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

  1. Jonathan says:

    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 says:

      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 says:

        > 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.

    • Noah says:

      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.

      • Arcanum says:

        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.

        • CF says:

          Arcanum – Speaking from a US perspective, the breakdown between fare and surcharge is opaque for nearly everyone. If you see a fare, it includes whatever surcharge is included to construct the fare. Now some airlines may let you click to break out the fare you see and that would display taxes and surcharges. But you will never see a fare published that excludes that surcharge so there is no shell game here.

          • Oliver says:

            I have read that surcharges aren’t subject to corporate discounts or kickbacks to travel agents (are there still any?). True?

            • CF says:

              Oliver – That can be the case, but that’s an issue for the company or
              agency to negotiate in the agreement. So yes, there is a benefit to the
              airline in that sense, but it doesn’t impact what the consumer sees.

  2. A says:

    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 airlines as their costs go up just as low oil prices should eliminate weak oil companies as their profits go down. An equilibrium will be found.

    • 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 on a city pair doesn’t have a fuel surcharge. (Say Emirates from the US to Johannesburg.) The former would be automatic, the latter would be via application to the DOT.

  3. BuriedInProvidence says:

    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.

    • 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.

  4. Bgriff says:

    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.

    • Arcanum says:

      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.

    • CF says:

      Bgriff – Fair point. Fuel surcharges mean nothing to someone buying a ticket, but they do mean something for award redemptions on some airlines.

  5. Kilroy says:

    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 fuel surcharge per mile based on DOE prices of fuel (currently said fuel surcharge runs ~$0.48/mile in the US, given or take a few pennies).

    I’m surprised that corporate travel departments haven’t tried to do just this with their top air routes, but I suppose that air travel demand and prices vary much more than they do for trucking.

    • CF says:

      Kilroy – It’s illegal. The feds decided that there can be no post-purchase price increases no matter what. I believe it was Allegiant that really wanted to offer two fares. One would be a low fare but you would pay a floating fuel surcharge. The other would be higher but would lock in fuel. They couldn’t do it based on the law.

      • Kilroy says:

        Got it, Brett. Thanks.

        What I described could still work if you used the fuel surcharge in place at the time of purchase (which would be close enough to actuals most of the time, given how few tix for business travelers are booked more than 14 days out), but I will be the first to admit that it is probably a bit too complex and may not be in the airlines’ interests to offer (or in the interests of those managing the travel budget for a company, for that matter).

        • Thank you for asking that Kilroy. I’ve thought the same thing. Though I can see it making sense at the time of purchase.

          I wonder if the airlines could work around this for corporate travel departments by making this part of a volume discount that is done quarterly or something.

          That being said, I’m surprised airlines haven’t lobbied for an exemption for “large sophisticated purchasers” John Doe shouldn’t have to understand fuel surcharges, but Jane COO sure should have to.

  6. David SF eastbay says:

    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 as an example (but they all do it), IAD-LHR fuel surcharge $414.00, IAD-NRT fuel surcharge $259.00. Both are nonstop flights and flying to Japan is a lot more miles/time in the air then to London, but the surcharge is way less. So that proves it’s not about fuel at all, but how much money UA (or any airline) can soak the traveler for depending on the destination.

    • CF says:

      David SF – They are not a scam because travelers never see them broken out when searching for fares unless they are specifically hunting for a breakdown. For the most part, it’s just an easy way to handle bulk fare changes. Why do you care if Dulles London has a fuel surcharge or not if the final price is going to be the same either way?

      I do agree they shouldn’t call it a fuel surcharge, and many airlines don’t.

      • Oliver says:

        Then what is it and why do (some) airlines charge it for “free” award tickets?

        What does “international surcharge” actually mean other than “we couldn’t be bothered to be creative in our naming”?

        • CF says:

          Oliver – International surcharge is fine by me. It’s just a made up name
          but it at least doesn’t lie about it being tied to a cost input.

