Initially brought in as a temporary measure to help airlines weather high oil prices, fuel surcharges have become an industry fixture. But some are moving to abolish them
When it was introduced in several countries in the 1800s, income tax was intended as a temporary measure to apply during wartime. When security and fuel surcharges were applied by airlines several years ago, they were meant to have been temporary as well. But like income tax, airline surcharges are starting to look permanent, prompting some to say it is time for them to be treated as normal operating costs and fully incorporated into air fares.
Airlines around the world began introducing new surcharges late in 2001, after security measures increased and insurance premiums soared following the terrorist attacks in the USA. Many airlines still charge them, even though the more stringent security requirements will probably never be eased.
There are many varieties of surcharge. In India late last year several of the country's airlines even went so far as to introduce an "air traffic congestion surcharge", saying their costs had been increasing due to congestion.
Fuel prices remain high
Fuel surcharges, meanwhile, started to be introduced in May 2004 and there are no real signs they are going to disappear, with jet fuel prices expected to remain well above pre-2004 levels for some time. "We have got to the point where fuel surcharges seem to be a permanent feature," says Andrew Herdman, director general of the Association of Asia Pacific Airlines (AAPA).
For Herdman, the argument in favour of fuel surcharges is that they function as a barometer as the oil and jet fuel price bounces around. "Even the gap between those, the crack margin, can vary as well. If it's beyond the control of the airline you want a mechanism that passes on the ups and downs," Herdman adds.
"The problem is there are leads and lags in the system. If you put it all into the fare, the exposure is that airlines are selling fares in advance - sometimes as long as a year in advance - and with that exposure you'll have to do a lot more fuel hedging to offset it. Of course, you've always got the exposure that people can book fares and then change their minds and cancel."
Passengers have not seemed to care much about surcharges until now. But there has been more noise of late about fuel surcharges from those opposed to them. Critics note that airlines were generally quick to increase them as fuel prices rose between 2004 and 2006, but they have been slow to reduce them as fuel prices started to fall around September 2006.
Ryanair is one of the airlines publicly opposed to fuel surcharges, saying fuel should be treated as a normal operating cost. It has repeatedly called - in typically aggressive style - for its competitors to "scrap these unnecessary and unjustified fuel surcharges".
The Irish low-cost carrier claims to be "the only airline across Europe to guarantee no fuel surcharges today, tomorrow or ever". It has even attacked its rivals, notably Aer Lingus and British Airways, for not bringing down surcharges as fuel prices started to drop.
Ryanair is in the minority, however, as most airlines do impose fuel surcharges in some form. And those charging them are quick to let passengers know that the surcharges only cover some of their additional costs.
IATA chief economist Brian Pearce says that in 2006 fuel surcharges covered only about half of the additional fuel costs incurred by carriers, or $10 billion of the extra $21 billion spent on fuel. He says passengers are aware of these charges. "Passengers are smart," he says. Surcharges are not included in the fare because that is a "legacy of how the industry has been set up".
Ryanair is not the only carrier trying to change this. Emirates recently said it would become the first airline operating in the UK to abolish standalone fuel surcharges and incorporate them into published fares from April.
"The cost of fuel is part of the operating cost of the airline, unlike airport taxes or security levies, and we feel it makes more sense to our customers to make it a part of the fare," says Vic Sheppard, vice-president UK and Ireland at Emirates.
In Australia, there has also been some noise in this direction, following a lawsuit filed by the travel industry against major international operators, which claims these airlines have been profiting by not paying commissions to travel agents on the surcharges.
"It's really part of the fare," says Steven Lewis, principal in Australian law firm Slater & Gordon, which filed the class-action lawsuit against six international airlines in December.
But many in the industry disagree, saying that the airline business is different from others and fuel should be treated differently. "Historically fuel surcharges have been temporary measures to cope with spikes in the fuel prices," says the AAPA's Herdman. "What's unusual about the past couple of years is the spike has never really subsided. It looks like fuel surcharges are here to stay unless we see oil prices really fall back.
"When fuel is so big an element in the mix it is hard to say you can just ride the ups and downs," says Herdman. "The truth must be that fares reflect the fluctuation in the overall cost in a competitive market, so it depends whether you think you can adjust the fares quickly enough. Part of the problem is that you are selling forward, you are selling package tours with seats at fixed prices ahead of time. You don't know what the oil price is going to be."
Chris Tarry, UK-based founder of consultancy CTAIRA, also does not see fuel surcharges disappearing any time soon unless fuel prices come down significantly. But he says that if fuel prices stay high there may be more calls for them to be eliminated and air fares simply increased.
"Then it becomes a question of when you do it," Tarry says. "Unless attention focuses on fuel surcharges, people forget about it. So this is an attempt by airlines to be more transparent, but at the end of the day what the passenger cares about is how much it is going to cost to travel. That's why they have to advertise all-up fares. So one argument is why break it down other than for the airlines to be able to say we are not trying to rip you off?"
Most observers believe that eventually fuel surcharges will be eliminated, but that probably will not happen until jet fuel prices drop to pre-2004 levels. For good legal reasons, airlines apply different criteria and have unique systems for charging. They cannot collude with each other over surcharge levels, and it appears unlikely there will be a common standard relating to surcharges any time soon.
So it seems fuel surcharges are here to stay for some time still. However, some appear to finally be addressing the question of how long they will be around by publishing clear criteria for their removal.
Japan Airlines, for example, recently became the first Asian airline to pledge to eliminate fuel surcharges once per-barrel prices stay below a pre-determined level for 30 working days. Its benchmark is the price of Singapore kerosene at $45 per barrel. Rival All Nippon Airways has since made a similar announcement, saying it will eliminate fuel surcharges once the market price drops below $40. Air France too made a similar pledge in May 2004 when it introduced surcharges, but it was almost entirely alone in doing so.
How far off are we from that level? A long way it appears. The Singapore kerosene trading price when the Japanese carriers made their announcement was around $75.
Source: Airline Business