Several Asian airlines, including Cathay Pacific, China Air, All Nippon Airways and Eva Air have announced higher security charges on air cargo in recent weeks. These new charges are unsurprising, given that public pressure and government regulations have forced many Asian airlines to scrap fuel surcharges, at least in name. Higher security charges are simply the fuel surcharge in new clothing.
Like their counterparts in Europe, South America, and the United States, Asian airlines want the fuel surcharge to stay forever. But they also worry about how sellable their cargo space is. Airlines have found many different ways to disguise the fuel surcharge, when it’s not convenient for them. Many European and American airlines, for example, will bundle the fuel surcharge into their “all-in” price. The simpler structure helps airlines look like they are giving customers a better deal, but in fact still includes the surcharge.
We decided to do some digging on airline fuel surcharges, and whether they are here to stay. Why do airlines refuse to get rid of the fuel surcharge and work so hard to hide it within something else? The short answer: aggressive profits.
First of all, passengers and freight forwarding companies alike are irritated by fuel surcharges. Crude is down and relatively stable. Jet fuel prices are always a bit higher, but vary predictably with the price of oil. They’ve dropped from a high of around $140/barrel in 2011 to $45/barrel in April 2016 according to the IATA. There’s no justification for why airlines would still make a charge to cover high oil prices.
Governments are responding. The Hong Kong Civil Aviation Department announced in February it would no longer permit fuel surcharges for flights departing from Hong Kong due to the tumbling price of oil. Japan and Taiwan also regulate fuel surcharges, while other Asian airlines have been pressured by the public to drop the charges given that they are no longer warranted.
But fuel surcharges are still hanging on in all but name. For cargo shipments, there are three categories of charges: air freight base, security charges, and fuel surcharges. With fuel surcharges no longer credible, airlines are simply transferring the charge into either security charges or the air freight base. It doesn’t matter what the charges are called: airlines determine a price that covers their cost and makes an adequate profit and then split the price within these three categories. With one type of charge no longer in the picture, the charges have simply been moved into another category that might not be regulated by governments or scrutinized as much by the public. In Hong Kong, for example, the Civil Aviation Department doesn’t require airlines to obtain approval for security charges.
Fuel surcharges have existed since the first Iraq War. Notably, they have been bundled into passenger tickets prices and cargo charges since the price of oil climbed upwards sharply in 2011. On the surface, they help airlines cover the variable price of fuel, but there’s always been a rather loose association between the price of oil and the fuel surcharge. In reality, fuel surcharges have been important revenue generators.
Even when the price of crude started falling fast with no sign of slowing, airlines kept the fuel surcharge much to public dismay. Yes, it can partly be explained by the concept of a “fuel hedge.” Airlines had purchased oil at an earlier date to cover future flights, anticipating that oil prices would increase. But now that fuel prices were lower than before, the companies would be paying a higher price than the market rate for fuel.
But of course, a more important explanation is also at play. Airlines in Asia have struggled to become more profitable in recent years. Despite rising demand, overcapacity of supply has made the market much more competitive for airlines - several carriers will compete to supply the same routes. Airlines were making additional earnings from the fuel surcharge and they were able to pad the bottom line. Today, as exports out of Asia are low, they’re using the fuel surcharge to squeeze more money out of cargo shippers.
The fuel surcharge strategy is also a clever marketing tool. Airlines have designated fuel surcharges as an extra charge similar to government taxes. Airlines could essentially make charges without taking full responsibility for them. With fuel surcharges, airlines were saying to customers, “These are additional costs that are beyond our control.” Except in light of falling oil prices, it has been a clear choice on the part of airlines to keep the fuel surcharges, and only scrap them when pressed by governments and the public.
Finally, the fact that several Asian airlines have announced a higher “security charge” in recent weeks is a worrisome trend. While it’s common for airlines to copy each other’s pricing strategies, sometimes they can take it to another level. In the past, airlines have been known to collude on surcharges, to keep prices high for customers and profits soaring.
Photo courtesy of Ikarasawa