Fuel surcharges – why aren’t airlines reducing them?

Oil prices are plummeting, yet most airlines have made either limited reductions to their fuel surcharges or none at all. Critics say it is the latest proof that surcharges are arbitrary and unfair, and should either be made more transparent or, better still, abolished completely
Written on 01.05.2015, 00:00
Fuel surcharges – why aren’t airlines reducing them?

The price of oil has fallen 60 per cent since June 2014. Motorists worldwide have seen what they pay at the petrol pump fall significantly in that time. Naturally, airline passengers expected similar cuts to the heavy fuel surcharges which have been added to air fares for more than a decade.

Except it hasn’t happened like that. Up to mid-January, almost the only airlines which trimmed surcharges were in Japan, where the process is regulated by the government. Since then, many other Asian airlines have reduced their surcharges too. A few, in Australia, have even eliminated surcharges completely, although they have raised their base fares at the same time, leaving no change to total ticket price.

In Europe and North America, far fewer airlines have announced surcharge cuts (although some European carriers appear to have taken action without any publicity). As a result, condemnation of airline surcharges has grown internationally. Critics want to see two changes:

  • If surcharges are to continue, they need to become transparent and rational. Today, other than in Japan, they are neither.
  • Even better, surcharges should be eliminated completely

Make surcharges transparent and rational
The reason some airlines have offered for making minor or zero surcharge reductions is that their fuel hedging strategies have delayed any benefits they may gain from lower fuel prices. In other words, they bought fuel in advance when prices were much higher.

This justification may be valid or it may not. The problem is no one can judge because airlines do not publish any rules to explain the basis on which they adjust their surcharges. Why don’t they publish the rules? Because all the evidence suggests there aren’t any.

Here are some examples:

  • In a recent article in The Beat, a spokesman for Lufthansa admitted its surcharges are “suitable for market conditions comparable with other airlines.” In other words, Lufthansa adjusts its surcharges according to what its competitors are charging, not the underlying costs.
  • The same article quoted research by the consultancy Advito, which found that on some routes the fuel surcharge exceeds the airline’s entire fuel costs for that journey. Remember that surcharges should, in theory, only cover the increase in fuel costs since airlines introduced surcharges in 2003/04.
  • In 2014, Lufthansa renamed its fuel surcharge as an “international surcharge” to cover everything it categorised as an “uncontrollable” cost, such as air traffic control fees. Yet even though the international surcharge theoretically covered more of Lufthansa’s costs than when it was simply a fuel surcharge, the level of surcharge did not go up.
  • A different airline imposes a higher surcharge in business class on its short-haul flights than in economy class – yet the seat and seat pitch in both classes is identical.
  • Airlines in joint-ventures do not buy fuel together, yet their surcharges on shared routes match each other.

“It is impossible to escape the conclusion that airline surcharges are arbitrary,” says TravelpoolEurope managing director Søren Schødt. “That is why they go up but rarely come down. If airlines are to be allowed to continue with surcharges at all, they should be required to state very clearly the basis of calculation and the rules for both raising and lowering them.”

Abolish surcharges
Are fuel surcharges justifiable at all? Surcharges should, in theory, be temporary adustments to a total price, so that the next time an airline changes its base fare (usually once per year), the higher costs of fuel are reflected by raising the fare accordingly and removing the surcharge.

In practice, that has not happened. We have had surcharges for over a decade and they keep getting bigger. One reason there are problems with the transparency of fuel surcharges is that they are combined with other surcharges and also  with taxes in a box on the ticket known as the YQ box. Advito calculated that between 2009 and 2014 alone, YQ charges across 13 European countries increased from 11.4 per cent of the total ticket price to 16.4 per cent. In many cases, YQ is much higher than that. Advito quoted the example of a ticket from New York JFK to Frankfurt. Total ticket price was US$797.70 but the base fare was $111.

“Surcharges have become a permanent pricing element, even though fuel is an essential and normal cost of airlines doing business,” says Schødt. “And in what way is fuel less controllable than other normal airline costs? Airlines need pilots – is this cost more controllable? The latest excuse for not reducing surcharges – hedging – proves that airlines do have some degree of control over their fuel costs.”

For travel buyers, the question of whether fuel costs are represented in the base fare or a separate charge is important. It makes a big difference to their costs because airlines do not apply corporate discounts to YQ, only to the base fare. To take the JFK-FRA example above, that distinction can cost a corporate client hundreds of dollars on a single flight.

Yet, when it suits them better, airlines apply one rule across the total ticket price, not just the base fare. For example, on non-refundable tickets the YQ charge is non-refundable too, even though passengers are not using any of the fuel they have paid for if they don’t fly.

TravelpoolEurope says – Time to press for change
When it comes to surcharges, it seems that for airlines it is “heads we win, tails you lose.” The recent fall in oil prices has made it even clearer that surcharges are unfair and lead to higher costs for corporate customers. There are two ways to take action:

Call for government regulation
Governments have stood by and let airlines do what they want with surcharges for too long, perhaps because airlines have been financially weak. Now carriers are making good profits again, it is time to take action. In January 2015, the Australian Competition and Consumer Commission announced an investigation into this issue, which immediately led to Australian airlines scrapping their surcharges. The same can be done elsewhere.

In particular, it is wrong to combine surcharges, which are imposed voluntarily by airlines, with taxes, which are not, in the same YQ box. Governments should be lobbied to force airlines to remove surcharges from YQ, which would improve transparency significantly.

Bring up surcharges in negotiations
Even if airlines don’t want to discuss discounting surcharges, that doesn’t stop you telling them about it. Put together data to show carriers how much it is costing you and tell them that if they aren’t going to discount surcharges or reform their pricing structure, you insist on a higher discount on your base fare.