Planes carry viruses, real and metaphorical, across the globe. Passengers will welcome this one. Last November, Caribbean Airlines became the first carrier to cut fuel surcharges. On Tuesday, Australia’s Qantas became the latest caught in the rip, following Virgin Australia, Japan Airlines and the Philippine airline industry.
The oil price is down nearly 60 per cent since last summer, so a cut in the levy seems overdue. Fuel surcharges have long outlived the reason for their existence: protection against rising oil prices in the early 2000s. Even as the oil price dropped four-fifths during the financial crisis, the fees survived.
This is not too surprising. The airline industry is highly cyclical. Fierce competition— from low cost carriers as well as incumbents — prolonged the post-crisis lean times. Fuel surcharges provide a fifth of airline revenues, according to CLSA research, so they are hard to surrender. Fuel price hedging, another plank in the strategy to smooth out costs, does not always help. It is costly (especially when it goes wrong, as Cathay Pacific learned in 2008) and negates much of the benefit of falling prices. So despite the falling oil price, Qantas and Virgin Australia are not being proactive. Regulators have been involved: the Australian Competition and Consumer Commission is investigating complaints against the airlines of misleading pricing. In the Philippines, too, the airlines removed the surcharge only on a regulator’s instructions.
Yet ending fuel subsidies may not hurt the airlines too much. Qantas is rolling the fuel charge into its ticket prices; Virgin Australia is reducing US-bound fares by A$40-A$50. Experience in the Philippines has been similar. This protects margins but goes against the spirit of what the regulators want to achieve, risking more intervention.
Analysts have been turning positive on the sector, in part because of fuel price trends. Airlines would be foolish to risk regulators’ wrath just as the tide on losses is turning.
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