Published August 25, 2008

Airlines unlikely to cut fuel surcharges soon

They say levy not enough to offset costs incurred from higher jet fuel prices

By NISHA RAMCHANDANI
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OIL prices may have dropped, but travellers are unlikely to see this translating to lower fuel surcharges just yet as far as airlines are concerned.

Sky-high oil prices: But most airlines are hesitant to increase fuel surcharges and are adopting a wait-and-see approach

In fact, for some airlines, the implementation of higher fuel surcharges came so late in the game that current surcharges aren't nearly enough to offset incurred costs from higher jet fuel prices.

Crude oil prices are currently about US$119 per barrel, down from a high of US$145 per barrel on July 3. However, jet fuel is costlier than crude oil, as it has to go through a refinement process, which results in additional costs through the refining margin (or crack spread).

Most airlines are hesitant to jump the gun and seem to be adopting a wait-and-see approach.

'We will continue to monitor the price of jet fuel and keep the application of fuel surcharge under review. We base the application of the fuel surcharge on longer-term trend movements in the price of jet fuel,' said Stephen Forshaw, vice-president of public affairs for Singapore Airlines (SIA). He adds that the fuel surcharge recovers slightly less than half of the extra costs as a result of higher jet fuel prices.

Cathay Pacific, which just raised its fuel surcharges by about 30 per cent from Aug 1, also pointed out that the fuel surcharges are still doing very little to mitigate costs.

'At present, it's not even covering 50 per cent. We've lost a big amount because of fuel,' a spokesman for Cathay Pacific told BT.

The airline posted its first loss since the SARS epidemic in 2003, as a result of fuel costs nearly doubling, according to a recent Bloomberg report. For 1H08, Cathay Pacific registered a loss of HK$663 million (S$120 million). Still, the airline remains conscious of the fact that raising fuel surcharges too high will adversely affect demand. 'It's a balancing act,' the spokesman said.

Malaysia Airlines also confirmed that it currently has no plans to revise fuel surcharges. Malaysia Airlines' chief financial officer, Tengku Azmil Zahruddin, had told BT in recent weeks that MAS was closely monitoring the oil price situation, given its volatility.

'Decisions on fuel surcharge will be based on the movement of the fuel price over a period of time rather than what could possibly be just a short-term decrease.' MAS reiterated that fuel surcharges represent only partial relief from jet fuel prices.

Australia's Qantas highlighted that even though fuel prices may have dipped of late, fuel prices year-on-year have still increased significantly. 'While the prices have come down, there is still a $1.6 billion year-on-year fuel price increase from 2007 to 2008-09 at current prices,' said a Qantas spokesman.

Airlines were slow to introduce surcharges last year and now the surcharges are a means of playing catch up, said Kurt Knackstedt, head of advisory services for American Express Business Travel (Japan, Asia Pacific and Australia). 'Costs have not come down. The market is still too volatile to question.'

While some airlines have opted for higher fuel surcharges, other airlines such as Emirates and some Japanese carriers have chosen to go the route of increasing base fares to offset costs.

Airlines haven't quite 'found the perfect model', said Mr Knackstedt. 'Raising base fares makes the airline uncompetitive. There is also the desire to maintain transparency,' he added.

Jet Airways' regional VP for South-east Asia, Gerry Oh, says the airline will keep in line with industry players. 'We don't know if this is a temporary slide. If the major airlines adjust, we will evaluate according to the industry,' he said, adding that Jet Airways' fuel surcharges are comparable to SIA's.

Singapore Airlines has raised fuel surcharges three times so far over the course of this year. Fuel surcharges for flights between Singapore and Asean countries increased from US$26 in December to US$40 per sector currently. US-bound flights come with extras of US$180 per sector - from US$123 - while all other flights have surcharges of US$110 per sector, from US$75 previously.

However, there have been instances in the past where SIA has reduced fuel surcharges in response to sustained reductions in the price of jet fuel - once in October 2006 and a further reduction in January 2007.