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Surcharges: Fair or foul?

By Hpanchal on October 31, 2011

From July to September, according to United Cargo’s calculations, the average jet fuel spot price came to $290 a barrel, which turned into a $0.90 surcharge on each kilogram.  This price seemed to echo the industry average. On October 17, the fuel surcharge Cargolux levied came out to €0.90 per kilogram; Emirates SkyCargo levied a $0.90 surcharge per kilogram.

But fuel surcharges actually cover a range of prices. OAG Cargo’s AFRA database for flights in the UK market showed that carriers were charging anywhere from £0.55 per kilogram to £1 per kilogram for fuel surcharges in mid-October.

To examine fuel surcharges further, take the case of China Airlines Cargo. On October 18, the carrier charged £0.67 from Europe to Asian destinations, but only £0.64 to the Middle East and Indian Subcontinent. Move to the U.S. market, and the charge is $1.05 per kilogram (the conversion then was about £0.61 per dollar). According to energy data provider Platts, fuel was at $128.8 per barrel during that period.

The Europe Brent Spot Price for jet fuel reached its peak in the summer months of 2008. China Cargo had risen quite a bit, starting out at £0.37 in May 2006, hitting a peak of £0.87 at the end of July, 2008, and dropping down to a low of £0.34 a year later.

Fuel price

Whatever the price, fuel costs industry officials at all levels significant cash. According to the International Air Transport Association, as of October 14, the impact of the average $127.50 per barrel global fuel price was more than $60 billion.

While fuel surcharge databases easily show the sometimes minute movements in surcharges, Imbriani says these shifts only loosely accompany changes in the price of fuel.

“They fluctuate some, but just like the price at the pump, it tends to go up faster than it comes down,” he says. “You’ll see fuel surcharges go up when fuel goes up, then you hear that fuel prices are coming down, but you don’t see [surcharges] come down as fast.”

The act of hedging — buying fuel at a set price now to use later — is primarily why the fuel surcharge doesn’t react to every change in the price of cruel oil. Van Doesburg doesn’t see anything wrong with this practice, but thinks shippers shouldn’t shoulder the burden when carriers make what amounts to a bad gamble on fuel.

He proposes that if airlines want to continue hedging, they should assume all the risk. If the price of fuel goes down after the airline sets a price, they should be able to keep that money, he said. But if they end up seeing a loss, that’s their problem as well.

One reason carriers are skittish about discussing surcharges is the U.S. Department of Justice’s ongoing price-fixing investigation. As a former assistant chief in the antitrust division of the DoJ, Mark Rosman can understand this feeling more than most.

In 2005, Lufthansa contacted Rosman’s office with a price-fixing mea culpa, and this lead to a seemingly never-ending string of plea deals featuring carriers all over the world. Their crime? Coordinating fuel and security surcharge rates.

Surcharges in themselves are not illegal, and there’s also nothing wrong with one carrier noticing that another carrier is asking customers for a bigger surcharge and following suit. “What is illegal, is the coordination and the direct communication about what their future plans are,” he says.

“Making a unilateral decision to follow somebody, that’s OK,” he continues. “But once the communication starts about what the intentions are, about what the expectations are about what each carrier is going to be doing, then you’re getting on very dangerous ground.”

Rosman subscribes to the prevailing wisdom that carriers decide to levy surcharges to make extra costs associated with volatile fuel prices and extra security measures more transparent to the customer.

But he is just as in the dark as van Doesburg or Imbriani when asked where the money goes. While surcharges were imposed to make up for the added price of fuel and screening, he thinks these fees have turned into revenue generators.

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Comments

Submitted by Mike on

Another option is for shippers to hedge their exposure to the fuel surcharge, something several shippers are already doing today.

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