Fuel Surcharge, Taxes and Fees

Hope no one minds that my 1st post here is a moan, and sorry if this has already been covered, if it has i didnt find it......

On September 6th 2005 the oil price hit a massive $70 a barrel and Virgin increased their fuel surcharge to 30 per sector.

Today, crude is priced at $40 per barrel but the fuel surchage is more than double what it was in 2005 at between 68 and 96 per economy sector, depending on distance travelled.

Prices seem to have stabalised, and even if they doubled overnight, we would only be back to the same level in 2005 when the fuel surcharge was 30.

At what crude price is their NO fuel surcharge? A surcharge is designed to cover extra costs. Fuel is never an extra, the airline always expected to pay it.

I see a scenario now where crude could dip to say $25 and there are still fuel surcharges.

Fuel surcharges confuse many and now serve no purpose. They also penalise loyal customers as when a reward flight is booked, surcharges and taxes are added.

Here is an example. Virgin advertise you can pay for your flight with miles to LA for 50,000 miles, however when taxes and surcharges are added, the cost is still 270 and you have had to make 5 return trips (n class) to get what is in effect only a 15% reduction on the sale prices (hardly free or a reward!), let alone you are spending your miles (which some will have saved for years) instead of earning, and not getting tier points.

Had this on my mind for a while - thanks for reading.

Col

[Scrooge]

I have to agree with you, at this point a fuel surcharge should not be in place, the one thing they may be trying to cover is their losses on fuel hedges, however if this is not the case then there really is no excuse for them.

On your second point, this is something that was raised when the UK governent proposed raising the APD taxes, again, between the high cost of staying in the UK and the high cost of getting there, the UK is starting to price itself out of the tourist market.

[preiffer]

Umm - exchange rate?

$70 back in the 2:1 days = £35.
$40 with the current rate of 1.45:1 = £27.60

So it's not actually THAT far out...


Also bear in mind that the 2005 fuel prices will be been 'subsidised' in some way from previous years' hedging. (Fuel pre-purchased at a lower amount). Those hedged reserves are likely to be unavailable now, so the 'mix' of cheap fuel vs expensive fuel is now dipping well and truly on the side of expensive these days.


While I disagree with the cr*p about 'surcharges' (it's NOT - it's PART of the COST of transportation and should therefore be classed as such in the ticket price), I CAN see why they've remained high.

At the end of the day 'hedging' is basically a gamble. Any of us can open a spread betting account and speculate on the future price of comodities, including crude. If Virgin had a bet go bad, then it isnt their loyal customer base who should be paying.

Fully agree on the APD taxes, however our plumenting pound should be making the UK financially attractive again....

Preiffer, even taking into account the exchange rate, fuel in sterling is still over 25% lower than than in 2005 (the exchange rate when this charge was introduced was $1.88 ish to £1) however today the surcharge is between 120% and 300% more!

[preiffer]

quote:Originally posted by kingcole1974
Prieffer, even taking into account the exchange rate, fuel in sterling is still over 25% lower than than in 2005 (the exchange rate when this charge was introduced was $1.88 ish to £1) however today the surcharge is between 120% and 300% more!

Again, I refer you to the hedging mix as I indicated. Exchange rate is not the *only* factor.

If a 2005 wing of fuel is made up of 50% 'hedged' (let's say $25 barrel = £13) and 50% 'current' ($70 barrel = £35) then it's full of £24/barrel fuel.

If a 2008 wing of fuel is made up of 100% 'current' (or even potentially higher hedged rate) fuel ($40 barrel = £28 at current exchange rate) then it's full of £28/barrel fuel.


In the case that MAYBE they hedged back in '05 when it 'peaked', let's say they went for a hedge price of $50 which would have appeared CHEAP then (yes, it's a gamble)...
At the same 50/50 ratio, they're now at: $50 hedged (£35) plus 50% 'current' (£28) so it's full of £31.50 fuel.

Either way, *assuming* the 2005 wings weren't 100% full of current fuel, and still had a mix of hedged vs current, the price is now HIGHER.


Simple maths.

