Fuel surcharge a real threat to airlines
www.globeandmail.com By AMANDA LANG
Monday, January 27, 2003 – Page B6
There is a notice posted inside Heathrow airport in London that surely wins a world-class award for subtext. "It is unlawful to strike airport employees," it reads, which raises the question: Do employees face injury on a regular basis? It may as well add, "no matter how annoying they are." The physical abuse isn't funny, of course, it's just that airlines -- like divorce lawyers -- see us at our worst. They are easy marks for humour or scorn because we tend to be overwrought or at least nervous around them.
That may be why it was so easy to make fun of WestJet,beloved Western no-frills airline -- which reports earnings this week -- when it recently implemented a fuel surcharge.
It must have been a painful decision for the company; WestJet vocally opposed such charges in the past.
But the length of time that oil prices have stayed uncomfortably high is taking many by surprise and the airline finally succumbed, saying it would start defraying the additional cost by implementing a surcharge that ranges from $5 per ticket on short-haul flights to $10 on flights more than 1,600 kilometres.
The rationale behind the surcharge is clear: Fuel is one of the biggest costs for an airline, along with labour costs and the planes themselves. Many airlines slapped on the surcharge in the past when oil prices sent fuel costs to levels they hadn't predicted.
But this is where the issue gets a little troublesome. Surely, if one of your top three costs is fuel, predicting its price is an important part of doing business. Hedging prices, or buying contracts in the forward market to ensure price stability -- while it may not guarantee the cheapest rate -- is common practice.
The current combination of events that is keeping oil priced at two-year highs -- the war premium that by some estimates is adding $4 to $6 a barrel, and a strike in top-producing Venezuela -- could hardly have been guessed at a year and a half ago. So for many airlines and other transportation firms, fuel costs have been taking a bite out of margins.
But that still doesn't explain why airlines have been permitted to separate out that cost. After all, when you buy a pizza the price doesn't come with a base rate, plus the prevailing stipend to cover fluctuating cheese prices. It would be shoddy marketing if it did, since we buy our products and services already assembled for a reason, namely to ease the purchasing decision.
While your local pizza place is probably not going to complicate its pricing system any time soon, the chances of the airlines simplifying their methods isn't highly likely.
In fact, the list of add-ons seems to be growing, not shrinking. In part that is because the airlines are labouring under a new tax that most industry analysts want to see abolished or at least reduced dramatically.
The Air Travelers Security Charge shows up as an additional cost after the advertised or listed price of a ticket, although for self-preservation, agents or airline representatives often quote a price that includes the tax. If the tax were a permanent item there would be a strong case that airlines shouldn't separate it. The logic is the same as the fuel surcharge: Airport and airline security is surely an important part of doing business.
But since it is a new tax, many are hoping it will disappear once the perceived risk of terrorism subsides.
But leaving aside how well the money is being deployed by government on security, the ATSC is a real threat to the health of Canadian airlines.
Analysts calculate that on pricier tickets, the tax amounts to 7 per cent of the total. But on cheaper fares, that percentage rises. For tickets in the $400 range, the tax is 10 per cent. It jumps to 14 per cent on fares between $200 and $300, and a whopping 23 per cent on tickets priced between $100 and $200. But the worst aspect of the tax, according to analysts, is that it gets at the high-growth low-cost fares most of all. The tax is more than 40 per cent of the base fare for tickets priced below $100.
The tax should either be abolished or made more progressive. And until there is clarity on its future, airlines will continue to list it as a separate line item -- along with fuel surcharges and who knows, maybe one day soon, peanut costs. Amanda Lang is the host of AM Business on Report on Business Television and CTV. She can be reached at alang@robtv.com