Will Airline Pricing Decline With Fuel Prices? (Ask Cranky)

I’ve been asked this question a lot lately, so I figured it was time to address it.

With oil prices plummeting, I wonder what will be happening to YQ surcharges. Mostly Ask Crankycalled international surcharge but sometimes more accurately fuel surcharge, the current drop in fuel costs should have effect. Since June it spot prices for jet fuel fell from $2.84/gallon to $1.51/gallon today. I do understand about hedging, but many US airlines seem to have dropped fuel hedging lately

Now to my actual question or suggestion for a write up, when (if ever) will this effect YQ surcharges? My guess, airlines will pocket it. But then someone should call them out on it.
Thomas

This particular question is mostly about fuel surcharges, but it’s really a broader topic about airline pricing in general. As fuel prices have declined, fares haven’t. What gives?

I actually have a split view of this. Just because fuel prices decline doesn’t mean fares should. But if you as an airline are going to specifically tie a piece of your pricing to fuel, then it better go down as well as up. Let me explain what I mean.

The general argument that airfare should be pegged to fuel costs (or any cost) makes no sense to me. Airlines should price based on demand for the product and demand is very strong right now. During the next downturn, fares will fall regardless of what fuel prices are doing. It’s all based on demand.

The response to this is usually, “yeah, but airlines blamed fuel prices when they jacked up fares before.” That is true. But that’s because a business needs to make money. Back in 2007/2008, that wasn’t possible since spiking fuel prices and depressed economy made things ugly. But fares had to go up quickly so airlines could try to lose as little money as possible. Airlines didn’t increase fares with impunity, however. They had to slash capacity in order to be able to have a level of supply that could support higher fare levels. As the economy improved, capacity slowly increased with fares going higher as well.

As you can imagine, when I hear people saying that fares should go down just because fuel prices have gone down, I disagree. But I do draw the line when it comes to fuel surcharges.

Airlines have used surcharges in a variety of ways over the years. For the most part, they’re just an easy way to change pricing on a mass scale. But in many cases, we’ve seen airlines call them fuel surcharges. Then we’ve seen some quote along the lines of “we didn’t want to increase prices but we had to add a surcharge because the price of fuel is so high.” If you’re going to specifically tie a surcharge to the price of fuel, then you better damn have it fluctuate as fuel fluctuates.

Some airlines agree. Air Asia just eliminated its fuel surcharges. Starting February 1, Japan Airlines is reducing its fuel surcharges as well. Then there’s Qantas.

Qantas ditched its fuel surcharge but it’s going to raise its base fare to offset the cut. That seems pretty sleezy, but it’s better than just keeping fuel surcharges high and pretending that reality doesn’t exist. Other airlines will do that, and that sucks.

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54 Comments on "Will Airline Pricing Decline With Fuel Prices? (Ask Cranky)"

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Jonathan
Guest

Let me put it this way. I think many consumers – myself included – will remember who which airlines will be sleazy and keep fares high and which won’t, and make all our plans accordingly.

Grichard
Guest

Do you really think that? I’ll bet that 99% of fliers, myself included, never pay attention to how the various surcharges on fares break out. The only cost that I really pay attention to is the bottom-line price that I pay. I agree that not lowering explicit fuel surcharges is sleazy, but I very much doubt I’ll keep an eye on who eliminates them.

Kilroy
Guest

> I’ll bet that 99% of fliers, myself included, never pay attention to how the various surcharges on fares break out.

Very much agreed. Think of the corporate types, who basically just buy the best time/schedule/airline they prefer while still keeping within their company’s travel policy, or the leisure travelers who buy whatever price/schedule/airline/etc combination looks good on Travelocity or Kayak.

That said, I expect that corporate travel types are already using the drop in fuel prices to push back on the airlines for better negotiated rates on their comapanies’ most heavily traveled routes.

noahkimmel
Member

high or low price is subjective…
sleezy is calling something a fuel surchange that isn’t linked to price of fuel. I agree that total ticket prices will likely not change as flights are full and people have more spending money. There is no reason to lower prices.

jboekhoud
Member

I think the whole idea of surcharges is sleezy. If McDonalds tried to add on a pickle surcharge everyone would call it nuts, but somehow it’s OK for airlines to do it. Set a base fare that includes all your operating costs (including fuel etc.), add on whatever government fees are mandatory, and then show us the final all-in price. Enough with the shell game.

