Could a more rational fuel surcharge be on the horizon?


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.

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.

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Seth Miller

I'm Seth, also known as the Wandering Aramean. I was bit by the travel bug 30 years ago and there's no sign of a cure. I fly ~200,000 miles annually; these are my stories. You can connect with me on Twitter, Facebook, and LinkedIn.

18 Comments

  1. There may also be implications for passing YQ through to award tickets. Since some airlines pass through the same YQ amount to award tickets, if that suddenly plunges, where does that leave them? Do they then create a new award “surcharge”? At least by associating the name with fuel, people might be convinced that this was a reasonable charge to add to award tickets… but by another name, there may be somewhat greater resistance. Don’t know exactly, but I could see this spilling over to the award realm as well.

  2. @Seth:
    “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.”

    Would this have a positive effect on the “costs” of award tickets? (For the airlines that impose fuel surcharges on award tix.)

  3. How do you think the fuel surcharge would vary across cabins? If a seat in F is taking up 2-4 times the space of a seat in Y, it probably should have a larger fuel surcharge to match.

  4. @Scottrick but I never check bags, so I should get a discount compared to that guy with three 70 lbs bags.

  5. @Oliver: Ha! While I like the idea of charging passengers according to their weight and baggage, I don’t think this is ever going to happen in the US. It would be time-consuming at check-in, and F/C/Elite passengers already get fre bags. I think if I first class seat is taking up twice as much space as an economy one, doubling the surcharge from $500 to $1000 is going to be easier and a larger difference than tacking on $10-20 per bag.

  6. @Scottrick: The fuel charges/fees usually increase with “premium” fares, which premium fares grouped into a bucket containing premium economy in some cases all the way up to first class. Not sure how they rationalize the increase, but they certainly do charge more.

    This is much more recognizable on international flights and Euro airlines (BA, Virgin, etc).

  7. If DOT could enforce accurate fuel surcharge pricing then it would stand to reason that it should just be added back into the base fare.

  8. Seems that Scottrick’s evaluation would make a lot of sense to the airlines – but if as Seth noted, the form 10-K measured it per passenger, I would think that includes every passenger regardless of class of service. Nonetheless, the airlines will likely find a way to increase revenue from J/F passengers whether on awards or paid through this mechanism as well.

  9. I should add that I looked at some markets out of the big time international United hubs. EWR-NRT/FRA/LHR average 4.78cpm in fuel surcharge.
    Average from LHR: 4.1 cpm (all UA LHR flights)
    Average from NRT: 5.1 cpm (all)
    Average from FRA: 3.8 cpm (all)
    So I guess United should be increasing YQ on the TATL routes.

  10. @Scottrick, I don’t think that pax weigh more in first, so the fuel surcharge being higher makes no sense (except that coach is more competitive, of course). Splitting YQ into fuel surcharge + int’l surcharge might, though.

    Some of the base charges are scary low.

  11. @Deirdre An F passenger might not weigh any more, but proportionally, they are using more space on the plane (bigger seat) than a Y passenger. I have no issue with YQ being square footage based (or the like) if YQ continues to be charged separately.

  12. @Deirdre
    It’s not like the money that airlines make from the YQ isn’t taxed, it’s just like any other type of revenue when it comes to taxes. In the end it doesn’t matter what the YQ is. They have to advertise the whole fare, government taxes included (total BS). You end up paying the same fare no matter how much of the total cost is YQ v fare (total price the same).

    1. The YQ isn’t a tax dodge – it still gets hit with the same tax as the base fare – but the bag fees are.

      The YQ is generally not an issue for regular revenue customers. It very much becomes an issue once corporate contracts or award tickets get involved when the program charges the fees for awards.

  13. Well, the airlines have done away with fuel surcharges! Hooray!
    Oops – they just changed the name and the fare code. No more YQ, no trouble with DoT.
    Now, it’s just a “surcharge” instead of a “fuel surcharge”, the code is YR, and everything for passenger remains rotten same BS.

  14. Not all the airlines have changed it from a YQ to a YR. I wouldn’t get too worried about that change. Yet.

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