Fare Surcharges Arbitrary

Airline fuel surcharge structures have no clear and consistent methodology, no direct correlation with the cost of fuel and little consistency in their application—even within a single airline on the same flight, according to examinations of fare data and discussions with airfare analysts. Corporate travel buyers and industry organizations are bemoaning the surcharges' placement in fare filings that leave the fees out of the realm of corporate discounts, and in some cases nonrefundable.

Fuel surcharges on international and many domestic routes are assessed on top of the base fare, leaving surcharges—a growing part of the overall cost of carriage—largely left out of corporate discounting.

Advito vice president Bob Brindley said fuel surcharges fall "on the more irrational side of the whole airline pricing spectrum. The discount applies off of the base fare, so it doesn't apply to the other fees and unbundling that's going on. In some domestic markets, the fuel surcharge is not an add-on, it's part of the base fare. Whenever it's part of the base fare, and those are primarily domestic U.S. markets or low-cost carrier markets, the discounts do apply."

The United Kingdom's Institute of Travel Management and Guild of Travel Management last month urged airlines either to include fuel surcharges in corporate deals or make them refundable on all tickets. The two organizations published an open letter to buyers, TMCs and airlines, calling for a resolution after several cases of unidentified airlines refusing to refund fuel surcharges on nonrefundable tickets.

"It is existing practice that airlines refund any taxation charges on receipt of unused nonrefundable tickets," the joint letter read. "Both the GTMC and ITM have, however, become aware of a practice by some airlines to withhold the portion of the total cost referred to as 'fuel surcharge,' stating that it is not indeed a tax and therefore not refundable on nonrefundable tickets."

"Our two associations consider that if an airline practices this approach, then the 'fuel surcharge' is in effect being treated as part of the ticket price, and airlines undertaking this practice have in effect said this is the case. If this is so, then this element of the fare should be included in any corporate agreements between buyers and airlines. If this is not the case, then this surcharge should be refunded if a ticket is not used, regardless of ticket restrictions."

The letter continued, "The airline community is entitled to treat the surcharge as they wish as far as refunding is concerned, but you cannot have your cake and eat it. It should either be treated as a tax, part of the fare or applied according to relationships to TMCs and travel buyers."

Sources told BTN that one of the carriers not refunding fuel surcharges on nonrefundable tickets is Delta Air Lines. In a prepared response to BTN's enquiry, the carrier stated: "Delta Air Lines offers its customers refundable and nonrefundable fare options. Taxes and some charges applied to nonrefundable tickets can be refunded. However, carrier-imposed surcharges are part of the fare and as such are not refundable when a nonrefundable fare is purchased."

GTMC deputy chairman Mike Hare told BTN there is a danger they will become a permanent separate charge within a ticket price. It would be more fair, he said, to reabsorb fuel costs into the total fare.

"If a passenger does not use their nonrefundable ticket, there is an argument the airline should keep the fuel surcharge because the airline will have to fly without them, probably with an empty seat," Hare said. "Let's put it in the fare and make it part of the agreement. Airlines are not charging leasing surcharges or interest surcharges, and it is very unlikely they will queue up to reduce the fuel surcharge when oil prices fall $10."

As of late September, FareCompare CEO Rick Seaney said domestic carriers this year have attempted 22 airfare hikes. Of those, 11 were attempts to increase the fuel surcharge as opposed to the base fare, and seven succeeded. Not all have been successful, Seaney noted, with all six legacy carriers matching increases on more than two-thirds of their network.

"To be honest, they call it a fuel surcharge, but it's a fare increase," Seaney said. "All that does is give them the marketing benefit of blaming it on the oil companies."

Seaney gave a hypothetical example of how pricing has trended for corporate travel buyers, using an $800 roundtrip fare and a negotiated 10 percent discount.

"For the sake of argument, the price was $800 roundtrip last year, with a fuel surcharge of $50, so the company would get $80 off. Then the fuel surcharge would be added and tax would be applied to that," Seaney said. "That same airfare could be $700 base with a $150 fuel surcharge, so the price is completely flat from out-the-door pricing, but your discount becomes 10 percent of $700 and that's only $70. You get less of a discount because you don't get that off the surcharge."

Seaney said domestic fuel surcharges often are filed with the Airline Tariff Publishing Co. through its Category 12, which enables FareCompare to break out fuel surcharges from most fares. Fuel surcharges on international fares usually are filed in what's known as the YQ/YR rule in ATPCo.

Joakim Karlsson, associate professor of aviation at Daniel Webster College, said he has seen rampant fee placement in the YQ/YR category. Seaney said the average transatlantic fuel surcharge among 452,000 airfares pulled in mid-September totaled $342. "In most cases for winter travel, the cheapest airfare in the transatlantic right now, the fuel surcharge is three times the base fare," Seaney said.

"The fuel surcharge business is a bit tricky, because who knows what the fuel surcharge really represents?" Karlsson said. Citing a colleague's research, he added, "Fuel surcharges don't correlate with the actual fuel cost of the carrier. Some carriers have lower fuel costs than others because of technology and hedging position and the numbers just don't quite match. If you look at what the airlines' cost structure is, the fuel surcharge is arbitrary."

Business travelers often take the brunt of fuel surcharges. FareCompare data pulled for fares from New York's John F. Kennedy International Airport to Los Angeles International Airport showed a wide disparity in fuel surcharges levied for the same route on the same aircraft.

American Airlines' JFK-LAX fares showed some $0 fuel surcharges on coach seats, but up to $186 for the front of the plane. Similar patterns emerged for other carriers. Between JFK and LAX, Delta's fuel surcharge pulled in early October ranged from $0 to $167, Continental's and Northwest's each from $0 to $158, United's from $0 to $186, and US Airways' from $0 to $205. In most cases, the high fuel surcharge applied to first or business, while the low applied to coach fares.

Seaney said business class tickets often carry a heftier surcharge, even on the same plane and route. "They're really high for business airfares and first class and they're relatively low for leisure fares," he said. "Business travelers have been stable and the airlines can afford to hit them up."

A mid-September FareCompare analysis of 193,000 domestic fares showed that 38 percent of fares did not carry surcharges, while 44 percent of the fares had surcharges "targeted at business travelers" traveling on seven-day or less advance purchase fares.

Wolff & Samson PC travel industry lawyer and consultant Laurence Smith said such problems are not limited to fuel surcharges in a dispatch to corporate travel clients. "These add-ons, together with fuel surcharges, GDS-related fees and merchant fees that airlines have passed along to their customers in many jurisdictions, comprise an ever-increasing portion of the total price paid by a company for an airline ticket," he wrote in an e-mail. "We believe this trend is inexorable."
—Amon Cohen contributed to this report