Fuel Surcharges and an a la carte future for air travel pricing?

Upgrade: Travel Better has an extensive post on fuel surcharges and the idea that airlines might start ‘unbundling’ fares such that you buy fuel separately from your entrance onto the aircraft… and speculates that this could lead to unbundling of oither services as well — like food, baggage, early boarding, and legroom.

Fuel surcharges are really just ‘disguised’ price increases. They aren’t some magic formula for airline profits. Fares are presumably at a market price indicative of what a seat might sell for. So how are fuel surcharges even beneficial, if the market won’t bear a meaningfully higher price for airfare? And why not just attempt a price increase?

Fuel surcharges

  1. set a price floor. The airline precommits not to lower prices beneath that level. So even if a fare goes to zero the airline still receives the fuel surcharge. This is especially an issue in Europe where fuel surcharges can be US$100 each way.

  2. publicly signal price hikes. Usually airlines attempt to raise prices through coordinated increases in fares displayed through global distribution systems. An airline moves first, some airlines follow suit, sometimes all do and the price hike sticks. But it requires signaling and the first mover may lose sales in the short run while other carriers decide whether to match. A fuel surcharge can be publicly announced to begin at a future date, allowing airlines better coordination on pricing (while steering clear of antitrust concerns) and without losing sales while other airlines sort out whether they’ll follow suit. (An airline could just load a set of higher priced fares that begin at a future date in order to accomplish the same thing, but this would involve changes to every fare for every city pair and would involve more ‘noise’ in signaling).

  3. generally apply to pre-existing corporate contracts, while fare increases might not (or might not apply in full, as a contract fare might be for x% off).

  4. can be made to apply even to ‘free’ tickets. Applying fuel surcharges to award redemptions is very common in Europe, less so in the U.S. Delta has begun tacking on such a charge on Air France reservations. My recent roundtrip business class mileage award redemption on British Airways cost about $320 (including the British luxury tax on premium cabin travel). A similar ticket booked on British Airways but with Cathay Pacific miles cost over $500!

  5. could potentially follow cruise lines, and be applied retroactively to tickets already purchased but not yet flown. I don’t see this happening, both because airlines affect more passengers than cruise lines (and thus make for more unhappy customers and better media stories) and because enough deep pocket companies would be hit — compared to individual leisure travelers cruising — such that a well-financed lawsuit might be more likely. (Although I’m still surprised that there aren’t more high profile class action suits financed by law firms that stand to gain than there already are.)

Here is a previous post of mine explaining airline rationales for fuel surcharges . Here is a post on on airlines sending coded messages to each other through their fares. Here is where American got in trouble for announcing future price changes (although the legal problem wasn’t anti-trust per se — it was that they had settled a previous anti-trust investigation by limiting their future actions and they apparently violated that agreement, not anti-trust law). Here is a discussion of Northwest ‘unbundling’ other fees from their published fares and why the whole thing was more or less a ruse.

But what about further ‘unbundling’?

People Express used to charge per luggage piece, not including any “free” baggage allowance for each passenger. And they used to charge for the can of coke on board, too. (When I was quite young I used to really enjoy the onboard snack basket available for purchase, perhaps it’s just the memory of youth but it seemed so much more appealing than competing buy on board offerings today.)

Delta just started charging for the plastic bags used to wrap strollers and carseats checked in as baggage. Northwest charges a fee to pre-reserve preferred coach seats (which are towards the front of the plane but in most cases don’t offer any other advantages)

In Europe the low cost carrier market is fraught with such charges as checked luggage fees (sometimes with a discount for prepaying online).

Airlines already unbundle food and legroom from the basic product, by offering a separate business or first class cabin. There they offer a different set of bundled services rather than offering each option a la carte.

Taken to the extreme, unbundling allows those carriers to offer lower advertised fares than their ‘full service’ competitors while still extracting higher revenue than those fares would otherwise suggest. And as the practice spreads it may become more likely that full service carriers will follow suit in order to compete, on the theory that consumers don’t calculate their total trip cost very well but just respond to advertised airfare.

On the other hand, though, it’s not clear that total unbundling of services actually leads to higher pricing. An individual buying all services separately might pay more than before, but total revenue could well fall. This is why Microsoft ‘bundles’ Internet Explorer with Windows, and why cable companies sell packages of channels rather than offering each channel for an a la carte price. It’s not just a good deal for companies bundling products, it improves total consumer welfare as well. Here’s a simple illustration of the concept and how it works with cable television.

As a result I just don’t see airlines going there (although on the whole the industry never ceases to amaze me in its ability to make decisions contrary to financial interest).

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. You don’t seem to outright mention it in this or the other post on the fuel surcharges, but there is one other reasons the airlines go that route. When you redeem a “free” ticket you’re still required to pay all taxes and fees, which includes the fuel surcharges. US-based carriers can’t bill it separately to their passengers but the European ones do, so that free tripp can cost EU$200+ just in fuel surcharges, while the same flight from a US-based carrier may only have a few dollars in taxes. A great example is looking at UA/LH rewards on the same route/plane on the TATL runs. The price difference can be huge.

    I don’t mind unbundling at all, but if you’re going to ro it there has to be a minimum basic level, which should include all fees necessary to transport your person (ie fuel, seat, Flight attendant and pilot pay, etc.). Anything above that (and I’m willing to include checked luggage in the list) can be piecemeal, so long as that is disclosed in the booking process, IMO. When the airlines unbundle so much that there is a fare for the seat and then a surcharge for everything from using the lav to having the pilot actually fly the plane it becomes a terrible case of misleading the consumer.

    More of my rant here: http://www.wanderingaramean.com/2007/08/on-taxes-service-fees-and-surcharges.html

  2. Referring to the seperate charge for a ”fuel surcharge” as ”unbundling” is deceptive. To be something that can be bundled or unbundled, it must be able to be offered seperately from the basic product. Meal service, drinks and snacks, seat assignment, and extra bagage are good examples, as a customer could choose to accept or not accept them, and it would not prevent him from using the basic product – a flight from point A to point B.

    Planes do not fly without fuel, however, and fuel is thus an essential part of the basic service, not something that can be bundled or unbundled. Charging for this seperately is like your phone company charging seperately for a dial tone. It is not ”unbundling”. It is ripping off comsumers.

    It is also called marketing deception. Many search engines only pick up what it considered the fare. So when part of what is really the fare is broken out and called ”fuel surcharge”, the fare search engine presents the fares of such airlines as the lowest, while in fact with the phony surcharge added back, they probably are the highest. The consumer is duped into buying a ticket he thinks is the cheapest out there, when in fact it may not be. Use of the ”fuel surcharge” scam is nothing but a fraud on the consumer and should be prohibited by law.

    CAlling this sleazy practice ”unbundling” is almost as deceptive as the airlines calling it a ”surcharge”.

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