DOT Adds Teeth To Fuel Surcharge Rules - Business Travel News

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DOT Adds Teeth To Fuel Surcharge Rules

March 15, 2012 - 11:50 AM ET

By Jay Boehmer

Ask airfare analysts about fuel surcharges and they'll tell you there is little evidence they're devised with a consistent methodology and that, as far as they can determine, these carrier-imposed fees don't correlate to the cost of fuel.

The U.S. Department of Transportation plans to change that, warning last month in a notice to carriers that fuel surcharges "must accurately reflect the actual costs of the service covered." Subsequently published in the Federal Register, the Feb. 21 memo warned that DOT would begin enforcing its tougher stance within 60 days.

Harrell Associates principal and airfare analyst Bob Harrell called the new guidance more rigorous "than any methodology I am aware of in the current system." As for now, he said, "fuel surcharges are totally archaic, and it's fair to say that by design they're quite obtuse. As far as I've been able to tell, fuel surcharges have nothing to do with fuel."

Carriers for several years have used fuel surcharges to offset one of their largest operating costs, particularly on long-haul international services. However, those surcharges have rankled corporate travel buyers, as they have not been applied consistently to fares, remain largely non-negotiable as a part of corporate agreements and can comprise more than 50 percent of the total cost of carriage.

As part of its rule clarification, DOT demanded that airline fuel surcharges "actually reflect a reasonable estimate of the per-passenger fuel costs incurred by the carrier" and be "calculated based on such factors as the length of the trip, varying costs of fuel and number of flight segments involved."

DOT declined to elaborate on what it now expects of carriers; a spokesman said that the new "guidance was very clear."

"We're not going to tell carriers how to determine fuel surcharges; that will be up them," the spokesman added. "Our emphasis will be to make sure that if carriers list surcharges, they accurately represent the actual cost."

While it's too soon to understand the full impact of DOT's new demands, industry watchers expect airlines to change how they devise and disclose fuel surcharges. Surcharges probably won't go away, especially as fuel costs move higher, but carriers are likely to put more methodology and transparency around their construction, Harrell and others said.

Peter Belobaba, who focuses on air transport economics and revenue management as principal research scientist for MIT's Department of Aeronautics and Astronautics, said airlines will have to "change in a big way" to abide by DOT's demands. "Until now, fuel surcharges have been strictly a pricing tool," Belobaba said. "You put in a surcharge, hope your competitor matches it, and if so, you're set. If fuel costs go down, you keep them in as long as you can."

In its notice to carriers, DOT highlighted one recent transatlantic fare found on an undisclosed airline's website: the cost was $769.41, including $476 "described as a 'fuel surcharge.' " While the department did not claim the carrier arbitrarily arrived at that $476 figure, it did stress that the dollar amount "must be an accurate reflection of the fuel cost over some reasonable baseline for an individual passenger for that trip, and the carrier should be prepared to detail the services and costs per passenger."

Data pulled by fare analysts for Business Travel News in 2008, when fuel prices hit all-time highs, showed that surcharges were not consistently structured or applied—even for the same airline on the same route—and did not directly correlate with the cost of fuel.

Though DOT plans to more stringently regulate fuel surcharges, there's no indication the United States will take the same approach as Japan, where airlines must gain permission to implement fuel surcharges based on recent fuel prices and apply them consistently based on length of haul.

For example, Japan Airlines last month requested authority to increase its per-sector fuel surcharge to $296 from $288 for all flights between Japan and the mainland United States between April 1 and May 31. At the behest of regulators, the carrier, like others serving Japan, indicated that it "sets fuel surcharge levels bimonthly based on the two-month average price of Singapore kerosene-type jet fuel." By May 31, the carrier will have a new average fuel price, and will adjust its surcharge accordingly.

"Because it still is such a regulated market in Japan, it's almost like an electric utility in the U.S., where you have to put in place the justification and go in front of a utility board to get a rate increase approved," said Bob Brindley, vice president of BCD Travel's consulting unit Advito. "Obviously, in the U.S. airline market, they don't have to do that, and the market tends to figure exactly what the airlines are able to get away with."

Even if airlines revise how they calculate and apply fuel surcharges, that doesn't necessarily mean the overall cost of air travel would decline, especially this year as fuel costs are expected to grow. "If I were an airline, I would just dump it in the fare, because they don't have to justify anything in the fare," said Harrell. "They can set the fare to whatever the market will bear."

Corporate travel buyers would welcome that approach since their discounts apply only to base fares, not surcharges.

However, airlines so far have not minimized their reliance on fuel surcharges, which typically are filed in the YQ category in fare filings via the Airline Tariff Publishing Company.

"According to our research, we haven't seen in fuel surcharges any significant fluctuations over the last several months in the filing volumes or carrier use," according to an ATPCo spokesman, though ATPCo declined to share "pricing-related information" on surcharge levels.

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