Airline fuel surcharges remain a very contentious issue

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We all know that the price of any journey by air is based on a range of factors and that individual airlines charge different amounts for what, on the face of it, often appears to be an identical product. The pricing, however, is far from commoditised and, most recently with the turbulence in the oil market, the issue of airline fuel surcharges has become both a significantly annoying and an expensive item which is added to the cost of travel by the airlines themselves. Michael Jackson, Editor of Business Traveller interviewed Floris Olivier, the National Airline Buying Manager at American Express Travel Services, a South African expert on airline pricing, for his views on this contentious subject.

Airlines are, for the most part, free to decide for themselves how much they charge,” says Olivier, “and Governments do not generally regulate prices. The taxes, fees and charges (TFCs) quoted by various airlines during the booking process include items such as Air Passenger Duty, local airport taxes, passenger service charges, security and insurance as well as other surcharges. Nothing, however, gets a passenger’s blood boiling more than the so-called fuel surcharge.” These surcharges are now commonplace and are usually quoted separately to the base fare and often in the late stages of the booking process. This separation of TFCs means that the base fare seems lower and therefore, it would appear, more competitive with other airlines’ fares.

“Fuel surcharges,” Olivier says, “should not be itemised separately when they are simply a cost of doing business like cabin crew uniforms or in-flight catering.” There are considerable discrepancies in the level of taxes, fees and charges imposed by airlines, even when operating similar or identical routes. “It makes a great deal of sense,” says Olivier, “to consider which airline you might consider flying – instead of remaining blindly loyal to any particular carrier. Recent activity concerning fuel surcharges has, and can, massively affect ticket prices on certain carriers – and the position is changing almost weekly.”

Business Traveller examined the surcharges of several  carriers on the Johannesburg – Cape Town route and the Johannesburg – London route. At the time of going to press these were:

• BA – R1170 return to Cape Town

• SAA – R744 return to Cape Town

• Kulula – R138 return to Cape Town

• 1time – Nil

• Mango – R200 return to Cape Town

• BA – R3954 return to London

• SAA – R3294 return to London

• Lufthansa – R2126 return to London

• Air France – R1996 return to London

• Qatar Airways – R0 (The actual ‘surcharge’ of R2100 is built in their airfares)

 IATA, the International Air Transport Association which oversees global airline operations recently announced that the outlook for the international airline industry was bleak – ‘the worst revenue environment in 50 years’ according to its new CEO, and predicts an industry loss of some US$2.5 billion for the year ahead.

It went on in its global outlook report for 2009 to say it expects:

• Industry revenues to decline to US$501 billion. This a fall of US$35 billion from the US$536 billion in revenues forecasted for

2008. This drop in revenues is the first since the two consecutive years of decline in 2001 and 2002.

• Yields will decline by 3.0% (5.3% when adjusted for exchange rates and inflation).

• Passenger traffic is expected to decline by 3% following growth of 2% in 2008. This is the first decline in passenger traffic since the 2.7% drop in 2001.

• Cargo traffic is expected to decline by 5%, following a drop of 1.5% in 2008. Prior to 2008 the last time that cargo declined was in 2001 when a 6% drop was recorded.

• The 2009 oil price is expected to average US$60 per barrel (Brent) for a total bill of US$142 billion. This is US$32 billion lower than in 2008 when oil averaged US$100 per barrel (Brent).

“The chronic industry crisis will continue into 2009 with US$2.5 billion in losses. We face the worst revenue environment in 50 years,” says Giovanni Bisignani, IATA’s new Director General and CEO. IATA also updated its forecast for the overall year of 2008 as being a loss of US$5.0 billion. This is slightly improved from the US$5.2 billion loss projected in the Association’s September 2008 forecast and comes primarily as a result of the rapid decline in fuel prices, which, it says, is largely due to a shift in the results of North American carriers. “Carriers in this region were hardest hit by high fuel prices with very limited hedging and are expected to post the largest industry losses for 2008 at US$3.9 billion.” Bisignani went on to say that ‘The lack of (fuel price) hedging is now allowing the region’s carriers to take full advantage of rapidly declining spot fuel prices. As a result, North American carriers are expected to post a small profit of US$300 million in 2009. Yet all other regions will show losses according to IATA:

• Asia–Pacific carriers will see losses more than double from the US$500 million in 2008 to US$1.1 billion in 2009. With 45% of the global cargo market, the region’s carriers will be disproportionately impacted by the expected 5% drop in global cargo markets next year. The region’s largest market – Japan – is already in recession. And its two main growth markets – China and

India – are expected to deliver a major shift in performance. Chinese growth will slow as a result of the drop–off in exports. India’s carriers, which are already struggling with high taxes and insufficient infrastructure, can expect a drop in demand following on from the tragic terror incidents in November.

