Airline fuel surcharges may decrease, but will the ticket price?

With oil prices having fallen below $80 a barrel, and jet fuel prices heading for their first annual decline in six years, some consumers are asking why the airline fuel surcharge is not dropping as well.

Not all airlines impose a fuel surcharge, a marketing technique that's been around for about a decade now.

WestJet does not have one, Air Canada does on international flights — yet their ticket prices stay competitive.

And when consumers are shopping for international travel, the airline websites, and the aggregator sites like Kayak and Skyscanner, quote a price that includes the fuel surcharge along with most other fees and taxes.

This is what you see about price when you choose your flights on Air Canada.

Unless you click on that "Details" button you won't find out the amount of the fuel surcharge. But this is what you get if you do click.

Don't click on "Details" and follow through all the way to purchasing a ticket and you won't see the fuel surcharge. And once you purchase a ticket from Air Canada, the fuel surcharge disappears into the base airfare.

Different airline, different philosophy

Whether or not an airline has a fuel surcharge depends on its business philosophy, says David Tyerman, airline industry analyst for the wealth management firm Canaccord Genuity.

He says for airlines with a surcharge, "they think they're making it clear that fuel is a big part" of the ticket price, with the implied message, "'we're not just trying to gouge you, we're actually trying to cover a higher cost.'"

For airlines without a surcharge, Tyerman says the marketing message is, "I just want to make it as simple as possible for the customer, I'm just going to charge a single ticket price."

At the end of the day, however, the price of the ticket is likely going to be determined mostly by supply and demand on the route, Tyerman says.

When searching for flights in our example above, a flight from Toronto to Barcelona, we found seven different total ticket prices on the same day in the same fare option category, out of 15 choices.

Since there was no non-stop on the route at that time of year, fuel costs could vary from one routing to another. But the fuel surcharge was the same for all the flights.

Next spring, Air Canada will resumes its Toronto-Barcelona non-stop service, which should require less fuel, but for those booking today the fuel surcharge remains the same, while the total ticket price drops.

Note that the fuel surcharge is now more than half the amount of the total ticket price.

Business class costs more, or less

Using the same Toronto-Barcelona example, the fuel surcharge comes in at $416 in all three of Air Canada's economy class fare options. But fly business class and the surcharge goes up to $776.

Air Canada spokesman Peter Fitzpatrick says the business class "seat is bigger in size and weighs more than an economy cabin seat" and that makes it "more expensive from an operational and commercial point of view."

He notes that this distinction reflects the industry practice.

Interestingly, the total cost of the business class ticket for this flight, $4,470, is less than the $5,232 one pays for the Latitude fare option in economy, despite the extra $360 for the fuel surcharge for business fares. (A Latitude ticket has advantages if travellers change or cancel their itineraries, but they still sit in economy.)

Will the high cost of flying go down?

Last week, International Air Transport Association director general Tony Tyler told reporters in Toronto to expect the fuel surcharge to come down very quickly.

But the price of jet kerosene usually lags the price of oil, plus airlines often hedge their fuel costs over time, which can cause further delays when it comes to sudden price shifts.

Fitzpatrick says "competitive and market conditions, and in some cases international air bilateral agreements between countries" also influence the amount of the fuel surcharge.

For Canadian airlines there is often another factor at play as well, as the Canadian dollar usually weakens when oil and fuel prices drop. 

Robert Palmer of WestJet told CBC News, "the decline in fuel is more than offset by the increase in foreign exchange."

By last week, Tyerman noted that jet fuel prices in Canada had fallen 13.5 per cent since July 29, when oil dropped below $100 a barrel.
 
According to Bloomberg Intelligence numbers, jet fuel in the U.S. last week was down 23 per cent after peaking in February.

Fuel one-third of airline operating expenses

Mona Aubin of the International Air Transport Association, the trade association for the world's airlines, told CBC News that "fuel is the largest category of operating expense for the industry, representing around 30-33 per cent of industry operating expenses."

Aubin says IATA's forecast for the industry in 2014 is a profit of just $6 per passenger.

Tyerman describes airlines as an "extremely competitive business" with a profit margin that historically "hasn't actually been enough for the airlines and that's why many of them have gone broke."

Now, "airlines are relying on strong ticket demand to hold the line on prices," writes Bloomberg's Mary Schlangenstein. "U.S. carriers have no incentive to start offering fares for less — and they say they won’t," she adds.

Fuel surcharge on awards tickets 'a nice side benefit' for airlines

Travellers who get their airline tickets with frequent flyer points pay a fuel surcharge when they fly on some airlines but not on other airlines.

Fly Toronto-Barcelona round trip on Air Canada with Aeroplan points and you pay the same $416 fuel surcharge. But Aeroplan members who choose a flight operated by some of Air Canada's partner airlines that do not have a fuel surcharge can save money.

In this example, an Aeroplan traveller saves half that amount, $208, by booking United flights on the leg of their journey from Europe to Toronto. (We were unable to find an outbound booking that did not include an Air Canada flight on the date we checked.)

Sometimes  Aeroplan charges consumers a fuel surcharge even when Air Canada says "fuel surcharges are included in the ticket price."

For example, if you fly Toronto-Los Angeles using Aeroplan points, there's a $54 fuel surcharge, even though Aeroplan states on their website, "All fuel surcharge amounts are applied by Aeroplan on behalf of the ticketing carrier and are passed through directly to the ticketing carrier."

While noting that Aeroplan is independent from Air Canada, Fitzpatrick says as a loyalty program, " it has a different pricing mechanism."

There are websites aimed at frequent flyers, such as The Points Guy, Travel is Free and CreditCards.com that list which airlines have and don't have a fuel surcharge. If a traveller is booking on Aeroplan, that's useful information to have in advance because the Aeroplan website does not show the amount of the fuel surcharge, or other fees, when it displays flight choices.

CreditCards.com notes that with a fuel surcharge, "profiting on miles redemption became a nice side benefit."