U.S. Airline Surcharges Set Record at $420 as Oil Prices Climb

United Continental Holdings Inc. (UAL), Delta Air Lines Inc. (DAL) and rival U.S. carriers added a record $420 in fuel surcharges to round-trip European fares as soaring oil prices propelled first-quarter losses.

Across the industry, surcharges are as much as 50 percent greater than those put in place when fuel prices reached a record three years ago, according to air-travel website BestFares.com.

Jet fuel has become airlines’ biggest operating expense, surpassing labor and climbing to an average $2.96 a gallon from January through March, up 41 percent from a year earlier. U.S. carriers raised surcharges and fares and trimmed expansion plans to try to preserve the full-year profitability achieved in 2010, when demand rebounded after the financial crisis.

“No one foresaw the dramatic increase that has occurred over the last three months,” Chief Executive Officer Gerard Arpey told American Airlines employees in an April 20 e-mail. “It is beyond frustrating to see the fruits of our labor wiped out by something over which we have seemingly little control.”

Combined first-quarter losses for the five biggest U.S. airlines widened to $951 million from $892 million a year earlier. Among the five, only Southwest Airlines Co. (LUV) reported a profit.

Adding surcharges, which airlines have used on international flights for decades, is easier than boosting prices because fees are applied to thousands of ticket-pricing algorithms at once. Fare increases are set for individual routes and time frames, then adjusted if competitors don’t match.

‘Getting Smarter’

“There’s no question they’re getting smarter about it,” said Michael Derchin, a CRT Capital Group LLC analyst in Stamford, Connecticut. “Even if fuel prices go down a little, you can bet that the surcharges will stay because they need it.”

American parent AMR Corp. (AMR), based in Fort Worth, Texas, was unable to overcome a 25 percent surge in fuel spending even after sales jumped 9.2 percent in the first quarter. The $1.84 billion fuel bill represented almost a third of total operating expenses.

United’s fuel expenses climbed $725 million from a year earlier, or about 35 percent, and hedging blunted about $154 million of that, Chief Financial Officer Zane Rowe said on a conference call after the Chicago-based company’s April 21 earnings report.

“Surcharges are the most effective tool for passing through higher fuel prices” for international routes, Chief Revenue Officer Jim Compton said on the call. Those fees have risen 26 percent this year on Atlantic flights, 42 percent for Latin American routes and 47 percent across the Pacific.

‘Veiled Fare Increase’

Some consultants questioned the extent of airlines’ surcharges, because the increases are outpacing fuel-price gains. Jet fuel for immediate delivery in New York Harbor closed at $3.39 a gallon yesterday, about 22 percent less than the July 2008 record of $4.36 a gallon, according to data compiled by Bloomberg.

“It seems airlines have come to rely on fuel surcharges as a veiled fare increase,” said Jay Sorensen, a former Midwest Airlines marketing director who is now an aviation consultant at IdeaWorks in Shorewood, Wisconsin. “The fuel surcharge should truly reflect the cost of fuel. If they are rising in excess of that, that is an abuse.”

Jet fuel climbed 29 percent from the end of last year through April 25, matching the increase in the same period of 2008, said Jean Medina, spokeswoman for the Air Transport Association, the lobbying group for the largest U.S. airlines.

Covering Costs

“In 2008, the airlines lost $23.7 billion,” she said in an e-mailed statement. “Fuel is the airlines’ single largest expense, and due in large part to skyrocketing fuel prices, carriers lost $1 billion in the first quarter alone. Like any business, airlines must be able to cover their costs.”

The $420 surcharge on U.S.-Europe flights, which make up one of the most competitive international markets, compares with $330 in the summer of 2008 when fuel prices peaked, said Tom Parsons, chief executive of BestFares.com. The prevailing U.S.- London surcharge is $362, up from $302 in the 2008 period, he said.

Fuel surcharges between the U.S. and some countries in South America are as much as $580 round trip today, up from $390 in 2008, said Parsons, who compiles fare data in part from Sabre Holdings Corp. The fee on flights between the U.S. and Sydney is $500 now, compared with $220 in mid-2008, he said.

Surcharge Influences

The Bloomberg U.S. Airlines Index slumped 11 percent this year through yesterday, compared with a 32 percent jump in jet fuel. Rising prices for crude oil, which is refined into jet fuel, also can slow economic growth and discourage lucrative business travel.

From April through June 2008, use of surcharges climbed 48 percent overall, said Zachary Wynne, a marketing analyst at Washington-based ATPCO, which collects and distributes airline fares worldwide.

The surcharges are influenced by local government regulations, flight distance and airline competition, said Tim Smith, an American Airlines spokesman.

Surcharges usually are the same among major carriers, and may be lower in markets with more competition, said Rick Seaney, CEO of Dallas-based FareCompare.com.

‘Hard to Argue’

An added benefit of the surcharges for carriers is that they’re not taxed and contractual corporate fare-discount agreements don’t apply, said Howard Brooks, the global travel practice leader at ICG Commerce, which helps companies including Whirlpool Corp. and Kimberly-Clark Corp. lower their travel spending. ICG Commerce is based in King of Prussia, Pennsylvania.

“Fuel surcharges are very hard to argue with,” Brooks said. “As long as airlines treat this as a reimbursement of actual costs and not a profit-maker to them, then there aren’t many things that can be done about it.”

United, the world’s largest carrier, expects to spend almost $13 billion on fuel this year, up more than $3 billion from 2010, said Christen David, a spokeswoman. The company was formed in the October merger of United and Continental airlines.

US Airways Group Inc. (LCC) will pay about $1.4 billion more for fuel this year than last, double what the carrier budgeted for, Chief Financial Officer Derek Kerr said on April 6.

‘Basic Fundamental’

Delta’s bill for fuel and related taxes rose about $610 million to $2.63 billion in this year’s first quarter compared with the same period in 2010. The company said it saved about $78 million through fuel hedges in the period.

For the full year, the Atlanta-based carrier said it would spend about $3 billion more on fuel than last year.

“As you see fuel rise and continue to rise over the course of the next few months, you can expect ticket prices to increase,” Delta President Ed Bastian said on an April 26 conference call. “That’s a fairly basic fundamental.”

In addition to boosting surcharges, four of the five biggest U.S. airlines -- United, Delta, American and Tempe, Arizona-based US Airways -- have trimmed capacity growth plans this year.

Delta is recouping about 70 percent of its costs and that “isn’t enough,” CEO Richard Anderson said on the call. “We must fully recapture our cost on every flight every day to maintain and improve our earnings performance.”

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net; Sonja Elmquist in New York at selmquist1@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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