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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