Virgin Blue eliminates domestic fuel surcharges

[crazydave98]

You were doing so well up until this though:

Different dynamics and competition basically means that you can't get away with it on domestic flights but you can on int'l - thus roll it into the base fare - you can't logical thought out justifications and then have another level of "because we can"...

Sorry, fact of life. In Australia we compete against Qantas group. On trans-Tasman you can add AirNZ, Emirates, LAN Chile, Aerolineas Argentina, Thai Airways, Royal Brunei and whatever other 5th freedom carrier happens to be dumping capacity in the market at this point in time. So it's not "because we can" it's "because the market is considerably more complex in regulatory environment, competitive structure and pricing dynamics to which we have to respond". If you go buy an AKL-SYD fare on www.airnz.co.nz you will see that they quote the base fare and you have to get near the end of the booking before they add taxes. They do this because they can under NZ regulation. We would be stupid to advertise an all-inclusive fare of $100 when AirNZ advertises $80 (and you only find out when booking it is plus $50 in taxes).

 

[wallacej]

... If you go buy an AKL-SYD fare on www.airnz.co.nz you will see that they quote the base fare and you have to get near the end of the booking before they add taxes. They do this because they can under NZ regulation. We would be stupid to advertise an all-inclusive fare of $100 when AirNZ advertises $80 (and you only find out when booking it is plus $50 in taxes).

In an international marketplace one would think that advertising toward the local market, and working within the confines of local regulations is a good business decision.

If it were my business I would do it the same way. I think in this case NZ authorities need to step in and make the playing field level, and look at it from through the consumers eyes - advertise the price you will have to pay (inc all taxes and charges).

Reminds me of my first time in the US as a child. Went to buy a chocolate bar. Could not understand why the price marked on the bar/shelf was less than the clerk wanted to charge me. (simply because txes were added on at point of sale).

 

[crazydave98]

Dave thanks for a couple of good points on this - information I was not aware of - just a couple fo comments below:

longer sector lengths use more fuel per seat per trip This is irrelevant in terms of the fuel surcharge - the fare already incorporates a pricing element for fuel so simply having a longer trip does not justify a differential

Sorry this obviously needs more explanation as you have confused two issues here that need to be separated. The first is whether increased fuel prices should be included in the base fare or whether they should be surcharged. This was discussed here (for the benefit of other members) http://www.frequentflyer.com.au/community/travel-news/fuel-charge-ignites-debate-15644-2.html

The second issue is how much fares (or surcharges) should increase/decrease to cover changes in fuel costs which I will try to give some insight on here.

The first thing to be aware of is that the spot price of oil (and movements thereof) bears little relationship to what airlines pay for jet fuel. This is primarily because of hedging - airlines buy most of their fuel in advance (or more accurately lock in the fuel price well in advance). So for example when oil was at $147 per barrel and all the pundits were predicting $200 it seemed pretty prudent to buy a ton of jet fuel at $100. Note that there is a "Crack" between the price of crude oil and refined products (e.g. jet fuel) which has also been widening over past few years from about $5 to $20 per barrel so $100 fuel = $80 crude. Back to the example the downside is that when oil is back to $40 our generalised airline is still paying $100 until its hedges expire (which is typically a few months). All hedging does is smooth the volatility in oil prices, not protect against high prices for ever and it comes at a cost - think of it like insurance. If you could accurately predict oil prices and consistently make a profit from hedging you should do that rather than run an airline.

The second thing is that in recent history fuel surcharges or fare price rises did not cover the increased cost of fuel (net of hedging) because the market would simply not take it and people will stop flying ("own price elasticity of demand" for students of economics). Let's say that in normal times an airline is making a decent profit on SYD-MEL and SYD-APW and the fuel cost per seat is $50 and $150 respectively reflecting the relative lengths of these routes. Let's say oil prices triple but because of hedging the fuel bill for the airline only (!) doubles. The airline puts on a surcharge of $30 domestically (SYD-MEL) and $100 internationally (SYD-APW). The airline is $20 per SYD-MEL sector worse off (less profit) but $50 in the hole on the longer sector (SYD-APW).

Next let's say that oil prices recede, and after a few months as hedges expire, the cost of fuel to the airline also starts to come down. After a while the actual surcharge (or increased ticket price) if held constant and cost of the fuel may actually meet. At this point the airline has forgone more profit on the longer sector (SYD-APW) than the shorter one (SYD-MEL) for some time. There are two ways (or combinations thereof) the airline can recover this profit. One is to cross-subidise from the more profitable shorter route. The other is to keep the surcharge for a while on longer on the longer sector. As per my previous post these sorts of decisions also have to be made with regard to the different competitive and regulatory environments. But back to my original point that simongr picked up - there are several reasons why surcharges are different for longer sectors than short sectors.

Anyway, hope this has given some insight into the tricky business of how to manage prices (whether fuel surcharge or inclusive prices) in the face of volatility in cost of fuel. Frankly the media has too much fun beating up the airlines about falling spot prices of oil not been reflected in surcharges or ticket prices, than to actually try to educate travellers. Even the journalists who actually understand the issues realise that a beat-up and inflaming public opinion sells more papers than a rational explanation of the situation. Am I just wasting my time here too?

CrazyDave98

 

[simongr]

Dave

I think most of us understand why the fare should move with movements (spot or otherwise) in fuel price. Fuel is more volatile than say landing fees or staff costs. I have no issue with airlines moving the fares however they please for whatever reason (i.e. jacking up prices/reducing discount availability during school holidays for example is fine with me as it reflects supply/demand constraints).

My issue is that if the fuel surcharge can be removed from domestic flights and the oil price volatility (which if you are hedging the bulk of your fuel costs should not move dramatically day to day except when one hedge "runs out") rolled into the base fare then the same should be true of international flights.

I think the true answer is that they stay on int'l flights because the industry as a whole is using surcharges for int'l flights (except EK) - if SQ dropped/eliminated them I would expect to see QF do the same...

 

[janjan]

The SKIES THE LIMIT AS FUEL PRICES PLUMMET

The SKY'S THE LIMIT. The SKIES are blue.

 

[markis10]

DJ have just released a sale saying no surcharge + at least 25% off!

Virgin Blue > Specials

 

[JohnK]

How this affects the total ticket price is not relevant to me. I really don't care if they remove the fuel surcharge and then add the exact same amount onto the base fare. That is where the cost of fuel (and all other airline costs) should be recovered. Good on them for having the guts to remove the surcharges. How they choose to set the price of their base fare amount is a business decision for the airline.

I think most of us have been using this argument for 5 years but the airlines have held firm until now. Good to see fuel surcharges removed....