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Consumer group Choice pushes for fuel surcharge reductions

written by australianaviation.com.au | December 2, 2014
Global fuel prices have fallen 40 per cent in 2014. (Boeing)
Global fuel prices have fallen 40 per cent in 2014. (Boeing)

Fuel surcharges should be lowered in line with the recent declines in the price of fuel, a consumer group says.

Choice head of media Tom Godfrey says airlines should pass on any savings they get from lower fuel prices to consumers.

“Continuing to charge a surcharge when prices are no longer high seems a bit disingenuous,” Godfrey said on Tuesday.

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“We don’t think they should maintain the fuel surcharge at the current level.”

Global oil prices have touched a four-year low, reaching US$66.15 per barrel at the end Friday’s trade in New York.

Oil, which has slid about 40 per cent since June when the price was more than US$100 a barrel, came under huge pressure at the end of November when the Organisation of Petroleum Exporting Countries (OPEC) decided to not reduce production as a way to stop the decline.

It has recovered slightly at the start of the new trading week.

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White Funds investment manager Peter Borkovec said it was understandable airlines would be reluctant to reduce fuel surcharges, given the massive losses posted by both Qantas and Virgin in the past 12 months.

“They have got a lot to heal from and there have been a lot of self-inflicted wounds through the capacity growth,” Borkovec said on Tuesday.

“I think there they will take a bit of time to take these charges off unless there is huge public pressure to do it.”

Opinion is divided on whether there was potential for further oil price declines or that the market would rebound, which was understandable given the volatility in the sector right now.

That volatility explains the caution from Virgin Australia chief executive John Borghetti, who said it was too soon talk about what, if any, relief would come from lower fuel prices.

“It is a little bit early for people to jump to conclusions that the world has changed dramatically on fuel,” Borghetti told reporters after the airline’s annual general meeting in Brisbane on November 19.

“Before you jump to conclusions about fuel, you have to remember we have a hedging program in place and as such you don’t see the benefits, the full benefits, of the fuel decline for a period of time until you catch up to that.”

By contrast, AirAsia group chief executive Tony Fernandes was delighted with the recent price drop, describing the move a “massive” for both AirAsia and AirAsia X.

“Early Xmas present as hardly hedged in 2015,” Fernandes wrote on his Twitter account on November 28.

Currently, Qantas’s fuel surcharge is A$570 for a return ticket from Australia to Europe in economy class, A$770 for premium economy and A$1,080 for business and first class tickets.

Those travelling Qantas to the United States fork out A$680 in economy and premium economy, while those in business and first pay A$780.

Virgin had no current plans to make any changes to its fuel surcharges, while Qantas has said previously the fuel surcharges on its tickets have not fully recovered the increased cost of fuel in recent times.

Qantas said recently it had hedged 85 per cent of its fuel requirement for the second half of 2014/15.

“At current rates, Qantas retains a 70 per cent participation rate to lower fuel prices in the half,” Qantas said in its latest operating statistics released on November 28.

Virgin Australia’s fuel surcharge for a return trip from Sydney to Los Angeles in economy was about A$680.

The drop in oil prices prompted a rally in airline stocks around the world, with some market analysts upgrading their earnings forecasts for airlines such as Qantas and others.

Qantas shares were up about 80 per cent so far in 2014 and touched $2 for the first time since the middle of 2011 last week.

Virgin stock had risen about nine per cent in 2014. However, there was less liquidity of Virgin shares, given about 80 per cent of the company was owned by four major shareholders – Singapore Airlines, Air New Zealand, UK-based Virgin Group and Etihad Airways.

Borkovec said the nature of oil hedging contracts, coupled with a weaker Australian dollar and a domestic market that is still dealing with the issue of extra capacity, meant it was difficult to determine how much airlines would benefit from the oil price movements.

“It is hard to look at these things,” Borkovec said.

“It is a bit blurry with regards to hedging unless you have an internal understanding of the costs they have locked in with these contracts.”

With oil priced in US dollars, a lower Australian dollar means the benefits of any fall in oil prices is offset by the weaker currency.

Some jurisdictions such as Brazil expressly prohibited fuel surcharges on flight tickets, while in Hong Kong the Civil Aviation Authority regulated the level of fuel surcharges airlines were allowed to impose on passengers.

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Consumer group Choice pushes for fuel surcharge reductions Comment

  • Brian

    says:

    The “fuel surcharge” is hocus pocus ! Required many years ago for a brief period of time, it became nothing more than a “fare increase” which is what it remains to this day. The airlines of the world have always avoided discussing this “surcharge” as they know their argument for needing the “fuel surcharge” has been a falsehood since 18 months after it was introduced.

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