Airline Price Hikes - Fueling Fare Confusion
(February 2000)
In the wake of fuel surcharges for cargo operations
implemented earlier this month, twelve major airlines have begun to
add a surcharge for higher fuel costs. The surcharge, which will
cost consumers millions of dollars, applies to all domestic flights
beginning Feb. 1 and is not included in quoted fares, though it does
appear on tickets.
The Department of Transportation (DOT) notified
airlines that they cannot list the surcharge separately in ads or in
computer reservations systems (CRS) but must show it as part of the
fare. The DOT stated only government-imposed fees and taxes can be
listed separately. Interestingly, United increased international
fares by 3%, which was quickly matched by competitors. They claim
this isn't a fuel surcharge, but a fare increase. Domestically, the
fare increase is called a "surcharge", but not a fare increase.
So, is it a surcharge, a fare hike, or both?
Confusing, isn't it? Whatever it's called, it means flying just got
a bit more expensive.
The surcharge applies to all fares for travel on the
following airlines:
Airlines with varying fuel surcharges
· Alaska Airlines ($5.00 one-way- $10.00 round-trip)
· Hawaiian Airlines ($3.00 one-way- $6.00 round-trip)
· Midway Airlines ($3.00 one-way- $6.00 round-trip,
applies to business fares)
· Southwest Airlines ($2 to $4 one-way and from $4 to
$8 round-trip, based on mileage)
Airlines charging $10 one way- $20 round trip fuel
surcharge
· America West (no surcharge on competing routes with
Southwest Airlines)
· American Airlines (no surcharge on competing routes
with Southwest Airlines or AirTran)
· Continental Airlines (no surcharge on competing
routes with Southwest Airlines or AirTran)
· Delta Air Lines (no surcharge on competing routes
with Southwest Airlines or AirTran)
· Northwest Airlines (no surcharge on competing routes
with Southwest Airlines or AirTran)
· TWA
· United Airlines (no surcharge on competing routes
with Southwest Airlines or AirTran)
· US Airways (surcharge on leisure fares only. No
surcharge on business fares or routes competing with Southwest
Airlines or AirTran Airways)
Airlines not charging a surcharge
· AirTran Airways
· Aloha Airlines
· American Trans Air- (ATA)
· Frontier Airlines
· National Airlines
· ProAir
· Tower Air
· Vanguard Airlines
Continental was the first to add the $10 one-way ($20
round-trip) surcharge for passenger tickets, followed by American,
Delta, Northwest, and United. US Airways played in-and-out by being
one of the last airlines to add the surcharge, then backed out, only
to jump back in again.
Airlines implemented the surcharges on all domestic
tickets to compensate for the extremely high prices of jet fuel.
Wall Street aviation analysts said the surcharges are justified
because the cost of fuel, at its highest level in nine years, is
cutting into airline profits. Last week's price of crude oil was
more than double the levels from a year ago - at the highest prices
since the Gulf War.
Hedging The Future
Higher prices aside, are the hikes necessary for all
airlines? It Depends. Jet fuel is such an expense for airlines, and
because prices change often, many carriers use hedging programs to
offset the spikes associated with the worldwide market pricing of
crude oil.
So, what is hedging? Fuel hedging locks in a certain
price for future delivery of the fuel. With a hedge, you pay a fee
to buy fuel later at today's prices. It is used mainly as protection
against rising fuel prices. It can be risky since fuel must rise
more than the price of the hedge to make it worthwhile. If you guess
wrong on the direction of future fuel prices you could be out the
hedging fee and pay more for fuel than everyone else.
However, several airlines have been very successful in
the timing of their fuel hedging, and have saved millions. For
example, in the fourth quarter of 1999 Delta Air Lines saved $114
million, American Airlines saved $90 million, America West $11
million, and United says it saved 10 cents per gallon in the fourth
quarter. Despite the savings from hedging, fuel costs rose between
9-25% for each carrier.
Airlines that did not hedge their fuel have been
severely impacted. US Airways reported a 60% increase in fuel costs
in the fourth quarter. Southwest reported a 71 percent increase.
Nonetheless, US Airways backed out of the surcharge one day and
jumped back in the next day with surcharges on leisure fares only,
and no surcharges where it competes with Southwest and AirTran.
Southwest opted for a modest $2-$4 surcharge per segment based on
mileage.
Is It Permanent?
Technically, a surcharge should be temporary. Many
aviation analysts predict jet fuel prices will go lower later this
year. When this does happens, airlines will save millions. Will they
pass the savings on to consumers? They should. With the political
pressure surrounding the airlines' new "Customers First" policies,
they would be foolish not to. However, knowing the airlines' past
history on similar issues, skeptics believe the surcharge will be
rolled into a general fare increase.
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