A
Guest
Well yes, if an airline is going to tack on a fee tied to the price of a commodity, said fee should fluctuate with the price of that commodity. I’ve never really been a fan of the fuel surcharge because of that fact alone – airline tickets are transportation, not commodity plays on the NYMEX. Then again who ever said airline pricing made any sense at all? Let’s also remember why the fall in oil prices – suppliers are pumping beyond what demand there is which is hurting many in the oil business. High oil prices should eliminate the weak… Read more »
Nick Barnard
Member
I try not to, but I’ll veer into politics. If OPEC etc continues this there should be a protective tariff/price floor of some variety by the US and if we can get em to go along Europe. From a science and economics perspective this is the right thing to do to support the development of better energy efficiency and renewable fuel sources. I recognize this is cruddy for airlines as they compete in an international marketplace, so I’d be okay with an exemption for fuel used to/from a country that doesn’t have a fuel surcharge, or where a significant competitor… Read more »
BuriedInProvidence
Guest

Yes, fuel surcharges should be dropped because it is tied directly to fuel.

However, I always ask people what other prices have dropped? Food? iphone? Clothes? I can bet they didn’t drop the prices of their goods due to fuel being less expensive and I bet every one of those items used fuel to get to you.

Nick Barnard
Member

I worked supporting transportation of a commodity product from 2004-2006, when fuel really started to rise. It takes a while for these surcharges to find their way through the process. For a while we ate some of those losses, but then we passed them onto our customers, who then passed them onto end consumers.

Those drops in price will find their way through the system, they’re just not instantaneous, and perhaps will take the form of a planned price increase not being implemented.

Bgriff
Member

Considering that the total purchase price is what it is, Qantas’ move is actually extremely customer-friendly, as it saves a lot of money for people redeeming frequent flyer miles who otherwise were the ones getting most screwed by “fuel surcharges.” If BA, for example, followed suit it would be a hugely customer-friendly move.

jboekhoud
Member

That’s precisely why BA won’t do it. They offer a lot of award seats, which translates into a lot of revenue from the surcharges.

Kilroy
Guest
To be honest, I am surprised that airlines haven’t moved to a system (at least for their big corporate accounts) similar to what the trucking industry uses. If you are a decent sized shipper, and know you will have roughly X truckloads per year of product in a given lane (say, from your factory to your warehouse, or your warehouse to your biggest customer), you get bids on it from a few carriers for the linehaul (base) rate, with the understanding that when you sign a contract, you pay the linehaul amount per truck for the lane, plus a floating… Read more »
David SF eastbay
Member
If Kellogg’s get corn cheaper does the regular price of Corn Flakes at your local store go down? No it doesn’t so air fares shouldn’t. Fuel Surcharges are the biggest scam around and governments permit it. The price has nothing to do with fuel, but how much extra money can the airlines get from you. If it really was a fuel surcharge then the more miles you fly the higher the surcharge should be, but it’s not. It’s charging more depending on the city you are going to and how much the national/major carrier of that country charges. Using UA… Read more »
jboekhoud
Member
Well, to be fair Kellogg’s does the same thing as the airlines. When the price of corn goes up, they raise prices. Look at how the price of bread has risen with the price of wheat. Of course, just like the airlines, when the price of commodities drops the price of bread/corn flakes/whatever tends not to go back down (or at least not as quickly). They’re all trying to squeeze as much out of us as they can get away with. As you point out, the fuel surcharges bear no relation to actual consumption. Of course, that’s hardly a surprise… Read more »
mandel.jerry1
Member

YR is also fuel surcharge. Readers should look for both YQ and YR.

