. But airlines too have learnt to make the formula work better for them, ceteris paribus, as they reduce capacity particularly in the US with merged operations to hold up demand and maintain airfares.

The consumer’s best hope lies in competition as how it should work in the liberal world, but with consolidation which has seen the merger of big entities in the US, raising questions about the assumed competition itself. Today four airline companies control more than 80 per cent of the US market. Little wonder how US carriers have collectively signalled that airfares will not fall in response to the falling fuel cost.

Where competition does not work, the consumer can hope that some conscionable authority will be able to address the fair fare issue. On that second score, you might fault McCarthy for turning a blind eye, but United, like any other, would contend with some validity that it cannot be both operator and watchdog. Company with conscience is a preacher’s prerogative, more idealistic than operative.

Still, the likes of United may be reminded that back in the days not too long ago when the fuel price reached giddy heights, airlines were raising fuel surcharges as many as four times within a year. Strange as it sounds, they have always maintained that the surcharge is not part of the fare, but not as far as the consumer is concerned. Even so, the corollary must apply as the fuel price dips. No lesser a person than Toby Tyler, director general of the International Air Transport Association (Iata), has said that airline fuel surcharges should begin falling as the drop in oil price works its way through the aviation fuel system. Tyler said: “In many cases, airlines operates now with a basic fare and a fuel surcharge of some kind and the fuel surcharge in many airlines is directly linked to the price they’re paying for fuel.”

Courtesy Airbus

Courtesy Airbus

But it looks like it is not happening quite as quickly as Mr Tyler was convinced that it would when he said in October last year: “You’ll see the fuel surcharge very quickly come down.” Still, better late than never. Better somewhere else if not in the United States. Japan Airlines (JAL) announced lower fuel surcharges for international flights from February 1, recognizing the genesis of introducing such levies back in February 2005 in response to rises in the cost of fuel. Now that is one conscionable airline. JAL said it would revise the surcharge, whether upward or downward, if the fuel price fluctuates further. Fair enough. American and other carriers waiting on the sideline, take note.

Qatar Airlines has also announced it will reduce the fuel surcharge although it has not committed to a date for implementation.

Courtesy flyertalk

Courtesy flyertalk

Australian airlines are among the first to drop airfares in response to the falling oil price. Two forces are at work: competition and the authority. Nowhere else in the world is there more bitter rivalry than that between the two Australian carriers of Qantas and Virgin Australia. Virgin took the lead, and Qantas followed suit. Virgin said it would not get rid of the fuel surcharge altogether, but incorporate it into the fares; however it is packaged, the bottom line should see a reduction. Virgin said the “reductions reflect the benefits of the decline in global oil prices” following monitoring over recent months and “in anticipation that fuel costs will continue to remain at lower levels than the record highs seen in recent years.”

At the same time, the Australian government is putting pressure on the airlines to respond to the drop in fuel costs. Rod Sims, chairman of the Australian Competition and Consumer Commission (ACCC) said: “It is not against the law to introduce a surcharge – what is against the law is to mislead customers.” The ACCC announced it was investigating the matter. In a statement that it released, it said: “The ACCC has confirmed that it is considering whether representations made by airlines imposing fuel surcharges, following the fall in wholesale aviation fuel prices, are misleading. 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.”

In this connection, Qantas said: “The bottom line for consumers is that Qantas fares already in the market are some of the cheapest in years. Fuel surcharges are already included in the advertised price and those fares remain extremely competitive.”

The issue is not about the fares already being the cheapest in the market but rather whether they should be even cheaper as a result of lower fuel costs that have saved the airlines millions to billions of dollars.

Meantime the British government is studying the need for intervention. British Airways circumvents the issue with no clear commitment, saying it has launched several sale initiatives. Virgin Atlantic said it has reduced the fuel surcharge before last Christmas and will “continue to monitor the situation and fuel surcharges under review to make them as affordable as possible.”

Courtesy Delta Airlines

Courtesy Delta Airlines

It is a world of ironies. The consumer may as well confront the hard truths about the market. The door does not always swing both ways. As the global economy improves, the demand for seats picks up. And when demand exceeds supply, the game belongs to the airlines so much so that Delta CEO Richard Anderson has suggested to passengers who are looking at reduced fares to “shop around”. He said: “The marketplace is incredibly competitive, and there are always differences in fares.” The consumer can only hope that competition is well and alive without the need for state intervention. If Anderson had come across as being somewhat arrogant, he probably knew he could afford it. But heed his advice anyway.

This article was first published in Aspire Aviation.