Why airlines are still dinging us for fuel

With oil prices as low as they've been since the 2008 recession, it seems an appropriate moment to ask: what's up with the fuel surcharge?

Darryl Dyck/CP

Darryl Dyck/CP

Hard to begrudge our airlines making money, considering the volatile, low-margin nature of their business. But with the revenue now pouring in, and oil prices as low as they’ve been since the 2008 recession, a passenger is compelled to wonder: must they keep dinging us in the name of fuel costs?

Both Air Canada and WestJet declared record quarterly income this week thanks largely to the reduced price of jet fuel, and the outlook for the industry as a whole has rarely been better. Annual pre-tax profits are expected to reach $1.3 billion in 2015—about double their level from two years ago.

Book an economy-class seat to London, though, and you’ll find an irksome holdover from the days when crude oil was trading above $100 a barrel. As much as 40 per cent of the price of an international Air Canada ticket still goes to so-called “carrier surcharges,” a basket that consists mostly of what the airline until recently labelled a fuel surcharge (Air Canada and WestJet do not apply fuel surcharges to North American flights, instead folding them into base ticket fares).

Five years ago, playing up spiralling fuel costs seemed like good marketing for international airlines. West Texas Intermediate was selling for $113 a barrel and Canada’s largest carrier was recording net losses in the $250-million range. It was thought that breaking out a fuel charge on ticket invoices might dampen consumers’ exasperation when high fuel prices forced carriers to hike ticket prices. But by mid-2014, oil prices were racing south and the surcharge was starting to look like an insult. Air Canada’s solution this spring was to bury it under a new heading on the bill, alongside unspecified costs like “navigational charges, insurance charges, or [costs related to] select peak travel dates.”

Exactly what share of the bill can be ascribed to fuel is impossible to say, because it and other carrier charges vary depending on the market where one is flying, says company spokesman Peter Fitzpatrick. But a comparison of charges on a round-trip ticket between Toronto and Barcelona, Spain, with those on the same route one year ago suggests little has changed. The stand-alone fuel surcharge in November 2014 stood at $416, on a total fare of $712.68, while the newly named “carrier surcharges” today stand at $456, on a total fare of $910.

So why not throw the passengers a bone? Why not reduce the surcharge in step with the fall in jet fuel costs, which for Air Canada have declined more than 30 per cent since last year?

Air Canada has its reasons, some of which are rooted in sound business practice. For starters, it buys fuel in advance, using strategic hedge purchases to buffer itself from future price shocks. That means oil price reductions don’t translate immediately into cost savings, and at least part of those savings must be banked against future price increases. Secondly, the declining Canadian dollar has cut into the recent discount on fuel, because the stuff must be purchased in U.S. dollars.

Still, the price of oil’s been down long enough that airlines could conceivably have begun passing on the savings. And the loonie hasn’t fallen nearly as far as petroleum prices. In fact, says a report released this summer by the Conference Board of Canada, the decline is actually helping our airlines by inducing foreigners to fly here, and discouraging Canadians from driving across the border to fly out of U.S. airports.

All of which suggests a different, more predictable reason the airlines have kept their surcharges in place: because they can. Air transport is one of the few industries bucking the effects of Canada’s sluggish economy, notes the Conference Board, adding routes and passengers with each passing month. The proportion of empty seats on planes remains low (a little under 23 per cent for Westjet, and 15 per cent for Air Canada), which the carriers are interpreting as a sign of consumer satisfaction. “Our aircraft are running at near record load factors,” says Fitzpatrick in an email, “even with the steady addition of capacity, which indicates customers feel they are getting good value.”

That last bit might not go down well with your $12 sandwich from the on-board cafe. But on paper, it’s true—and has been for some time. Thanks to deregulation and the gradual growth in competition, the inflation-adjusted cost of air travel in Canada has declined 40 per cent in the last 25 years, and currently sits at a four-year low. Prices are expected to decline a further 1.5 per cent by the end of the year, reports the Conference Board, adding: “It is an ideal time for Canadians to fly, and this will be reflected in traffic growth, which will remain robust.”

All of which suggests we’re a lot less fussed about how the airline spends its money than how we spend our own, and that we’re willing to pay the price. But no one should imagine that hefty fuel charges are thing of the past. Nor should we forget their lingering presence the next time oil prices suddenly take flight.


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