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 The Brancatelli File

joe The (DIRTY) LAUNDRY LIST
OF FUEL-SURCHARGE OUTRAGES


BY JOE BRANCATELLI

January 27, 2000 -- There is so much wrong with the new airline fuel surcharges on so many moral, financial and philosophical levels that I'd need 9,000 words to explain it all.

But I only get about 900 words, so there's only room for a (dirty) laundry list of the airlines' egregious offenses.

HOW TO LOSE FRIENDS AND INFURIATE PASSENGERS
Security analysts estimate that U.S. airlines earned a profit windfall of $2 billion in fiscal 1998 thanks to the plummeting cost of jet fuel. Not a dime of that was ever rebated to customers, not a dime went toward lowering airfares. But now that jet fuel prices are rising, the major full-service airlines expect you to pay for the increase via a $10 one-way/$20 round-trip surcharge on virtually every domestic itinerary. Unlike gasoline stations and home heating-oil providers--businesses that lower retail prices when energy costs decline and raise them when oil costs increase--the airlines have adopted a unique financial model: When fuel prices go down, it's their profit to pocket. When energy prices rise, it's your cost to bear.

FARE INCREASES? WHAT FARE INCREASES?
The airlines are quick to note how relentlessly jet fuel prices rose during 1999. To be fair, the numbers are hard to dispute. Early last January, jet fuel was selling for 38 cents a gallon on the spot market. By late December, the price was 75 cents a gallon. But what the airlines conveniently forget to mention is that airfares rose just as rapidly during 1999. The airlines pushed through six across-the-board fare increases last year. In fact, unrestricted "walk-up" fares today are 17.5 percent higher on most domestic routes than they were at the beginning of last year. By contrast, the national Consumer Price Index increased by approximately 2.5 percent last year. If that extra 15 percent wasn't designed to offset rising jet fuel prices, what did it cover? Honey roasting the peanuts?

FUN WITH FIGURES
Airlines will tell anyone who'll listen--and, unfortunately, too many mainstream media pundits listen--that the rising cost of jet fuel on the spot market has made the surcharges unavoidable. Yet the simple fact of the matter is that airlines buy less than 10 percent of their jet fuel on the spot market. All the major carriers aggressively hedge their fuel purchases and thus pay much less per gallon than current spot-market prices. But, just for fun, let's spitball some figures: the average of the January, 1999, spot-market price (38 cents) and the December, 1999, spot-market price (75 cents) is 56.5 cents. Do you know what the airlines paid on average for jet fuel during 1998, the year they reaped that $2 billion windfall? According to analysts at BT Alex Brown, airlines paid an average of 54.4 cents a gallon in 1998. With surcharges pegged at $20 per round-trip, you're paying $10 for each extra penny the airlines paid for fuel.

COST SAVINGS? WHAT COST SAVINGS?
While airlines reaped windfall profits during the late 1990s thanks to the low price of jet fuel, they also slashed their operating costs. Less than five years ago, airlines paid travel agents a 10 percent commission on every ticket they wrote. Now it's just five. That has reduced airline expenses by several billion dollars during the intervening years. And what about electronic tickets, which the airlines have stuffed down our collective throat? According to industry executives, paper tickets cost about $8 each to process. An electronic ticket costs less than a buck. More than half of all tickets these days are electronic, thus saving the airlines additional tens of millions of dollars. How much of these savings have the airlines passed along to you in the form of a rebate or lower fares? Zero.

A FARE INCREASE BY ANY OTHER NAME
Some credulous observers believe the airlines deserve credit for adding a fuel surcharge to tickets rather than raising airfares. These folks believe the carriers did the honorable thing by unbundling the higher cost of fuel from the base fares. But we know better. We know airlines have no honor. The airlines imposed fuel surcharges rather than raise fares for two reasons--and both of them benefit the carriers financially. Reason one: Surcharges are not subject to the corporate-discount arrangements that carriers have negotiated with large companies. That means corporate travelers pay the full $10 one-way/$20 round-trip surcharge. Reason two: Surcharges are not subject to travel-agent commissions. That means agents, who still write about 80 percent of the nation's tickets, collect the surcharges, but don't get even their measly 5 percent cut. In case you hadn't already guessed, the airlines hate to share the booty when they're jacking up your prices.

THEY'VE GOT A SECRET
If you need further proof of the airlines' venality, consider the manner in which these surcharges appeared last week. Rather than own up to their actions, the airlines slipped the surcharges into their pricing computers and hoped no one would notice. There was no public announcement of the fees and, once they were discovered by journalists and fare watchers, no airline executive would discuss them for attribution. Contrast this code of silence to what happened a few days after Christmas when airlines began adding fuel surcharges on cargo shipments. Those surcharges were publicly announced--and at least one airline gave shippers 30 days advance notice. The obvious conclusion: Airlines don't believe you deserve the same courtesy they extend to their cargo.

This column originally appeared at biztravel.com.

Copyright 1993-2004 by Joe Brancatelli. All rights reserved.