Airline Industry in a Quandary Over Fuel Surcharges and the Search for More Efficient Planes by Kane Minks

Aircraft leaves a contrail in sky. Kane Minks

by Kane Minks

The airline industry has been adding fuel surcharges to the tickets of passengers for some years, and increasing them as fuel costs jump. Yet, there have been no reduction in charges since 2009 despite decreases in fuel costs.

A study by Carlson Wagonlit Travel found these facts and more, demonstrating that the airline industry has been profiting off their customers through unreasonable fuel surcharge fees. The study found that fuel surcharges have risen 53 percent since 2011, a stark contrast to the 24 percent increase in airline fuel costs in the same study time frame. Clearly the airlines are using the fuel fees as a way to increase profits. They may find it more difficult to justify the exorbitant charges going forward.

A new law requires all airlines based in the U.S. advertise the full fare, which includes all of the components that make up the ticket price. The fuel surcharges must be disclosed, making it more difficult for airlines to justify the exorbitant charges. The new transparency rules may turn passengers off to the idea of taking vacations that require air travel.

Airlines are using hidden fuel fees as a way to stay competitive in tighter markets, and lowering fares in order to lure in more passengers. However, the fuel fees can make up to half of a ticket price for international flights, which may lead to a reduction in the amount of passengers for those flights.

The airline industry is also facing pressure in areas related to the use of jet fuel in the form of carbon taxes from the European Union. The European Union is requiring all flights taking off or landing in Europe pay for carbon dioxide (CO2) generated by aircraft. The program begins next year, and initially provides 85 percent of the cost of required permits for free. The rest can be traded off with less polluting airliners. Countries around the world are balking at the requirement by the EU, and the issue is still not settled. It’s a sure bet the extra charges are going to be passed onto passengers.

Volatility in the cost of fuel and threats of carbon taxes is causing the airline industry to purchase new, more fuel efficient planes. The goal is to reduce the amount of inefficient, older planes that are in the current fleets, and move to planes that get better fuel mileage. Some of the redesigns are expected to get anywhere between 13 to 15 percent improvement in efficiency, reducing the amount of fuel used.

The current state of the airline industry is a tenuous one; especially with the cost of fuel cutting sharply into already low profit margins. The amount of flights initiated around the world is increasing on an annual basis, but it only takes a small action to dramatically affect success and passenger satisfaction.

Article By: Kane Minks


The Foundation of Low-Cost Air Carrier Price Structures prior to Airline Deregulation in the United States by Kane Minks

by Kane Minks

The U.S airline industry has come a long way from the days of government regulation and oversight.  In the November 1964 Air Transport World article “Let’s not give the store away!” many of the top minds in aviation at that time shared ideas and viewpoints on what the future may hold for aviation.  They may have speculated, but really had no idea what was to come.

Before U.S. airline deregulation, those in the aviation world continued to wonder what might become of their ever-changing industry, in the age of airline regulation.  Many domestic and international airline fare structure strategies were considered, including the implications of price elasticity.  The thought of overzealous marketers moving toward low-cost structures had many in the U.S. fearing the industry would head in the wrong direction.

The domestic and international markets were headed in two totally different directions.  The low-cost fares of the international airline market made sense since these fares provided greater load factor by increasing passenger volume.  At the same time, the U.S. domestic market was not yet convinced since they could not find the optimal point of price elasticity; whether or not fares should be increased or lowered and the point where passenger traffic would be reduced.

Many airlines grew frustrated with dull and unproductive fare structures in a regulated environment.  Low-cost and special advanced fares seemed to be the rational direction for airlines.  Passengers may have been paying different fares, but airlines could expand the market to price-sensitive passengers and others not flying.

The fears of discounted fares were largely based on what happened after the U.S. World Wars in the electronic housewares industry.  Americans were war-weary and found a new ability to buy.  There was a huge demand for goods.  Companies sought to beat out competitors by expanding production.  Supply outgrew demand and sales began to drop.  Conventional and discount retailers alike began to suffer.  Price wars erupted to capture as much of the remaining demand as possible, which slashed company profits.  Similarly, airlines had an over-supply of seats to fill, but adjusting fare structures set to reshape the airline industry for good.

The low cost fares and price wars of today are making flying increasingly accessible to people around the world.  Airlines that cannot afford to wage price-wars have to find new and unique ways of attracting business.  Customer-service, incentives, technology, and the overall travel experience are ways some airlines are gaining steam to retake market share from low-cost airlines. Some of these strategies have proven successful in regaining market shares.  Many things will continue to change.  The highly dynamic world of aviation around the globe will further shift and evolve as new strategies and factors appear. What the future holds for airline price structures may rely more on fees and less on volume.  Only time will tell.

delta dc aircraft regulation structures Kane Minks

Delta DC-6

A retrospective from Air Transport World’s “Let’s not give the store away!” November 1964

Kane Minks