Lucky wrote a disturbing post this morning suggesting that American was going to start collecting fuel surcharges on all international awards.

If correct, this is a very big deal.

What are fuel surcharges?

First of all, understand what “fuel surcharges” are. They’re generally a fixed amount of money added to a fare. The amount will usually be the same across all fares for a given city pair. In other words, all “New York – London” fares that an airline publishes will add the same amount for fuel surcharge.

There are some exceptions to this. An airline may file a different fuel surcharge amount for premium cabins (so a business class ticket might have a higher fuel surcharge than a coach one). And it is possible to file discounted fares that do not incur fuel surcharges or that have lower ones.

But in general, each route can have a fuel surcharge and it’ll be a constant amount added onto all fares for that route.

Here’s a fare breakdown for a random set of dates in September flying British Airways roundtrip economy between San Francisco and London Heathrow.

The fare is $598 ($284.50 outbound plus $313.50 return). The fuel surcharge is $458. The rest of the taxes and fees total $220.10.

Why do airlines impose fuel surcharges?

Once we establish that, it’s easy to understand why fuel surcharges are useful to airlines. Fuel surcharges have nothing to do with the price of fuel.

It makes no logical sense for ‘fuel’ to be broken out separately from the rest of the cost of transportation. It’s one of the cost factors in providing transportation. You cannot buy transportation with the option of taking the fuel or not. Fuel surcharges are, fundamentally, part of the cost of transportation.

Fuel surcharges are an easy, efficient way for airlines to alter their airfares across a given market. They can change one number — the fuel surcharge — and raise or lower (almost) all prices in the market at once.

That’s a whole lot easier than changing the price of every single fare in the market.

For paid tickets, fuel surcharges don’t really matter. They’re displayed as part of the ticket price. They don’t really increase the amount most consumers pay. (They may raise the price paid on some contract fares, where a base fare is negotiated but the surcharges may be on top, that doesn’t touch most consumers but it’s another reason airlines like fuel surcharges.)

How do fuel surcharges influence the cost of award tickets?

This becomes a much bigger deal for award tickets than for paid tickets. It’s almost an historical accident. Airlines use the tool to quickly and efficiently alter all fares in a given market. And as a byproduct they’ve figured out a way to extract cash from their frequent flyers for ostensibly “free” tickets.

Most European and Asian airlines say, effectively, that miles cover the cost of the airfare but not the taxes and fees that are part of the ticket.

So when you redeem your miles, the fare is covered by the fuel surcharges are not. All of a sudden instead of collecting perhaps $50 – $200 in airport taxes in government fees, an airline might collect nearly $1000 total in taxes, government fees, and fuel surcharges.

In our San Francisco – London example above, the fare is $598 and the taxes and fees are $678.10. An airline adding fuel surcharges onto the cost of an award would require the person redeeming miles to come out of pocket $678.10 (not including any telephone booking fee). That’s 53% of the cost of just buying the coach ticket even though one is using miles..

One implication of programs that add furl surcharges to award tickets is that coach awards almost never make sense — a fuel surcharge often represents a substantial portion of the total ticket cost, sometimes even the majority. So you’re spending miles and still coming out of pocket half or more of the cost of a paid ticket, not earning miles and status, and are constrained by award availability.

I’ve even seen cases where discounted fares exist in a market that have lower fuel surcharges — and it is less expensive to buy that ticket than it is to redeem miles (using miles could mean spending more cash rather than less).

Will American Actually Begin Adding Fuel Surcharges to Award Tickets?

They already add fuel surcharges to awards on British Airways. Fees on British Airways awards are several hundred dollars more than flying American across the Pond today.

They also collect a very small fuel surcharge — sufficiently de minimus that I don’t generally worry about it — on Iberia. Those charges are about 10% the amount added onto British Airways awards.

I have reached out to folks both at American AAdvantage and in their communications department to clarify what is going on, but:

• I reserved a Malaysia Airlines award this morning, and fuel surcharges were added.

• I reserved a Cathay Pacific award this morning, and fuel surcharges were not added.

• I hoped that this change was simply going to be adding Malaysia to the list of airlines where American collects fuel surcharges. That does not appear to be the case — an Executive Platinum agent read me their internal guidance that said effective today (August 28), American would start to collect other airline-imposed fees on awards. The agent pushed back on calling these fuel surcharges but I was able to confirm that the new fees are “YQ” and “YR” which are the codes generally used for fuel surcharges.

So presumably they are in the process of rolling out this change to other carriers, subject to confirmation and clarification.

But since it hasn’t yet rolled out to other partners, and might, if you have any awards you’re thinking about booking today would be a good day to do so.

How Big a Deal? What About Other Frequent Flyer Programs, What Will They Do?

This means that many international awards will get several hundred dollars more expensive.

It also means that coach awards will rarely make sense to destinations where there are significant fuel surcharges, since even though you’ll be using miles, not earning miles, and will have to hunt and peck for award seats you’d still wind up paying much of the cost of a paid ticket.

There are some destinations that don’t incur fuel surcharges, such as South America. There are some airlines that don’t impose fuel surcharges, such as Air Berlin.

But — again, if accurate — this is a huge across the board change, one of the single biggest overnight and without notice devaluations that I can ever recall. It is at a minimum on par with the British Airways Executive Club massacre of November 2011 (there it was changes to their mileage pricing primarily, they already added fuel surcharges onto awards).

Delta already adds fuel surcharges onto some partners like China Southern. They add a fee that is effectively a fuel surcharge onto awards originating in Europe. They have flirted the most with fuel surcharges in the past among US airlines, they’ll certainly watch this closely.

US Airways does not impose fuel surcharges, though they have the most ‘fees’ (which are much smaller) — fees simply for using miles. They’ll watch this closely, merger or no. (And it is interesting to see this major change — that is happening independently of a merger — as I’ve been saying, changes are coming to programs regardless of any mergers and if the deal goes through it would simply be blamed for those changes.)

United MileagePlus does not add fuel surcharges. They also offer fantastic routing rules and a reasonably priced award chart. Already they probably had the best redemption value of any major frequent flyer program. I’m hopeful that the sway Chase holds with them will ward off their making this sort of shift — adding fuel surcharges to United awards would be a major blow to to the value of Chase products. Citibank doesn’t have the same influence with American, especially as they’ve negotiated what a co-brand deal would look like post-merger.

I may be starting to pay a lot more attention to the 100% bonuses on purchased miles from Avianca’s LifeMiles, a Star Alliance program which doesn’t impose fuel surcharges and has reasonable one-way awards (but frustrating customer service and an inability to book itineraries with flights in more than one class of service).

In the meantime, my very large AAdvantage balance may have just gotten a whole lot less valuable. Look — $600 for a first class roundtrip Cathay Pacific ticket, far less than what coach would cost — is still “worth it.” But the miles one day cover this cost and the next day do not, that’s a big difference and a devaluation.

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