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Posted: February 10, 2009

What gives?

Fuel surcharges are sticking around

Robert Polk

Recently I have been asked why the airlines have not lowered or eliminated the fuel surcharges that were instituted last summer when oil was $160 per barrel. We all know that oil today is in the $40 per barrel range. So why are we still paying these surcharges?  And why are we still paying for baggage, soft drinks, pillows and blankets? 

The simple reason is this: airlines are just not profitable. 

All of the domestic carriers have now reported fourth quarter results. The large legacy carriers --United, American, Delta, Continental and USAir-- all reported operating losses. The low-cost carriers, such as Southwest, jetBlue, airTran and Frontier, for the most part made a little money. 

Last summer, when oil prices were soaring, many airlines bet that they would keep soaring and hedged their fuel costs, most of them through the fourth quarter. Many bet wrong and while oil prices were falling this fall, and they paid for that hedge mistake one barrel at a time. 

Now that oil prices have stabilized, demand continues to decline and create a whole new (or maybe not-so-new) problem. Overall, oil prices are only a small piece of the puzzle, and no matter how many pieces you get in the right place, the industry is still not out of hot water. It still needs every dollar of revenue it can find. 

That is why the fuel surcharge is still in place. However, after much research, I could not determine any rhyme or reason as to which markets are still paying the fuel surcharge and which markets are not. I'm confident, though, that this charge will remain where it is still being charged, as long as people continue to pay it. 

In addition to the haphazard method of determining what amount these fuel surcharges should be, the airlines also have an unusual way of collecting it. It is not really part of the fare, but it is added after the fact and appears to be a tax. We all know this is not a tax, but just a fare increase.  

Even on the travel agency side of things, airline pricing is baffling.  The word “simple” should never be used in describing the airlines, and in particular, airline pricing. Have you ever looked at all of the “taxes” charged on every airline ticket?  Consider the following:

• A 7.5 percent federal levy is attached to every airline ticket.
• A Passenger Flight Segment Tax (PFST) of $3.60 per every take off and landing.  That means a roundtrip ticket, with one stop there and back, costs an additional $14.40.
• After September 2001 a Security Fee of is $2.50 per segment was added to each ticket. And we are not done yet: 365 domestic airports also get to charge a fee of between $3 and $4.50 per segment.
• If you are flying internationally there is, you guessed it, yet another fee of $15.10 per passenger on all flights either arriving or departing from or to an international destination. 

On top of all that, remember that these fees are nickels and dimes they collect before any fuel surcharges and before you get to the airport and want to check a bag or have a soda. But apparently all of these nickels and dimes still don’t add up the billions the airlines lost in the last year.

My guess is that you now know more about airline pricing than when you started reading this article, but you are more confused than when you began. If that is the case, you are now truly an expert in airline pricing.  

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Robert Polk is CEO of Polk Majestic Travel Group, Denver's largest independent travel agency. He welcomes your comments and questions at Robert@polkmajestic.com.

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