Zack Rules
Guest
I think fare surcharges should simply be folded into the fare, perhaps in the same way Spirit does it with its clever break down of gov’t cut, fuel and fare. Otherwise, you see a ticket price and then you are surprised when a fuel surcharge is added on the back end. The Qantas move is the right way to go. Instead of faring dropping as a result of fuel costs, demand will force fares lower. Delta and American are already seeing some softness in the fourth quarter at current fare levels. I think we will also see some of that… Read more »
Derek Pugh
Member

Are Fuel Surcharges (YQ and the like) taxed differently than the base fare? If the effective tax rate is lower on these surcharges, airlines have even more incentive to drive as much of the fare as possible into them rather than the base fare. The company gets the same revenue and lowers their tax burden. I agree that calling these “fuel surcharges” is sleazy if they aren’t really tied to the price of fuel, especially if also being used to pay less taxes.

David SF eastbay
Member
YQ/YR are service fees imposed by the airlines. A carrier can use either one and some use both. They are used for Fuel Surcharge or Insurance Surcharge. Some airlines show it as a Q surcharge which then becomes part of the base fare. If you have a trip with a number of airlines on the same ticket, you can see YR,YQ and a Q surcharge. If an airlines uses YR/YQ then it shows with all the taxes and most people will just think it’s a government tax and don’t know that the money goes to the airline and they can… Read more »
jaybru
Member
I’m certainly guilty as anyone else about complaining over why this or that isn’t happening to air fare prices when I see this or that going down–like with fuel prices. But, who knows why any fare is set where it is and how a change in any cost element should be making my ticket price cheap. So American is saving billions with the drop in fuel prices. Lower prices for my tickets? Sure, I’d like that but why do it? Maybe they want to use the savings to buy back stock, pay some dividends to shareholders, increase pay for employees,… Read more »
lenniefalcon
Member

The airlines are in a bad place, especially Delta & UA. Delta has a refinery which is just sucking money down the proverbial tubes, and UA’s hedges have gone really, really wrong. They have lost so much money that is hidden on the books. Fuel surcharges will go away till oil climbs back up later this year, but they will be replaced by financial mismanagement fees. Look on the bright side of life-you can still get mismanagement miles!

tivoboy
Member

Technically, due to federal regulations the airlines MUST reduce them if the reasonable actual amount of the fuel charge has changed for an individual passenger trip.

I think we’re going to see the airlines pretty soon reporting a change to their fuel sur-charge policies.

Nick Barnard
Member

Say what? Where does the DOT say this?

tivoboy
Member

look back on this site oh about three years..search DOT fuel surcharges..you should find the links to the DOT policy statement and then a pretty healthy discussion around the issue..one would think this was a Mac vs. PC debate or something. ;-)

tivoboy
Member

look back on this site oh about three years..search DOT fuel
surcharges..you should find the links to the DOT policy statement and then
a pretty healthy discussion around the issue..one would think this was a
Mac vs. PC debate or something. ;-)

DesertGhost
Guest
American’s earnings call addressed this issue. The airline executives said the company is going to be managed as if oil prices were $100 per barrel. To me, this is the prudent way to deal with the oil price situation because market prices can easily and quickly climb to higher levels. In my humble opinion (which, along with $5.00 or so will buy you coffee at Starbuck’s), it’s not wise to manage a company only for the short term. Management has to look at the long run, also. The failure to do that in the past is much of the reason… Read more »
MeanMeosh
Guest
The airlines have largely painted themselves into a corner of their own making. For years, as they were instituting baggage fees, higher change fees, seat reservation fees, fuel surcharges, etc., they consistently blamed the imposition of the fees on the cost of fuel. They shouldn’t act surprised when people now demand relief from the fees with fuel prices down so substantially. This is where I really think the airlines have done themselves no favors – if they want to raise prices, just raise the dang prices and be done with it. Of course, the other side effect of calling something… Read more »
Kilroy
Guest

.

I suppose this means we can expect another round of populist “The airlines are making too much money!” rants from politicians pretty soon. Funny how airlines are one of the least profitable industries around, and yet you never see policies making the same rant about Apple or other companies that throw off tons of cash.

Kilroy
Guest

Sorry, that comment should have started with a “Sigh,” and “policies” should be “politicians”.

Nick Barnard
Member

Comcast and Verizon know to throw the cash at the politicians. The airlines are working at learning that skill.

