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International Airlines First To Roll Back Surcharges As Fuel Prices Fall

By Jay Boehmer / October 22, 2006 / Contact Reporter
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International carriers in recent weeks rolled back fuel surcharges in light of declining jet fuel costs, but U.S.-based carriers thus far have been less aggressive in instituting broad-based surcharge reductions. The multitude of foreign carriers includes Air France, Austrian Airlines, Czech Airlines, El Al, Lufthansa, KLM, Singapore, Qantas, and Virgin Atlantic, all of whom cited a drop in fuel prices in recent months.

Calyon Securities airline analyst Ray Neidl in a research note wrote that fuel prices are down about 20 percent from a high in early August. "There is no guarantee that oil prices will continue to fall but the trend is encouraging and should give airline results some upward momentum in 4Q06," he said in a research note. Last week, oil prices stayed below $60 a barrel. However, the Organization of the Petroleum Exporting Countries late last week said beginning Nov. 1 it would reduce oil output by 1.2 million barrels per day. The move would cut OPEC's daily oil production to 26.3 million barrels from 27.5 million barrels.

Oil prices held steady immediately following OPEC's move, yet the restriction in supply likely would up the cost of oil, reversing the trend in recent months of steadily falling prices.

"I think you've seen some of the fuel surcharges come off, I just don't think U.S. carriers have been as public about it as some of the other carriers," said Helane Becker, managing director and transportation analyst at The Benchmark Co. "None of them have announced a widespread drop that I've heard so far. They're saying they expect fuel surcharges to come off, but there's a lag of about a month. So, in October, November and December they'll roll off a little, but I don't think they're going to aggressively advertise it."

In April, American, Delta, Northwest, British Airways and KLM Royal Dutch Airlines upped fuel surcharges. American, Northwest, United and US Airways in June matched Delta's fuel increase of $10 on most transatlantic flights from the Western Hemisphere, except those originating in Canada and Mexico (BTN, June 19).

Last week during its earnings call, American Airlines said lower fuel prices would benefit its earnings for the year compared with its initial outlook, which included $528 million more in fuel costs for 2006 than its readjusted outlook.

"While falling fuel prices provide significant benefits to our company, fuel prices remain at historically high levels and continue to be volatile," according to CEO Gerard Arpey.

Despite recent drops in oil costs, Continental noted last week in its third-quarter earnings statement that fuel costs increased $174 million over the same period last year, "primarily due to a 17.8 percent increase in fuel prices compared to the same period last year."

When asked if Northwest would drop its fuel surcharges, CEO Doug Steenland in a conference call this month said, "We never make any forward-looking statements or predictions as to what we might do in the fare arena."

Likewise, Delta COO Jim Whitehurst told BTN, "We can't speculate about price publicly," but said fuel prices still are historically high, especially when compared with the days when fuel costs were half as much as current levels.

"We used to say that no airline business model works at $30 fuel," Whitehurst said. "I remember going from the teens to $25 and everybody was gasping and saying, 'What are we going to do?' It's amazing that after going to $78 that $60 sounds good, but these are record fuel levels even where they are."

John Caldwell, president of consulting firm Caldwell Associates, said that fuel surcharge increases do not necessarily mimic those of fuel costs, which frustrates many corporate travel buyers. "The surcharge may or may not be the same as the actual cost of the fuel increase," he said. "It can be an excuse for hiking prices. That's another thing that has customers upset and skeptical is that they're not sure there's been any proof or audit trail between the actually incurred cost of fuel costs and the surcharges."

However, foreign-based carriers en masse have reduced surcharges on the heels of falling fuel prices.

Air France, KLM Royal Dutch Airlines and El Al Israel Airlines were among the first to announce reductions in fuel surcharges. Air France cut its long-haul surcharge by E7. KLM reduced its fuel surcharge by E5 per leg on all intercontinental flights and El Al $28 per long-haul roundtrip.

Meanwhile, Qantas beginning this week is cutting its fuel surcharge by up to $15 per way on international long-haul routes, representing its first major drop since raising them in 2004. "When Qantas was forced to address the issue of high fuel costs in May 2004, we chose to add a surcharge rather than increase the cost of fares so that we could reduce or remove the additional charge if fuel prices dropped," CEO Geoff Dixon said.

Virgin Atlantic reduced its fuel surcharge by £5 per way and Singapore cut its surcharge by $2 per way on flights within Asia and $8 per way on long-haul flights.

Austrian Airlines reduced its fuel surcharge by $20 for all roundtrip transatlantic flights, "given that fuel prices have relaxed somewhat," the carrier said in a statement.

Czech Airlines also reduced its fuel surcharge by about $7 on long-haul flights, while Philippine Airlines said it would implement a reduction this week.
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