Fuel Surcharge Resulting In Hostile Buyer Relationships

<B>Fuel Surcharge Resulting In Hostile Buyer Relationships</B>

By David Jonas

With a $10 surcharge on most one-way tickets already on the books, fuel has remained a hot topic for both airlines and corporations. Many of the major carriers matched the fuel surcharge, but variations on the theme have emerged and, for now, fuel prices show no signs of abating.

Continental's initial move to add the surcharge on all domestic tickets was promptly matched by many competitors (<I>BTN</I>, Jan. 24), but as it became apparent that it would stick, several airlines devised different strategies. Delta, for example, matched but said the surcharge was not added exclusively to cover fuel costs, but rather to "respond to the competitive market." Industry observers pointed out that this gives Delta, and other carriers using this tactic, an excuse to keep the surcharge in place, even when fuel prices recede.

To counter its high fuel costs, Southwest simply instituted up-front fare increases--ranging from $4 to $8--on roundtrip tickets, depending on flight distance, and were commended by many for its open strategy.

Meanwhile, a source familiar with US Airways' strategy said the carrier now is charging the one-way $10 fuel surcharge in all domestic and Canadian markets, including advanced purchase and walk-up fares, with the exception of markets "where competitive adjustments are necessary." In markets where US Airways competes with Southwest, for example, it just matched the latter's small fare increase. In markets where it competes with a carrier that has not imposed the surcharge, US Airways has held back altogether. The carrier in a recent Securities Exchange filing forecast another 41 percent rise in fuel costs for fiscal year 2000.

Indeed, after instituting the surcharge, carriers have been keeping close tabs on one another, and pulling the surcharge back in more competitive markets. "It definitely has become a competitive tool and, for us, the impact is very severe," said Kevin Iwamoto, global air and car supplier for Hewlett-Packard and Agilent Technologies in Palo Alto, Calif.

H-P's annual U.S. booked air volume reached $180 million last year. "It forces us and other customers to make some really difficult decisions. It's not business as usual and we have to ask ourselves if we need to cut back on travel," he said, acknowledging that adjustments are needed for fuel, while advocating a happy medium.

The airlines have not been immune to the public outcry against the surcharge. Delta, followed by several counterparts, unleashed a bevy of sale fares that do not include the extra $10 each way.

Meanwhile, late quarterly earnings reports last month showed more airlines taking fuel costs on the chin. Alaska, which opted to partially follow its larger counterparts with a $5-each-way surcharge, saw fuel expenses rise almost 53 percent in the fourth quarter. TWA also saw overall fuel costs rise by roughly 53 percent, while Midway reported a 64 percent jump. AirTran was more fortunate with only a modest 7.6 percent increase.

Overseas, KLM reported an operating loss near $38 million, "mainly as a result of 41 percent higher fuel costs." In fact, KLM is raising prices worldwide and said it would embark on a "substantial" cost reduction program as fuel, in part, muddies the industry outlook for the next year.

Underscoring the reality of the fuel threat, the world's largest airline, United, expects fuel costs in 2000 to jump another 25 percent, despite its hedging program. In fact, James Goodwin, the carrier's chairman and CEO, told BTN that he's "concerned with weakening demand" as fuel prices remain high.

Analysts also warned of further ramifications, to both passengers costs and airline earnings, as oil prices are hovering around their highest levels in nine years.

In fact, after initially holding off on adjusting international prices, several carriers recently increased transatlantic fares by 3 percent, including KLM, British Airways and others.

However, at press time, many low-fare carriers--such as AirTran, American Trans Air, Frontier and Tower--had not implemented any fuel adjustment.

What has angered buyers most is the process by which the airlines implemented the surcharge--without any notification or communication to corporate clients. In a suggested draft letter to the airlines from corporate buyers, the Business Travel Coalition wrote, "In no other commodity that a company buys can a supplier increase that company's prices without even a single phone call, a meeting, a negotiation."

The letter also states that airline deals include "no provision whatsoever for changes to our mutual obligations as a result of spikes up or down in the price of jet fuel," and that companies do not request rebates tied to lower fuel costs.

So what can corporations do? In most cases, nothing, but John Heilner of Management Alternatives suggested that everything is negotiable. "It will be difficult to negotiate on the surcharge because it would be complicated to price a percentage off in the CRSs, and no airline wants to set the precedent of completely negotiating the surcharge away," he said. "But you can try to negotiate for a different surcharge, say $7 or $8, for your organization. This would probably be easier to implement in the CRS."

Last week, the price of a barrel of crude oil, which is used to make jet fuel, topped the $30 mark, up 18 percent from early January and 166 percent from this time last year.