How Fuel Fees Are Keeping Airfares AloftBy and
As fuel prices have soared over the past year, airlines have looked to fliers to help shoulder the burden. Rather than relying solely on higher fares, carriers are embracing an alternate revenue savior: fuel surcharges. The levies—paid in addition to the standard airfare—can be hefty. U.S. airlines including United Continental Holdings (UAL) and Delta Air Lines (DAL) have recently instituted a record $420 fuel surcharge for some round-trip fares to Europe. Across the industry, current surcharges are as much as 50 percent greater than those put in place when fuel prices hit a record three years ago, according to air-travel website BestFares.com. Now fuel accounts for almost half of some fliers' tabs. On a Delta flight from New York to London next month, for example, the $362 fuel surcharge accounts for a full 40 percent of the $897 roundtrip ticket price.
"[Airlines] are getting smarter," says Michael Derchin, an analyst at CRT Capital Group. "Even if fuel prices go down a little, you can bet that the surcharges will stay because they need it."
That's because the average price of jet fuel in the first quarter was up 41 percent from a year earlier, making fuel airlines' biggest operating expense, surpassing labor costs. United, the world's largest carrier, expects to spend almost $13 billion on fuel this year, up more than $3 billion from 2010. US Airways Group (LCC) will pay about $1.4 billion more for fuel this year than last, double what the carrier budgeted, according to Chief Financial Officer Derek J. Kerr. "It is beyond frustrating to see the fruits of our labor wiped out by something over which we have seemingly little control," Gerard J. Arpey, chief executive officer of American Airlines' parent AMR (AMR), wrote employees in April. Combined first-quarter losses for the five biggest U.S. airlines widened to $951 million from $892 million a year earlier. Among those leaders, only Southwest Airlines (LUV) reported a profit.
Airlines have used fuel levies on international flights for decades. (Domestic surcharges haven't been widely used since the 2008 energy price spike.) On United, those fees have risen 26 percent this year on Atlantic flights, 42 percent for Latin American routes, and 47 percent across the Pacific. Fare increases must be set for individual routes and time frames, then adjusted if rivals don't match. Adding fuel surcharges is easier because fees are applied to thousands of ticket-pricing algorithms at once. "Surcharges are the most effective tool for passing through higher fuel prices" for international routes, says United Continental's Chief Revenue Officer Jim Compton.
Some consultants say increases in the levies sometimes outpace fuel-price gains. "It seems airlines have come to rely on fuel surcharges as a veiled fare increase," says Jay Sorensen, a former Midwest Airlines (RJET) marketing director who is now an aviation consultant at IdeaWorks. Jean Medina, spokeswoman for the Air Transport Association, a U.S. airline lobbying group, says carriers need flexibility to respond to fuel-price hikes. "Like any business, airlines must be able to cover their costs," she says.
An added benefit of surcharges for carriers is that they're not taxed and aren't subject to fare-discount agreements carriers have with some big corporations, says Howard Brooks, the global travel practice leader at ICG Commerce, which helps companies including Whirlpool (WHR) and Kimberly-Clark (KMB) lower their travel spending. "Fuel surcharges are very hard to argue with," Brooks says. "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."
The bottom line: After losing about $1 billion in the first quarter, U.S. airlines are increasing fuel surcharges to offset soaring jet fuel costs.