Rebranding the Fuel Surcharge

By February 10, 2015Pricing

I was shopping for a flight to London Heathrow in December and noticed that with the rapid drop in crude and fuel prices last Fall, Air Canada quietly rebranded their Fuel Surcharge to “Carrier Surcharge”.

From Air Canada’s site under International (emphasis mine):

Carrier Surcharges: Carrier surcharges are included in the Air Transportation Charges and are collected by airlines to partially offset certain volatile, unpredictable or fluctuating operating costs and fees, and certain fare Premiums linked to peak travel periods. These carrier surcharges can be used to offset some (among others) of the following costs: fuel, navigational charges, or select peak travel dates to/from certain destinations.

It’s not just about fuel anymore, you see? It’s about managing “fare Premiums linked to peak travel periods”! Which sounds a lot like increasing our prices when demand is high. Didn’t that used to happen by changing fares?

Like most people, I am not a huge fan of surcharges. Particularly when they seem to cover things that really seem to be part of the basic price. Like fuel for an airline ticket, for example. And unlike other industries where there is at least an attempt at transparency (e.g. trucking companies indexing against an independent marker like diesel fuel prices published by Natural Resources Canada or perhaps pegging against the NYMEX /HO contract), the airlines have done an excellent job of making their charges extremely opaque.

But as a pricing guy, I remain intrigued. All-inclusive air price advertising has been law in Canada for quite some time now. Why continue to have a surcharge when you’ve got fares as a perfectly good mechanism?

I have a couple of theories as an outsider:

Carrier Surcharges as Fares for Reward Tickets

Anyone who has booked an Air Canada ticket using Aeroplan points knows that a “free” flight is far from it. For example, my recently booked flight contained $414 in carrier surcharges and $256 in taxes—all of which would be owed on a reward fare assuming you’re flying on an Air Canada flight. While I believe the taxes are all straight pass-throughs, I’d bet that $414 carrier surcharge contains more than a little margin and charging it to those redeeming rewards is a significant source of revenue.

Furthermore, I would argue there is likely a bit of decreased price sensitivity when dealing with a reward ticket. After all, the ticket is free right? You spent a lot of effort to build up the required points, you probably only found a few good flight options given limited inventory, and so what’s the chance that you decide to balk at paying the surcharges? Not much, I say.

Negotiated Fares Structures

I believe that a significant portion of the market is tied up in negotiated pricing or rebate structures. So a major corporate buyer will have a percentage discount or rebate based on the base fare. Surcharges don’t factor into the discount. Large purchasing departments aren’t unsophisticated but my theory is that this is one of the areas where airlines have been able to sneak in a bit of margin. From a competitive standpoint, if you’re able to say that you’re competitive on fares, your discount is competitive, and you’ve got a reasonable product, it would seem you’re competitive enough. So you might as well recover a few dollars of margin by putting it in a bucket where you can.

Momentum

This certainly isn’t a good reason to retain a pricing practice, but I imagine that good old momentum keeps surcharging alive. Because of reward tickets and negotiated fares (and likely factors I don’t know), it would be just plain difficult to change the system. No longer surcharging on fares to regular customers is probably relatively simple. But having to rejig the value of an Aeroplan point or renegotiate with all your corporate customers? Who wants that kind of grief?

Conclusion

I believe the rebranding of the fuel surcharge to a carrier surcharge confirms what most people thought: it’s really just a fare with a different name. And it persists because airlines have revenue management practices that are trying to hone in on different customer segments. Believe it or not, that’s okay with me. I know the airline is trying to profit from my business and I rely on competition to ultimately ensure I’m getting a fair deal. And with Canadian law requiring all-inclusive pricing, most of the advertising shenanigans of times past are gone. So I think the days of these surcharges being a part of Canadian fares are numbered as the airlines are forced to be a bit more transparent as to what these surcharges really all.

And while you can be sure there is a revenue manager holding onto these fees as long as they can; soon enough they’ll have to call it what it is: a fare.