I think you're not alone in wondering what and when fuel surcharges will reduce by. But, what we still don't know is:

- what portion of fuel in a jet today is priced in today's terms - there's a good likelihood that a good portion is priced as per a headge agreed 6 or 12 months ago (see CX who hedged long and high and who are now paying over $100 a barrel equivalent for some of their fuel still)?

- what portions of VS's currency trading is hedged and at what rate (which could be helping a lot, or hindering)?

So there are more variables than just the price of raw oil, added to this is refining cost etc. I'd like to see surcharges fall further and I'd like to see some transparency.

Transparency is the key here.

If the extra fuel part of the ticket really was £192 for a return to LA then we would not see fares being advertised at £329. After taxes this would leave little more than £50 which even without knowing the costs of running an airline, I know if not profitable.

If it does not work for VS to give away a Free flight with 50,000 miles (rather than pay another £270 for the Free flight) then make it 100,000 miles or whatever works.

Prices change - we are seeing that everywhere at the moment, but be honest about what is going where.

[preiffer]

quote:Originally posted by kingcole1974
If the extra fuel part of the ticket really was £192 for a return to LA then we would not see fares being advertised at £329. After taxes this would leave little more than £50 which even without knowing the costs of running an airline, I know if not profitable.

Ummm... That's EXACTLY what they do!

Yes, they sell seats that are unprofitable. The plane is going anyway, and most *profit* comes from flexible fares, business class/PE and cargo. Anything else they can get for the seats is often deemed a bonus. So yes, when tickets are sold this low (where the fare element is around £50), they ARE 'giving them away'.

(Logic - plane going anyway, may as well get some of the fuel bill paid for and cover a little bit of extra cost). The number of seats at that price is limited, but availability IS there.


This is the way ALL airlines operate when it comes to the cheap seats. You really think RyanAir/Easyjet can genuinely operate as an airline purely on £1 seats?!?


Transparency is one key issue here. UNDERSTANDING the economics behind an industry that you are criticising before attempting to analyse them is another...

To suggest a lack of understanding is very harsh.

The model you quote with the budgets is true, however, what the punter sees is what they pay. Although in the UK this is true of advertised fares, my inital thread actually highlighted what a rip off the fuel surcharges are when applied to reward flights.....

If the minimum VS wasnt to sell a ticket for is £300 then make it so. But don't make it £50 with a £250 surcharge, as this just distorts reality and means those who choose to redeem miles pay all these fees as well as use their miles for what is initally perceived as a reward flight.

The real airmiles company (flying boat) which is a subsidary of BA is more upfront. A round trip on BA to JFK is 5000 Air miles. No taxes, no fuel, just 5000 miles.

As I said before, if it's not profitable for VS to give away a flight for 50,000 miles, then make it 100,000 or whatever it needs to be, but dont pretend its a reward flight and take 80% of the fare anyhow.

The purpose of my starting this thread was to debate the fact that since 2005 the price of crude is 25% lower (40% is $US alone) and the fuel surcharge is between 100% and 300% higher.....

[preiffer]

Oh, believe me - I agree (as I stated in my first post) that the use of 'surcharge' is inappropriate at least, and in some ways deceiving. Fuel is a direct cost of provision of service.

Restaurants don't have a 'cooking oil surcharge', so why should airlines be allowed such ways of 'hiding' the cost of providing their services.


HOWEVER, you then went on to break down the charge in a way that suggested airlines could now be MAKING money from the charge compared to 2005 - indeed, that they're not passing on reductions. This is an argument that, as demonstrated, is fundamentally flawed.

You continued further, to suggest the ticket prices are false as there's no way they would sell anything for a base cost of £50. Again, incorrect.


So, while I agree with your issue *specifically* around the use of the phrase 'surcharge', your arguments beyond this assertion were entirely flawed. Sorry, but if you're going to attack an airline's business model, you need to understand that model in the first place.

fuel costs in $
It should not be forgotten that VS get paid in $US by their US customers
I have no idea how much they contribute, but I am sure that their payment in US$ must must make a major contribution to the VS US$ fuel purchases.
This must surely offset the diminishing value of sterling /R/E effect upon their fuel purchase cost in US$!
or does it?

