Fuel surcharge, what fuel surcharge?

By Jamie Robertson
Business reporter, BBC News

image copyrightGetty Images
image captionNo charge - fuel surcharges have all but disappeared

Remember the fuel surcharge imposed by the airlines when oil prices started to rise?

Now with oil at a 12 year low, below $30 a barrel, how can airlines possibly be hitting passengers with a surcharge for jet fuel?

The point is they aren't.

But before you crack open the champagne and book a quick flight off to the Maldives - those surcharges haven't gone away.

They're just not for fuel any more. They're for - well it's not quite clear what they are for, apart from maintaining profit margins at the airlines.

To recap: the surcharges were introduced as a way for the airlines to distance themselves from the rising cost of oil, in the same way that they itemised government taxes on their bills.

Travel writer Simon Calder explains: "It was a way for the airline to say "this is nothing to do with us - don't blame us for the price rises".

Even when oil prices began to fall, for a while fuel surcharges were still acceptable because the airlines had hedged, buying much of that oil when the price was high.

"And let's not forget the oil price is paid in dollars and the dollar has been very strong over the last year," he adds.

Impossible to defend

That has meant that savings have been slow to come through. The International Air Transport Association (IATA) reckons the final hedges which locked airlines into higher than market oil prices will unwind by mid-2016.

Even so, as the oil price raced downwards, the surcharge became virtually impossible to defend.

image copyrightGetty Images
image captionQantas was one of the airlines that rolled the fuel charge into its basic fare last year

And, more important, the regulators were not going to let the airlines hoodwink their passengers.

In 2012 the US Department of Transportation had ruled: "When a cost component is described as a fuel surcharge … that amount must actually reflect a reasonable estimate of the per-passenger fuel costs incurred by the carrier".

So bit by bit the fuel surcharge has disappeared.

Has that meant fares have come down?

IATA's chief economist Brian Pearce says: "In 2015 air ticket prices on average still fell by around 5% (adjusted for exchange rate changes) and we expect similar reductions in 2016.

"That's a substantial reduction because at the same time airlines are seeing the costs like labour and airport charges going up."

The end of the surcharge?

But the interesting point is how the airlines have removed the surcharge.

Some airlines like Qantas and Virgin Australia did get rid of it altogether and absorbed it into their basic fare early last year.

Many of the budget airlines, such as Ryanair, boasted that they never had a fuel surcharge in the first place.

A few held on to it, most notably in Japan where it is strictly regulated, and accurately reflects the falling cost.

So the fuel surcharge for a JAL flight from Japan to Korea at the beginning of 2015 stood at 1,000 yen (£5.80; $8.40). A year later and it has sunk to 300 yen.

But many of the other airlines simply removed the fuel surcharge and replaced it with something different, often described as a "carrier imposed surcharge".

What that means is not exactly clear.

image copyrightGetty Images
image captionBA is one of the airlines charging a carrier imposed surcharge

For instance BA's explanation of the charge is as follows: "Carrier imposed charges were introduced in October last year in response to a variety of factors.

"These include changing industry practices and to be consistent with changes that have been in place for flights originating in the USA for a number of years."

Lufthansa is slightly more illuminating. It introduced an "international surcharge" in 2014. Spokesman Boris Ogursky says: "The surcharge covers costs beyond our control such as air traffic control fees, emissions trading scheme payments and so on.

"It is important for the customer to compare the overall cost of the flight with other airlines. The total fare is steered by market competition - it's not just us making up surcharges and putting them up and down as we like.

"It is a highly competitive marketplace."

The frequent flyer

In some respects the name of the surcharge is irrelevant. As Simon Calder says: "You could call it a uniform charge if you want, and you can say it's to cover the cost of uniforms, it matters not a jot.

"It is just another way of charging the passenger."

However, it does matter to frequent flyers. In general, frequent flyer points can only be redeemed in exchange for basic fares. Surcharges and government taxes, with some exceptions, have to be paid for with cash.

So, by framing a large chunk of the fare as a surcharge, airlines can protect that income from discounts and loyalty scheme claims.

The bottom line could come as a bit of a shock to a frequent flyer eagerly queuing up to redeem points to buy a British Airways round trip to New York, say.

If they leave early this Saturday and come back on Wednesday, they will be faced with a total fare of £523.55.

Of that £155 is government taxes. No chance the frequent flyer points (known as Avios to BA customers) will pay for that.

£163 of the fare is the carrier imposed surcharge. The points won't pay for that either - unless there is a special offer available.

In the end the points will pay for just £205 of the £523.55 fare. The frequent flyer (not the points) ends up paying the rest.

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