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Fuel Surcharges and Fuel Costs

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NM

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While I was bored this afternoon (supposed to be studying for an exam next week), my mind drifted to wondering just how much of the fuel costs for a flight are actually covered by the fuel surcharge. So using some QF examples, I plugged some assumptions and some facts into a speadsheet for some interesting results.

Obviously the numbers are affected by numerous factors, including the route flown (affects the fuel surcharge revenue, fuel burn etc), the aircraft type used (number of passengers, fuel burn rate etc) and the actual cost of fuel. So here are some of my assumptions used in my calculations:

  • Jet fuel cost is about $1.25/kg. Fuel burn is usually calculated in weight/hour so I have used kg for fuel costs, which would relate to about $1/litre with a specific gravity of 0.8 for Jet Fuel.
  • Fuel burn is more or less proportional to aircraft weight. Using the baseline of a fully loaded 747-400ER burning 29,000lb/hr (13,154kg/hr), fuel burn was estimated based on an average mission weight and that burn rate. This assumes modern aircraft burn fuel at about the same rate per weight of the aircraft. I am assured by a 747 captain that this is a reasonable assumption.
  • The aircraft is operating with an average 80% load factor.

So here is what I found:
Code:
Route	  AC Type	Surcharge	Pax	 Revenue 	Time	Avg Weight	Fuel (Kg)	Fuel Cost	Difference	% Cover
BNE-SYD	  737-800	$ 33.20		134	 $ 4,449 	 1	  155,000	  2,241		$  2,801	-$ 1,648	159%
MEL-SYD	  767-300	$ 33.20		200	 $ 6,640 	 1	  290,000	  4,192		$  5,240	-$ 1,400	127%
SYD-PER	  737-800	$ 33.20		134	 $ 4,449 	 4	  164,000	  9,483		$ 11,853	$  7,405	 38%
SYD-PER	  747-300	$ 33.20		360	 $11,952 	 4	  720,000	 41,631		$ 52,039	$ 40,087	 23%
SYD-AKL	  767-300	$ 62.00		200	 $12,400 	 3	  330,000	 14,311		$ 17,888	$  5,488	 69%
BNE-AKL	  737-800	$ 62.00		134	 $ 8,308 	 3	  160,000	  6,939		$  8,673	$    365	 96%
MEL-AKL	  747-400	$ 62.00		330	 $20,460 	 3.5	  650,000	 32,886		$ 41,107	$ 20,647	 50%
SYD-LAX	  747-400	$135.00		274	 $36,990 	13.5	  710,000	138,554		$173,192	$136,202	 21%
BNE-SIN	  A330-300	$107.00		238	 $25,466 	 7.8	  410,000	 46,228		$ 57,785	$ 32,319	 44%
MEL-SIN	  747-400	$107.00		303	 $32,421 	 7.3	  700,000	 73,867		$ 92,333	$ 59,912	 35%
BNE-HKG	  767-300	$ 76.54		200	 $15,308 	 8.75	  340,000	 43,004		$ 53,756	$ 38,448	 28%
So from this it can be seen that for some short-haul domestic services, QF is possibly recovering its entire fuel bill for the flight from the fuel surcharges. But for some long-haul flights it is well short of recovering the full amount.

But if we assume that the price is Jet fuel varies in a similar manner to petrol prices with the movement in crude oil prices, by my estimates petrol prices have risen around 30% in the time since the airline's started to apply fuel surcharges. So it would be reasonable to expect that on average the fuel surcharge should cover about 30% of the cost of the fuel. As can be seen from the last column, some missions are below this mark, but many are significantly above it.

And we must remember that this is a very simple analysis and does not consider things like hedging etc.

If anyone sees and glaring errors in my assumptions or calculations, please let me know.
 

JohnK

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NM said:
While I was bored this afternoon (supposed to be studying for an exam next week), my mind drifted to wondering just how much of the fuel costs for a flight are actually covered by the fuel surcharge.
Your calculations look good.

