United Screws Around with Fuel Surcharges

Fares

Anyone else having flashbacks to 2000?

Fares are going up, sort of, but not in a healthy way. This time, it’s in the form of massively increased fuel surcharges. United put together a $25 each fuel surcharge for domestic flights, and the usual suspects have matched except for Northwest. They may match today, or it may fall apart, but I don’t like the trend this is setting.

No, it’s not the increase in fares that bothers me, but rather the piecemeal way in which it’s happening. All I know is that with fuel prices where they are, fares need to go up. They can do it with a fuel surcharge even though that seems like a waste of time. Why not just increase fares? Maybe there is a hidden reason that I don’t know. Are fuel surcharges commissionable? Anyway, that’s not the point.

As with most fare increases, this happens on higher structure fares. Take LAX to Chicago on United, for example. Right now there are sale fares out there for as low as $224 roundtrip. The surcharge doesn’t apply to these fares. In fact, the fuel surcharge doesn’t apply until you reach the “UA” fare for a whopping $437 each way. You think there are a lot of leisure travelers buying that fare? Nope.

So, it’s like we saw in 2000 right before the bubble burst, fares at the upper end of the spectrum kept going up while leisure fares stayed where they were. When the economy started going downhill, business travel started to drop off or at the least became much more cost conscious. That meant fewer seats were filled and less revenue was coming in the door. To compensate, the airlines had to fall back on the leisure fares, and those were still too low. Since the number of passengers dropped off, fares dropped so that people would buy more tickets. And that’s how the airlines started bleeding money last time.

People may say that we don’t need less capacity since planes are full, but it’s higher business fares that are propping that up right now. Planes may be full, but airlines will be losing money when they have to rely on leisure fares that they have been unable to increase. That doesn’t work.

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6 comments on “United Screws Around with Fuel Surcharges

  1. The brunt of the increase is absorbed by smaller regional airports and airports that do not have competition with a low cost airline like Southwest or AirTran which are very leisure oriented. The legacy airlines tiptoe around competitive markets and also their targeted airfare sales for Tuesday, Wednesday, Saturday travel (where they leave off the surcharges in many cases).

    11 significant increase since Labor Day 2007, means prices are up significantly for all but the most flexible leisure travelers…

  2. Thanks for chiming in, Rick. I always enjoy getting the FareCompare email updates.

    The problem is that these days, most of the big markets have overlap with low fare carriers. So, as you say, the regional markets get hit the most. I would think that this will only make it more compelling for people in smaller cities to drive to bigger ones since the fare difference will be greater.

    I have seen plenty of fare increases, as you say, but I’ve also seen fare sales come out from people like United, Frontier, and Virgin America at the very least.

    Does this not remind you of what we saw in 2000? I guess the difference is that many airlines have resisted the urge to add capacity, so they should be in a better position than they were back then, but that doesn’t mean the trends aren’t similar.

  3. This doesn’t mean the bigger markets don’t see the increase they do, especially for business travelers.

    The low cost airline overlap is more based on competition — than overlap only , if the low cost airlines owns the market share it is a non issue.

    As you noted, capacity is the key this time around, the supply and demand curve skews towards the airlines which allows for increases to be “stickier”.

    Airline analysts have this wonderful term called “pricing discipline” which basically means “quit competing on price” and compete on your outstanding service …

  4. The airfares have indeed become crazy lately.

    Case in point:
    I booked 3 ppl @ PHXDAY for business travel next week. It was a 7 day adv purchase fare. The roundtrip for the flights, with the corporate discount was $575 each (booking it as a roundtrip). Booking it as 3 ppl @ 2 one-ways (for the exact same flights) was $120+$150 each.

    Guess which way we booked it?

    I’ve been noticing a lot recently that the airlines are beginning to change their tune as to how flights are priced: a one-way fare = 1/2 of round trip fare, even for the cheap-o fares — I guess they’d rather have half of the pie and fill a seat even if it means giving a competitor half as well. Skyteam member airlines seem particularly good about this out of PHX. AA is about the only one that consistently does not play ball in this fashion out of PHX (maybe because they are the largest airline?). From a practical point of view, it just means that AA only wins my travel if they have empty planes (==lower fares) in _both_ directions at _both_ times I want to travel…

  5. So what I don’t get is why fuel surcharges haven’t taken on in the airline industry in any consistent form.

    When I worked in trucking logistics (and right next to sea cargo logistics.) the variable fuel surcharge based off the DOE’s numbers was our friend, it eased negotiations since we didn’t have to haggle over fuel.

    I understand from an average joe consumer standpoint why this might not work (and thus airlines would leave leisure fares out of a fuel surcharge scheme.) But, I as an airline would be willing to give a better corporate contract price if I didn’t have to put in a protection factor for fuel into my contract.

    If I were setting up a surcharge today in trucking (or for an airline, the numbers more or less work the same.) I’d offer a “surchargable” portion of the rate/fare, and the remainder would be fixed. Say 40% of the fare is surchargable, the remaining 60% is fixed. Sure its a little more complicated but a business contract could manage this. And I can see an online travel agent working out a way to take advantage of this as well..

    An aside, I though the airlines got rid of commissions to travel agents long long ago?

  6. You might think that they could implement a variable surcharge for corporate contracts. That would be an interesting idea to see if they could make it work. I think the problem is that if the competition doesn’t do it, it may be tough for one airline to do it. Still, it’s worth a shot.

    As for commissions, they got rid of traditional commissions, but the big players still get paid.

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