I totally agree about the issue. In these days of fluid prices, airlines can quite reasonably adjust fares and prices so why the need to 'deceptively' break it down when they benefit?!

get the feeling that the frustration is in the term 'reward', VA's scheme seems to allocate points more freely than others (like BA),and the 'reward' value is generally less when you come to use them, but would agree with the option to be able to spend more miles to cover the 'tax-surcharge' element.
It can be done, like you say (BA/ Airmiles etc)

quote:Originally posted by northernhenry
get the feeling that the frustration is in the term 'reward', VA's scheme seems to allocate points more freely than others (like BA),and the 'reward' value is generally less when you come to use them, but would agree with the option to be able to spend more miles to cover the 'tax-surcharge' element.
It can be done, like you say (BA/ Airmiles etc)




BA Miles work the same as VA miles - i.e you have to pay, tax, &surcharges and the like.

Regards,

Hackneyguy

BA Miles do, but was refering to actual 'AirMiles' the sort you collect at Tesco or when you fill your tank.

They charge a set number of miles for a return trip - and is inc of all Taxes and dreaded fuel surcharges.

Your right northernHenry, one of my main points was about the reward flights - Using 50000 miles for your reward aint a great reward if you are still paying 80% of the price you see when you log onto the net.

[Decker]

and therein lies the rub - most people agree that miles are not well used if used for economy travel - rather use them for upgrades when they give remarkably good value for money...

I agree with the comments, the rub is that you have to buy a fairly pricy ticket in the first place to qualify to use the mileage !

[quote]Originally posted by Decker
and therein lies the rub - most people agree that miles are not well used if used for economy travel - rather use them for upgrades when they give remarkably good value for money...


Out of interest, and slightly OT I guess, but would you saying getting a G is VFM or advisable buy an upgradeable PE fare and upgrade to UC with miles ?

Thanks,

HG

[Scrooge]

I would go for a G every time, IMHO if you are looking at doing an upgrade from PE you may as well look for a Z as the prices will not be to different and the earn/spend miles works better. If your going to upgrade route it is worth seeing what an upgradable Y fare would be, assuming you have the miles.

Also I am going to change the subject as the OP raised an number of issues not involving the surcharge.

[Decker]

HG

Depends how many miles I have and whether I need the TPs . So early in the year I'll look at Ls or Ss to upgrade to G (S if the client is paying ). When I'm requalled and have plenty of miles I'll look at Gs.

Regards

quote:Originally posted by Decker
and therein lies the rub - most people agree that miles are not well used if used for economy travel - rather use them for upgrades when they give remarkably good value for money...

I certainly agree that using miles for Y is not good VFM - unless you are travelling in a peak period. However as someone with a family using miles for UC (even if you could get 4) or even premium is rarely an option - not when you need 4 or 5 tickets. Much though I'd love to jet off to the Carribean or Vegas in upper by myself or with my wife, I normally get to spend 200K at a time on trips in Y to MCO.

It's something I have come to terms with but I have to say throwing another 700 on top for tax's/fees after paying out 200k miles grates a bit with me too.

FM

[Neil]

I think upgrading L's is an excellent use of miles and an excellently priced way to fly UC. Still earn miles and TP's, 40k less miles than a full G which would earn nothing and an L is usually very well priced.

Neil

[HighFlyer]

quote:Originally posted by Neil
I think upgrading L's is an excellent use of miles and an excellently priced way to fly UC. Still earn miles and TP's, 40k less miles than a full G which would earn nothing and an L is usually very well priced.

Agreed. And you have to pay taxes on reward flights anyway, so its often not too much more to purchase an L fare.

Thanks,
Sarah

At the end of the day the fuel surcharge is a con, the cost of fuel regardless of source price should be included directly into fares, after all it is a major part of the original cost of the service provided.

With the large majority of seats being bought via the internet, the airlines can adjust prices at the drop of a hat to reflect the current fuel costs if they really wanted to.

As for the APD increases, remember this Government is involved in 2 wars and as with all wars through history, these have been paid for with increases in taxes across the board on the populus, it is just another way for the Government to make sure they can afford it.