Sunday 17 November 2019

Fuel surcharges: Oil prices are plummeting, so why aren't airfares falling too?

Hedging bets

An aircraft is refuelled. Despite falling oil prices, many airlines continue to levy fuel surcharges.
An aircraft is refuelled. Despite falling oil prices, many airlines continue to levy fuel surcharges.
Air Lingus fuel surcharges, in a screengrab taken from its website on January 7th, 2015.
Despite falling oil prices, many airlines continue to levy fuel surcharges.
Anatomy of an airline ticket. Source: TravelZoo
Pól Ó Conghaile

Pól Ó Conghaile

Oil prices dropped below $50 a barrel recently, so why are air passengers still paying substantial fuel surcharges?

That's the question an increasing number of people - including British Chancellor of the Exchequer, George Osborne, who said recently that the lowest oil prices in five years should be passed on to consumers via cheaper flights - want answered.

Oil is now 60pc cheaper than its year-high last June ($107), thanks to a supply glut. Prices of petrol and home heating oil are tumbling, with consumers seeing real benefits at the pumps.

So why do airlines like Aer Lingus continue to levy fuel surcharges of up to €95 each way (Dublin/Shannon to San Francisco) on its long-haul flights?

One word goes a long way in the explanation: hedging.

Because oil pricing is so volatile - it can rise as well as fall, as consumers know - many airlines prefer to fix, or hedge, their fuel costs for a set period of time.

"Aer Lingus hedges fuel costs in advance so market benefits take some time to realise," the airline explains. "We will continue to monitor the situation."

Airplane stock photo: Deposit Photos

Many airlines continue to levy fuel surcharges.

Fuel surcharges were first introduced in response to a rise in oil prices about a decade ago - allowing airlines to single them out as a reason for rising ticket prices (especially on long-haul routes), even though fuel might be considered part and parcel of the services airlines provide.

What's frustrating, of course, is that while airlines were quick to introduce fuel surcharges, a perception now exists that they are slow to lower them when oil prices drop.

This isn't unusual, however.

To date, just a handful of airlines - Qatar Airlines, JAL and Cebu Pacific among them - have announced an intention to lower or remove fuel surcharges, despite mounting pressure.

Why so?

For starters, airlines that hedged their costs in the past are now paying up to $95 a barrel for fuel, despite the market rates being considerably lower. A strong dollar exacerbates this.

In addition, airline costs are made up of numerous factors (including passenger duties and travel taxes), many are investing in fleet improvements (in-flight Wi-Fi, upgraded cabins and so on), and there is high demand for seats at the moment, creating little incentive to lower fares.

Ultimately, fares reflect what passengers are prepared to pay.

London Heathrow Airport Credit: Peter Macdiarmid/Getty Images
London Heathrow Airport Credit: Peter Macdiarmid/Getty Images

An airplane preparing to land at London Heathrow.

“Historically, low oil prices have not necessarily led to an immediate fall in flight prices," says Joel Brandon-Bravo, Managing Director of Internet media company, Travelzoo.

"For the major airlines, we would however expect some softening of the headline price in the medium term as the fuel surcharges will inevitably fall. This will probably take around six months because the airlines have hedged positions that protect them from volatility in the fuel market (either way), but they will now be working to unwind the hedges and take advantage of lower fuel costs."

Fuel costs typically make up 30-50pc of airline costs, Brandon-Bravo says.

“Total ticket prices are made up of a combination of elements, including fuel surcharges," a spokesperson for Etihad Airways, which flies from Dublin to Abu Dhabi, adds.

"Etihad Airways continuously monitors and adjusts total ticket prices to ensure that we are competitively positioned in the markets we operate and sell in.”

SAS, which operates several routes from Dublin to Scandinavia, says current jet fuel prices do lower its costs, but nevertheless continues to levy a fuel surcharge.

"The US dollar is offsetting a significant part of the lower jet fuel prices," it says.

"Also, environmental surcharges have increased. Overall, jet fuel costs in SEK including environmental charges combined have not decreased enough to justify a reduction of SAS jet fuel surcharges."

"Surcharges can be determined by a number of factors and may vary by type of fare purchased, aircraft cabin and geographical region," a spokesperson for United adds. The airline has surcharges in place for certain tickets, which are included in the fare quote at the time of booking, it says.

A Ryanair flight is refueled at South Charleroi Airport, Belgium

A Ryanair plane refuels at Charleroi Airport, Belgium.

Ryanair is alone among the airlines we contacted in eschewing fuel surcharges - although obviously, the airline does not currently operate long-haul flights.

"While ticket prices may fall, Ryanair continues and will continue to offer Europe’s lowest air fares, with no fuel surcharges guaranteed,” a spokesperson said.

One reason for this, the airline adds, is that it has "taken advantage" of recent oil price weaknesses to extend its fuel hedges to 90pc for the financial year 2016.

"Hedging at approximately $93 per barrel will result in at least a 4pc reduction in unit fuel costs over the next 12 months," the airline says.

Reuters has also reported that Aer Lingus is aiming to take advantage of low oil prices to lock in fuel costs into 2016 and beyond.

If passengers wish to avoid airline fuel surcharges, of course, they can always avoid flying. Lower petrol prices have made driving holidays cheaper than they have been in years.

travel zoo anatomy airline ticket.jpg
Anatomy of an airline ticket. Source: TravelZoo

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