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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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