Carl
Member
At the end of the day, fuel surcharges have little to do with the cost of fuel. When airlines blame fuel prices to justify a raise fares or surcharges, then they create themselves the PR problem when fuel prices go back down. In the short run, if they can’t change capacity, fares will be based on demand irrespective of the fuel price. Cheap oil could even raise demand if people have more discretionary income. In the long run it will become somewhat self-correcting in that it will motivate airlines to increase capacity and continue flying less fuel efficient planes more,… Read more »
Marjorie9018
Member

ARTA (the Association of Retail Travel Agents–yes we still thrive) sent out a press release on January 24 challenging
airlines to answer exactly this question about their so-called fuel surcharges.

Dave
Guest

First off I have thought for a while that it’s time to re-regulate fares and let the airlines compete on service.A simple two or three tier system i.e advance purchase, maybe two or three weeks out, and a walk-up fare would work. Fare’s may go up somewhat but I do think it will be minimal. Secondly the frequent flyer programs are well past there useful life. Time to get rid of them as well. With all of the restrictions and associated cost’s that are being imposed there really not worth the time and effort any more.

Oliver
Guest

If the main purpose is to make it easier to change fares on masse, why don’t have have them for US domestic flights? Transcons and flights to Hawaii aren’t really that much different in distance and aircraft than some international routes, even to Europe.

Emily Garrigan
Guest
Agreed. Companies will try and make money any way they can. And yes, businesses don’t make decisions based on one thing, like fuel or taxes. They take all expenses into consideration, and try to juggle everything in the most profitable way. One thing I’m curious is why didn’t gas stations just keep their gas prices up a little bit so they could make a little more money? I understand their margins are razor thin, like the grocery stores. As an aside, corn has plummeted in price since last year; yet the price of my poultry laying mash has not gone… Read more »
tivoboy
Member

About gas stations…they really make essentially NO money on the GAS they make almost all their profit from the sales in the store, or add-ons. If they lower prices faster they actually get the driver/buyer to spend more on a 1.75$ coke or bag of chips, where there profit can be 100’s%..so the station owner is really incented to lower prices as soon as possible

tivoboy
Member

About gas stations…they really make essentially NO money on the GAS they
make almost all their profit from the sales in the store, or add-ons. If
they lower prices faster they actually get the driver/buyer to spend more
on a 1.75$ coke or bag of chips, where there profit can be 100’s%..so the
station owner is really incented to lower prices as soon as possible

Scott
Member
Fuel Surcharges are not about fuel, but instead about a way for airlines to hide fares from commission, and collect partial fares on frequent flier redemptions. Air Canada tried to go as far to say that you can’t use a voucher (IDB, VDB etc) toward the fuel surcharge, only toward the base fare (the CTA shut them down on that). Case in point, Air Canada (or BA or LH or…) across the Atlantic. Their fuel surcharge EXCEEDS the per-seat total fuel cost for the flight (per the published numbers from their financials). (If the airline doesn’t publish the fuel CASM,… Read more »
Nick Barnard
Member

So Dallas Morning News had a good few snippets from Doug Parker on this:
http://aviationblog.dallasnews.com/2015/01/american-airlines-execs-demand-determines-fares-not-our-costs.html/

TL;DR: We price on demand. When demand was lower we lost our shirts, now demand is higher we’re going to keep our shirts.

ZuluLima
Guest
All of this ignores the real reason that prices will drop: competition. There isn’t a monopoly that allows any airline to keep prices higher than necessary. When Virgin for example needs to stimulate traffic on any route flown by the legacies, they will drop the price, since they now can afford to do so. Legacies will follow suit to keep competitive. This is all very basic economics, and it plays out in every industry. The airline industry sees rounds of price hikes/cuts where one airline tries out a fare change, then all of the others will jump on board and… Read more »
MDawg
Guest

Ultimately that goes back to demand. If there is ample demand on a route, Virgin nor anybody else won’t have a need to drop the price. Before the drop in jet fuel, the airline probably would have dropped the route. If fuel prices stay low, airlines will be tempted to fly more marginal routes, which increases supply. That is when you will see a drop in fares given static demand. It really is Econ 101, supply and demand drives fares not the price of fuel.

Thomas
Guest

Hi Brett,
Thanks for taking up my question.
I am curious to see the future of YQ on US carriers.
Thomas

mandel.jerry1
Member

Be careful. YR is also fuel surcharge. Sneaky.

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