          • Oliver says:

            Seems to me they called it fuel surcharge until people started demanding that it gets reduced when fuel prices dropped. So either the original name was a scam or the new one is.

    • Arcanum says:

      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 with airfares. That IAD-NRT flight might cost less than IAD-LHR or IAD-LAX regardless of fuel surcharges depending on market conditions.

      You assume the price of gasoline or corn flakes at least somewhat correlates with the underlying costs to produce the product. Airfare pricing is charlatanism.

  7. mandel.jerry1 says:

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

  8. Zack Rules says:

    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 capacity discipline airlines have stuck to over the past 5-6 years will fall by the wayside as a result of lower cost fuel. Southwest has been talking capacity increases as a result of fuel and Spirit has been adding planes rapidly. And don’t forget the airlines have been up-gauging from 50 seat jets to 76 and mainline planes, and to A321’s and 737-900ERs

  9. D-ROCK says:

    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 says:

      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 charge whatever amount they want. And since some airlines will charge First/Business class fares a higher surchange then coach, they some how are able to figure out that the front of the plane uses more fuel then the back of the airplane…LOL

    • CF says:

      D-ROCK – No. Well, I can’t speak for every country, but the answer is no for every one I’ve seen. In the US, the only percentage tax is on domestic travel and airlines don’t use YQ or YR surcharges domestically. (Q charges are part of the base fare and are taxed accordingly.) Internationally, taxes are flat rate and it doesn’t matter what the fare is.

  10. JayB says:

    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, recover some losses of stupid, or unwise fuel hedging, buy and pay for new, more efficient aircraft, Maybe, they get around to lowering my ticket prices.

    But, Isn’t it really just AA’s call? Let’s forget about thinking any fare is somehow the simple sum of a few cost elements and any change in any factor has to affect the final fare.

    Aren’t fares supposed to be the result of supply and demand, and OK, competition? But, is that how pricing is really going on today?

    Consolidations/mergers, use of contracting out to regionals, all manner of air fare rules, not to increase travel demand, but to regulate it, like the government did during regulation days, prohibiting customers from being able to re-sell tickets, making ticket pricing as complex as possible so consumers don’t really understand purchase options for even the simplest of point-to-point journeys, rules prohibiting hidden-city ticketing, using nested tickets to avoid minimum-stays, using a round-trip to avoid the higher cost one-way service, marketing flights as direct flights when they involve plane-changes, and on and on.

  11. lenniefalcon says:

    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!

  12. tivoboy says:

    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.

    • Say what? Where does the DOT say this?

      • tivoboy says:

        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 says:

        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. ;-)

  13. DesertGhost says:

    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 so many airlines have gone bankrupt.

  14. MeanMeosh says:

    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 a “fee” instead of a “fare” allows them to also reduce TA commissions, since those usually aren’t payable on ancillary fees, but again, just be honest and say we’re cutting the commissions. All this mealy-mouthed cloak and dagger just gives legs unnecessarily to the “consumer advocates” demanding idiocy like seat pitch regulations and bans on ancillary fees.

  15. Kilroy says:

    .

    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.

  16. Carl says:

    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, so routes and frequencies will increase

  17. Travelgal says:

    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.

  18. Dave says:

    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.

  19. Oliver says:

    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.

  20. Emily Garrigan says:

    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 down at all.

    • tivoboy says:

      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 says:

      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

  21. CZBB says:

    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, you can easily calculate from the airline’s total fuel bill and their total system ASM).

    A fuel surcharge is one thing, but when it exceeds the total fuel cost to the airline, it moves squarely into the fraudulent category.

    Some countries have gone as far as to completely ban them, such as Brazil.

  22. 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.

  23. ZuluLima says:

    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 match price and BOOM, cheaper tickets. These can happen multiple times per week across the whole of the domestic market. To make the point simple, you just can’t keep prices artificially high without price-fixing ot trusts, which are illegal. Just give it a few weeks/months to kick in. Competition will drive down prices.

    • MDawg says:

      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.

  24. Thomas says:

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

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