x Abu Dhabi, UAEThursday 27 July 2017

Are airlines' fuel surcharges cruel?

Traveller's world Back in July when crude oil hit a historic high of over US$147 per barrel, it seemed plausible that airlines would have to pass on some of their rising costs to passengers.

Back in July when crude oil hit a historic high of over US$147 per barrel, it seemed plausible that airlines would have to pass on some of their rising costs to passengers in order to avoid being clobbered themselves. And pass on those costs they did. A British Airways (BA) flight from Atlanta to Dubai on July 1, for example, attracted a fuel surcharge of US$604 (Dh2,219) - around half the price of the base fare.

As consumers we kept a stiff upper lip in the same way that we did at the petrol pump, and took it for granted that the price of anything that relied on oil would be awfully expensive for the foreseeable future. So it might strike those same passengers as odd that considering the price of oil dipped below $50 per barrel this week, the fuel surcharge on that same Atlanta to Dubai ticket on Dec 1 was still a hefty $532. In other words, the price of oil has fallen 66 per cent and yet BA's fuel surcharge has reduced by only 12 per cent.

According to the airlines, they lost so much money earlier in the year that they are unable to part with this useful source of revenue now. "The fact remains that oil has remained well above $100 for most of this year, a price which puts huge pressure on any airline's cost base," an Etihad spokesman said. "Our fuel bill presently accounts for more than 40 per cent of our total operating costs which is a huge increase on 2006 when the cost to the business was 20 per cent."

Etihad has not reduced its fuel surcharges since this summer and said that has no immediate plans to do so. BA has made reductions but nowhere near what is required to return its fuel surcharges to levels that were common the last time oil was below $50 per barrel in 2005. "The fuel surcharges don't recoup our fuel costs," Euan Fordyce, a spokesman for BA, said. "Our fuel costs this year will be in excess of £3 billion and the fuel surcharges that we impose on tickets don't recoup those costs. So to say that we should eliminate the fuel surcharges just because oil prices have fallen doesn't really tally."

Perhaps. But if fuel surcharges don't move in step with the cost of aviation fuel, then are the surcharges really levied due to extraordinary circumstances with which some consumers might feel sympathy, or just a handy way for carriers to make money on ticket prices so that their balance sheets add up nicely? Some consumer advocacy groups are confident that it's the latter. "The fuel surcharge bears no relation to what the airlines actually pay for the cost of oil," explained James Fremantle, the industry affairs analyst at the Air Transport Users Council (AUC), the UK's consumer council for air travellers which is funded by the Civil Aviation Authority. "Airlines hedge their fuel purchases so the consumer often has no idea what price airlines are actually paying."

Fremantle is talking about the widespread practice in the airline industry of carriers buying a portion of their fuel in advance at a fixed price, so that if the market price for oil spikes they will be insulated against the shock by a pre-purchased stockpile of oil. From May to August, for example, 85 per cent of BA's fuel was locked in at a price of $91 per barrel. That meant that when oil prices were gunning towards the unprecedented $150 per barrel mark BA - and most other carriers - were actually experiencing a much smoother ride than air travellers might have assumed.

One reason why the airlines may be slow to reduce their ticket prices now is that the same hedging that helped them to mitigate losses during high oil prices has caused them considerable grief since oil prices have plummeted. "We hedged around 35 per cent of our consumption until the end of 2009," Hatam Akroush, the chief finance officer at Royal Jordanian, said. "Of course, the hedging worked against us when the fuel prices went down [and] like almost all of the airlines, we're suffering a little bit for this [now]."

However, most ticket-buyers are likely to feel that if this is the reason for maintaining high fuel surcharges - essentially saddling consumers with the consequences of a poor bet - this is very different to consumers sharing the burden of an unexpectedly high commodity price. While it might make good business sense for airlines to pass on their losses and collect their winnings, Fremantle from the AUC believes that it is misleading for them to present themselves as innocent bystanders and not players in a high-stakes game. "The fuel surcharges imply that they have been imposed by a third party when the fact is that it's really just the cost of doing business," he said.

Fremantle added that the AUC dismisses the premise that passengers should get a bill that specifies any surcharge instead of just a single ticket price. "Consumers do not need to know what makes up their ticket. If you go into a store and you buy a shirt you don't need to know what the price of cotton is and what the price was to sew it together. By this line of thinking you could even have a fuel surcharge on the shirt because obviously it had to be transported to the store."

Since March of last year Emirates Airline has included its fuel surcharges in the base fare for tickets sold in the UAE, as does Etihad. Others may follow suit if enough consumers start baulking at the words "fuel surcharge". Airlines in the US saw their businesses change in October when Bob Menendez, a senator from New Jersey, sent a letter to the chief executives of major carriers telling them to cut their surcharges in light of the decline in oil prices. With the threat of a looming congressional investigation, most airlines did drop surcharges on their domestic fares.

But that wasn't the end of the story, according to Graeme Wallace, a co-founder of FareCompare.com, a website that tracks airline tickets and the airline industry. "If they had a $150 fuel surcharge all they did was add it into the base fare," Wallace said. "They just rolled it back into the fare and so essentially there's really no transparency anymore of how much they are really charging.'" Wallace believes this lack of transparency has recently become a public relations nightmare for the airline industry.

After all, consumers had learned to swallow fuel surcharges back when oil was high. But now that oil prices have tanked those surcharges are leaving a mucky taste in our mouths. lkummer@thenational.ae