I thought that fuel surcharges were introduced to cover the increase of oil prices in 2004. Oil prices have been dropping steadily the last few months but are not yet at the point they were in 2004.

The interesting question would be how much of the fuel cost is actually factored in to the base airfare? My guess would be a tidy profit on fuel costs pre 2004. Enough to cover fuel costs of today? Probably not, but I would still guess that fuel costs factored in to the base airfare cover the majority of total fuel costs for the airline.

The actual purpose of the fuel surcharge? Increase profit margin! YMMV.
 

NM

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JohnK said:
The interesting question would be how much of the fuel cost is actually factored in to the base airfare? My guess would be a tidy profit on fuel costs pre 2004. Enough to cover fuel costs of today? Probably not, but I would still guess that fuel costs factored in to the base airfare cover the majority of total fuel costs for the airline.
I guess the key point for me is that the percentage of actual fuel cost that is recovered by the fuel surcharge varies greatly by the aircraft type and route flown.

I just added a calculation for a 767-300 flying MEL-SYD. When you look at the surcharge revenue vs actual fuel cost for the short domestic routes, it is clear that the surcharge on those routes (the busiest routes by passenger volume and probably by surcharge revenue) well outstrip the increase in fuel costs since the oil price instability commenced. In fact, if my assumptions are not too inaccurate then the surcharge revenue may actually be more than the fuel cost for the mission.

But on longer routes, this is not the case. So overall Qantas may not be recovering as much in fuel surcharges as they have experienced in increased fuel costs (as they are still claiming), but that just goes to show how the current schedule of fuel surcharges does not reflect the fuel cost base and hence has the short-haul services subsidising the long-haul services.
 

DJ737

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Hi there

Interesting figures, If i were to approach QF/DJ to hire a 737-800 to fly a group for a MEL-SYD-MEL day trip, what would the charge be? Is there an hourly rate for aircraft charter from Australia's main carriers?

How do the people that do the Antartic (never could spell that) 747 charters go about hiring aircraft from QF?

Cheers
DJ737
 

straitman

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NM,

Interesting set of data.

The only bit I have trouble with is the actual price per Litre that you've used. I believe that it's still somewhat more than what you've used. This won't effect anything expect the final percentages as the principle is correct.

I'll have a look tomorrow (if I remember) and let you know.
 

NM

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straitman said:
NM,

Interesting set of data.

The only bit I have trouble with is the actual price per Litre that you've used. I believe that it's still somewhat more than what you've used. This won't effect anything expect the final percentages as the principle is correct.

I'll have a look tomorrow (if I remember) and let you know.
Hi Bill. I was hoping someone with the right knowledge could provide an accurate current price. So if you have a more suitable value I would be very happy to plug it into my spreadsheet and recalculate. That is why I detailed my assumptions and and happy to adjust as more accurate information becomes available.
 

Evan

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The cost of Jet A-1 will vary depending on if your talking a spot price or a contract price. But you estimates from what i know are not to far off. I know somebody who works for an fuel supplier (aviation) so can ask them if nobody else happens to throw the answer up sooner.

Evan
 

NM

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Evan said:
The cost of Jet A-1 will vary depending on if your talking a spot price or a contract price. But you estimates from what i know are not to far off. I know somebody who works for an fuel supplier (aviation) so can ask them if nobody else happens to throw the answer up sooner.

Evan
Any clarification you can provide will be helpful. I do suspect the price in my calculations is a little, but it will not greatly affect the outcome. I am assuming Qantas gets a good price on their fuel, but may be a little too low. Once someone can provide a better estimate I will plug it into my spreadsheet and re-port the results.
 

oz_mark

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NM said:
But on longer routes, this is not the case. So overall Qantas may not be recovering as much in fuel surcharges as they have experienced in increased fuel costs (as they are still claiming), but that just goes to show how the current schedule of fuel surcharges does not reflect the fuel cost base and hence has the short-haul services subsidising the long-haul services.
Not really surprisng given the flat rate (ok several flat rates(dom/int etc)) that is charged without regard for distances. On the plus side, us folk in Perth seem to do ok out of it for domestic sectors!
 

