Could a more rational fuel surcharge be on the horizon?
Posted by Seth on March 22, 2012 under News | 
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It wasn’t too long ago that the concept of the fuel surcharge in the context of airline tickets simply didn’t exist. The full price of the transaction was simply the ticket cost and the mandated airport and government taxes or fees and that was that. A few years ago airlines realized that they could manipulate the pricing systems a bit, charging a fuel surcharge rather than just raising fares and an ugly trend began. In theory the fuel surcharges would be relative to the actual costs of fuel and would decrease when those costs decrease, but that sort of behavior has not been particularly common.
Perhaps the most adversely affected group from these fees are those traveling on corporate contracts. Those deals allow for discounts on the fare paid but the taxes and fees are not subject to discount. By shifting the cost to the fuel surcharge the airlines have effectively killed a chunk of those discounts. The US government has finally caught on, however, and they don’t seem too impressed.
In a notice published in the Federal Register two weeks ago the Department of Transportation put the airlines on notice that they consider the current practice to be a violation of the unfair or deceptive trade clauses which they have the power to enforce. To that end, they are proposing that the airlines must change their behavior in two significant ways.
First, all fuel surcharges and any other fees which the airlines keep for themselves must be identified separately from fees which are paid to the government or airport authorities.
We have found, in reviewing airline Web sites, that many Web sites which detailed additional fees labeled all additional charges, government and carrier-imposed, as taxes when in fact carrier-imposed fees were often the major portion of these fees. Such displays were deceptive and in violation of section 41712.
This should help clear up the fact that a $100 base fare plus $650 in "taxes & fees" for a NYC-London flight is actually $550ish to the airline and $200 in real taxes (still obscene, but way better than the old way it was shown). Interestingly, they do indicate that it would be acceptable to have a single entry called "Taxes and carrier-imposed fees" rather than just "Taxes and fees"
Second, the airlines will be required to align the fuel surcharge component with the actual cost of fuel to provide the service, or at least a near approximation.
When a cost component is described as a fuel surcharge, for example, that amount must actually reflect a reasonable estimate of the per-passenger fuel costs incurred by the carrier above some baseline calculated based on such factors as the length of the trip, varying costs of fuel, and number of flight segments involved.
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Therefore, the “fuel surcharge” of $476 in the above example, which is associated with a transatlantic trip originating in New York City, 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 associated with its “Passenger service charge international.”
In other words, the numbers have to actually line up with something that vaguely resembles the cost of the service being offered. Take, for example, the fuel surcharges levied by United Airlines for non-stop flights from Newark to four nearby destinations in Europe (all rates are one-way for travel in late March 2012):
- Dublin – $101
- London – $219
- Paris – $248
- Amsterdam – $248
With a spread of less than 500 miles from the shortest to the longest, it is clear that the numbers do not reflect the actual costs of the fuel. According to the company’s 2011 10-K filing the cost for fuel averaged 4.77 cents per ASM. That puts the actual fuel cost per seat for the above flights somewhere around $150. And that assumes that there is a direct correlation from the fuel costs to the miles flown, something that doesn’t actually work out quite so directly. Plus, the DoT seems to think that the "surcharge" should actually reflect the difference over some acceptable baseline, not the entire fuel cost.
This might mean that base fares go up while fuel surcharges go down, leaving the final fare the same for most folks. Not a huge deal in the end if the number is the same, but at least the fares will more properly reflect the reality of what is being offered.
