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View Full Version : Legality of fuel surcharges for airlines who have hedged costs


Momo
4th Jul 2008, 11:50
I note that the latest rounds of fuel surcharges include similar amounts for airlines who have hedged and those who have not. Air France KLM (for example) has 75% of fuel needs into next year hedged at around $75, according to their own website. Some airlines, particularly US ones, have no hedging. To me (and I am not a lawyer, but know that airlines are exempt from some aspects of competition law), hedged and non-hedged airlines matching each other's fuel surcharges feels like a BA/Virgin-type illegal agreement. Any lawyers out there?

Momo

James 1077
6th Jul 2008, 08:59
I believe that there is no problem in matching your competitor's prices; provided that you aren't talking to them before the event!

Supermarkets, petrol stations etc all do price surveys to make sure that they are charging the same as their local competition and many stores also offer price matching guarantees. All of these are "price fixing" but aren't illegal as they don't communicate with their competitors before the prices are set.

With respect to the fuel hedging it is simply down to economics; if people are willing to pay $X for the ticket then charge $X - if your costs are lower than your competition due to your hedging then there is nothing that means that you have to pass that saving on to your customers.

Momo
6th Jul 2008, 09:35
Well, there are two points on this. First, in competition law, you don't have to speak to the competitor for there to be a cartel. You have to behave as though you were speaking to the competitor.

Second, the issue is that the fuel surcharges are being added to "free" tickets awarded unded frequent flyer schemes. That does not seem right if there is no real cost increase.

Momo

Capot
6th Jul 2008, 10:35
It's an instructive exercise to calculate the probable revenue, with some very cautious assumptions about sector load factors and so on, received as "fuel surcharges", and set that against the probable total cost of the fuel used for the flight(s) that the surcharges are said to relate to.

Obviously to get the total cost you need to have the normal sector fuel burn data and, much more difficult, a figure for the real cost to the airline of the fuel burnt on the route in question. This can only be an average at best, but if one has some information about the real cost, ie the contract rate paid by the airline at various places, allowing for hedging, it's not very difficult to work out that even with a wide margin of error, the airlines have been having a laugh, with BA leading the field.

Globaliser
13th Jul 2008, 18:33
First, in competition law, you don't have to speak to the competitor for there to be a cartel. You have to behave as though you were speaking to the competitor.But it's OK if you simply respond to what your competitor has already done in a way which is independent of any express or tacit communication between you.

The classic example is a sale. Airline A announces a sale, tickets down from 300 to 200. Airline B responds once it sees the sale announcement by cutting its own fares to 200 in response. No problem with competition law here - in fact, airline B's response is exactly what you expect from proper competition.

Ditto with times when everyone is trying to raise their prices, but waiting for someone else to go first.Second, the issue is that the fuel surcharges are being added to "free" tickets awarded unded frequent flyer schemes. That does not seem right if there is no real cost increase.If the FF scheme allows a fuel surcharge to be added, then there is no problem with this.

In fact, if you think about why the airlines that do the price increases via fuel surcharges are doing it this way, you can see that it's no different from what they do with many of their corporate customers. For example, take a fare of 200 + 100 fuel surcharge. Corporate discount of 50% means the customer pays 100 + 100 fuel surcharge (a total of 200, rather than 50% of 300 = 150).

So if you're in a FF scheme that basically acts as a 100% discount off the base fare, you pay 0 + 100 fuel surcharge, just like the corporates do.