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11/10/2008 – Some Airlines Reduce Fuel Surcharges : Will US Passenger Airlines Follow?
With the global cost of fuel reaching record highs during 2008 airlines were forced to add fuel surcharges to airline tickets. The cost of fuel has significantly altered every airlines cost of doing business. In some cases airlines were forced to completely reevaluate their business model and in more extreme cases many airlines completely collapsed due to the soaring cost of fuel.
As the cost of fuel continues to drop in recent weeks, the cost of jet fuel has also begun to come down. Jet-A fuel sold for US$181.85 per barrel as of 3-July-2008, while it now trades at US$94.35 as of 8-October-2008. Will the lowered cost of aviation fuel be passed onto the flyers?
Historically airlines have been hesitant to reduce or remove additional fees associated with fares. If an additional fee has becomes outdated, the airline can still collect the fee and use that fee as additional revenue to the airline.
Air Canada, instituted a fuel surcharge in May 2008 and has chosen to remove their fuel surcharge as of late September 2008 to adjust for the declining cost of fuel. Fellow Canadian carrier WestJet also removed their fuel surcharge fee at the same time. Airlines in the United States have neither removed their fuel surcharge nor indicated that these fees will be reduced either.
There is however a glimmer of hope for those who fly U.S. airlines. On the 20th of October Northwest Airlines Cargo will begin to reduce their fuel surcharge. Northwest Airlines operates a fleet of fourteen Boeing 747-200F aircraft for dedicated cargo operations. Northwest Cargo will reduce its fuel surcharge from US46¢ per pound to US42¢ per pound.
While 4¢ per pound may not seem like a lot of money, but adding up to the cargo capacity of a Boeing 747-200F, the reduction in costs can be significant. The maximum cargo capacity of a 747-200F is approximately 249,122.35lbs. A reduction of 4¢ per pound eliminates US$13,964.89 in fuel surcharges per loaded flight. On a daily basis, with a fleet of 15 747-200F in operation, this is at minimum a reduction of US$209,473.35 in fuel surcharges for Northwest Cargo’s clients (based on aircraft only flying a single flight, many aircraft will fly two flights per day).
With airlines seeking additional revenue stream with the ‘unbundling’ of airfares hopefully they will reduce or remove the fuel surcharge. It is likely that the Northwest cargo fuel surcharge reduction will trickle over to the airlines passenger operations.
Northwest Airlines is currently bringing in an additional average of US$370,000 daily for the newly instated checked baggage fees for an estimated new revenue stream of US$150mil-to-US$200mil annually.
The new unbundled fees in place should help northwest, and other airlines that have instituted these fees, make up for their losses. As the current cost of Jet-A fuel is approximately 51.88% lower than it was in early July 2008, airlines should reduce or eliminate their fuel surcharges that are rapidly becoming outdated.