alect

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NM said:
Any clarification you can provide will be helpful. I do suspect the price in my calculations is a little, but it will not greatly affect the outcome. I am assuming Qantas gets a good price on their fuel, but may be a little too low. Once someone can provide a better estimate I will plug it into my spreadsheet and re-port the results.
Contract prices are obviously not available readily. Spot prices:

Singapore Kerosene-Type Jet Fuel Spot Price FOB (Cents per Gallon)
U.S. Jet Fuel
 

NM

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alect said:
Contract prices are obviously not available readily. Spot prices:

Singapore Kerosene-Type Jet Fuel Spot Price FOB (Cents per Gallon)
U.S. Jet Fuel
Thanks muchly for the links. Seems like the Singapore spot price for Jet fuel is currently just under 170 UC Cents per US Gallon. So I make US$1.70 about A$2.15 at today's exchange rate. And there are 3.785412 litres/US Gallon, so that makes it A$0.5685/litre. And with a specific gravity of 0.8, that makes it about 71 cents/kg. I used A$1.25/kg for my calculations.

Now I think it is fair to assume that the airlines are paying somewhat more than that rate for their fuel by the time the supplier and government all take their share of the transaction. But unfortunately it does not help us very much to determine approx what they are actually paying for the fuel.
 

cabbage74

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Nice spreadsheet. I think that it is interesting that they cover more than the cost of the fuel of the surcharges on the shorthaul flights. Yes they "lose" on the longhaul flights, yet how many of them are there compared to the short flights between, ADL BNE CBR MEL and SYD? Rather a nice deal, can claim not to cover the increased cost on one hand and still grab a nice little package on the other.

M.
 

Altair

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Sorry I may be lost here.:confused:
The fuel surcharge was to recover some of the extra cost of fuel. As NM has shown the fine recovers most of the entire cost of fuel for domestic short haul flights, and used 80% load factor, but for long haul it does not recover the of the price increase. From what I remember the price of the long haul ticket includes the "normal operatng costs" which should include fuel, but of course not abnormal incrase in fuel costs:rolleyes: .
So for long haul the % column is more important, while the case is made that short haul fines should be dropped or heavily reduced.
Also over in LOTLWC we have been informed that QF will not be extending the reductions to us.:evil:
Kiwis cut out of Qantas price drop - 18 Jan 2007 - Aviationhttp://www.nzherald.co.nz/topic/story.cfm?c_id=556&objectid=10419689
 

Commuter

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NM said:
And with a specific gravity of 0.8, that makes it about 71 cents/kg. I used A$1.25/kg for my calculations.
I'm talking from memory (I don't have immediate access to data at the moment) so I might have it all wrong, but I think it would be reasonable to assume that the figure that an airline pays is somewhere between those two figures, fairly near the middle of the two but perhaps on the lower side. But bear in mind things like hedging and fuel cost variation depending on location - resulting in tankering sectors at times (I don't know if QF does any tankering).
 

NM

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Commuter said:
I'm talking from memory (I don't have immediate access to data at the moment) so I might have it all wrong, but I think it would be reasonable to assume that the figure that an airline pays is somewhere between those two figures, fairly near the middle of the two but perhaps on the lower side. But bear in mind things like hedging and fuel cost variation depending on location - resulting in tankering sectors at times (I don't know if QF does any tankering).
Thanks for the info. If you are right, then my $1.25 is on the high side. Reducing the cost of fuel in my spreadsheet would make it look even worse for Qantas in terms of justifying the fuel surcharge on short domestic sectors.

Tankering is a commercial decision an airline may choose to undertake. It should not be subsidised by the fuel surcharges paid by passengers. Sometimes its cheaper or logistically better to tanker the fuel rather than source it at a remote port. But I suspect that is only viable for some of the QantasLink routes on a regular basis.
 
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