As fuel costs continue to linger below historical averages, questions about airline fuel surcharges remain.
Here is a short summary of the issue as it currently stands.
The lower oil prices are the combined result of increased supply and lower global demand
- New sources of oil—notably in the US and in Canada—have significantly increased the global supply with OPEC refusing, so far, to cut their output in response.1
- Lower oil prices will likely impact production from high-cost oil sources (e.g. US shale, Canadian oil sands, Mexican deep-water wells), but the effect will not be immediately felt as companies continue to produce from existing sources.
- With Europe fighting off recession, China continuing its slowdown, and the increased viability of cleaner alternatives, demand for oil has fallen below expectations, but has likely reached its floor.2
The drop in oil is not all good news for airlines
- Delta Airline wrote off $1.2B in fuel-hedging losses for YE 2014; without those, they would have posted a hefty $2B profit3
- United Airlines wrote off nearly $200M in Q4 2014 hedging losses and expects 2015 hedging losses of close to $1B 4
The response to oil prices from airlines span a wide spectrum, with no global trend or correlation of oil cost to air fare changes—at least not in today’s industry:
- Many airlines have technically already addressed the question of “fuel” surcharges by simply converting them into some other form of carrier-imposed charges, including carrier-imposed charge (British Airways), international/domestic surcharge (Lufthansa), carrier imposed surcharge (Air France), and carrier-imposed international surcharge (Delta). In the US, this change started in 2012 when the Transportation Department (DOT) began cracking down on use of the “fuel surcharge” as a way to push the price of tickets higher without having to increase the base fare.
- In other cases, airlines—such as Qantas—have eliminated the fuel surcharges altogether but increased base fares accordingly to make up the difference, resulting in minimal or no change to the overall ticket price.5
- The overall elimination of airline fuel surcharges can be problematic for carriers because it forces them to change how they construct ticket prices:
- On the one hand, corporate discounts are usually calculated on base or published fares only. By simply rolling the fuel surcharges into the base fare, a greater portion of the overall price is subject to discount and could significantly reduce corporate/contracted revenue streams. Airlines could, over time, be able to restructure their agreements to stem losses, but the undertaking would likely be lengthy and costly given the sheer volume of their contracts (major carriers can have 1,000 or more large corporate contracts, all with varying dates of renewal).6.
- On the other hand, published pricing is completely dynamic and airlines can push fare changes out to the market almost round-the-clock. The primary “competition platform” in the airline industry is published airfares as airlines will initiate or respond to competitive pricing changes several times per day, which is not necessarily the case with fuel surcharges. Therefore, while rolling in a surcharge into a base fare could subject more of the overall ticket price to discount, the price point from which the discount is taken is very dynamic and could quickly increase depending on supply and demand. In this case, the net effect could be neutral or even positive for airlines
- In the US, carriers are continuing to operate normally and have stated that they’ll continue to base price on supply and demand. As a result, any fuel-price related savings gained by the airlines will not be passed on to the consumer in the form of lower ticket prices, but will be used to pay down debt, invest in infrastructure, or buy back stock from shareholders. This approach is being driven by a number of factors, namely the recent consolidation among carriers. The larger and much stronger players in today’s industry can collectively match supply more closely with demand, maintain their load factors and ultimately their pricing leverage (whether by restricting cheap inventory, or not publishing sale fares).
- In the Middle East, Emirates and Qatar have announced their intent to lower published fares in response to the drop in fuel prices. While they’ve stated that the expected savings are enough to pass on to the consumer and still make a profit, neither of the government-owned carriers is required to actually publish earning statements so other factors may also be at play.7 Extremely rapid growth means they have seats to fill (e.g. Emirates has 50+ A380 aircraft in its fleet, with another 80+ to be delivered over the next 5 years). Furthermore, lower oil prices are likely impacting demand within the local petroleum-based economies. Together, these factors suggest the fare reduction by Middle East carriers is due to softer-than-needed demand for their growing networks (in which they’ve made significant investment) rather than a price drop on a large cost input. Look for these airlines to keep fares lower than would otherwise be the case in the markets they serve from Europe and the US (i.e. traffic flows to the Middle East, India and Australia).
- In APAC, All Nippon Airways (ANA) and Japan Airlines (JAL) have trimmed fuel surcharges, and most low cost carriers, such as AirAsia, have abolished them outright.8 In some cases, fuel surcharges have been reduced or dropped as the result of involvement by national aviation bodies. For instance, in December, the Philippines Civil Aeronautics Board removed fuel surcharges on all flights by foreign and local carriers operating in the Philippines.9 Other notable fuel surcharge changes include reductions by Singapore Airlines, conversion into the base fare by Virgin Australia on US flights, and the outright removal by Chinese carriers on domestic flights