• Losses for European carriers will increase ten–fold to US$1 billion. Europe’s main economies are already in recession. Hedging has locked in high fuel prices for many of the region’s carriers in US dollar terms and the weakened Euro is exaggerating the impact.

• Middle Eastern airlines will see losses double to US$200 million. The challenge for the region will be to match capacity to demand as fleets expand and traffic slows – particularly for long-haul connections.

• Latin American carriers will see losses double to US$200 million. Strong commodity demand that has driven the region’s growth has been severely curtailed in the current economic crisis. The downturn in the US economy is hitting the region hard.

• African airlines will see losses of US$300 million continue. The region’s carriers face strong competition. Defending market-share will be the main challenge. “Hedging appears to be an issue across the globe; and although not mentioned in IATA’s summary as being a major issue in Africa’s carriers, it certainly was implemented here last year when the fear of oil prices hitting US$200 a barrel became a seeming possibility,” says American Express Travel Services’ Olivier. This may partly explain the unusual fuel surcharge situation in South Africa today. “SAA are widely believed to have hedged  their fuel at US$140 per barrel… and if true, those prices would have to be passed on to their customers for some time to come. Are we seeing this now in the fuel surcharges being quoted by the country’s national carrier?” Back at IATA, Bisignani went on record in December as saying, “Airlines have done a remarkable job of restructuring themselves since 2001. Non-fuel unit costs are down 13%. Fuel efficiency has improved by 19%. And sales and marketing unit costs have come down by 13%. IATA made a significant contribution to this restructuring.

In 2008 our fuel campaign helped airlines to save US$5 billion, equal to 14.8 million tonnes of CO2. And our work with monopoly suppliers yielded a saving of US$2.8 billion. But the ferocity of the economic crisis has overshadowed these gains and airlines are struggling to match capacity with the expected 3% drop in passenger demand for 2009. The industry remains sick.” What of SAA and its alleged hedging? “The international Jet Fuel Price Monitor is published weekly by IATA to provide the latest price data in association with global leading energy information provider Platts. “The weekly index and price data (at the time of writing this article) showed the global average price paid at the refinery for aviation jet fuel as being some US$59.5 per barrel which is 47% down on the same price one year ago, yet SAA continue with their programme of massive surcharges,” says Olivier.

According to American Express Travel Services, the issue of fuel surcharges has been around for around six years already and has steadily caused the average ‘taxes’ on an airline ticket to be hiked massively Today, some 80% of these so-called taxes comprise the fuel surcharge levied by carriers. “All too often,” adds Olivier, “ certain airlines are looking to avoid being seen to have fare increases and are now effectively hiding these in their fuel surcharge levy or tax.” “We advise our customers to look very carefully at where they are spending their travel budgets, and seriously recommend looking into what once were non-traditional carriers on the routes out of South Africa. Take Emirates and Qatar Airways for example. They have no fuel surcharges in their taxes, only legitimate airline taxes – their fuel is part of the ticket cost – which is just the way it ought to be, and as a result, when you compare apples with apples they, and carriers like them, offer new opportunities which should be considered when booking and scheduling trips.”

“Often passengers on the main South Africa to London routes have selected the three direct carriers (SAA, BA and Virgin

Atlantic), Emirates and Qatar Airways have become a significant carrier on the route as a result of fuel surcharges being levied by the direct carriers – and, importantly, the quality of the product and virtually seamless transfers through the Middle East and Gulf States, are also making them seem much more appealing.” Olivier, like many others in the trade is furious with the ‘smoke and mirrors’ surrounding the fuel surcharge issue: “American Express Travel Services would like to know where the fuel surcharge money is really going. Are airlines just making money unfairly out of these surcharges? Prices are fluctuating every week, and the usual excuse is that the either oil price or the economy, or both are to blame.” “It really is a case of investigating the numbers.”

(As this article went to print, Virgin Atlantic has followed British Airways in reducing its fuel surcharges on all its flights, saying reductions will save passengers up to £60 on a long-haul return flight inneconomy. Virgin said the reductions follow a sustained decline in the price of oil. This follows BA’s announcement that it would be reducing its fuel surcharges on long-haul, European and domestic services. SAA remained at its current levels). Business Traveller recommends, in conjunction with American Express Travel Services, that you look long and hard at the total cost of the tickets on offer for your travel plans in 2009.

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