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.