THE cost of oil has been cut in half since the summer, and it now sits at close to $55 a barrel. And yet people flying home for the holidays are still paying fuel surcharges on top of airfares. Professor Anming Zhang, the Vancouver International Airport Authority Professor in Air Transportation at Sauder, explains why the surcharges persist, and what consumers can expect in the new year.
Why are we still getting hit with these fuel surcharges?
Essentially, the price of oil dropped too quickly. It’s been a shock to the airlines, and they’re wondering if the price might go up again soon. Things are still uncertain, so they’re being cautious in case it’s only a temporary drop. The airlines are generally quicker to react to increases in the price of oil than decreases, as they’re reluctant to let go of those surcharges – it’s a nice way for them to say, it’s not our fault the fares are high, it’s just because oil is so expensive. It’s like a drug for them – they like those surcharges, and certainly don’t want to get rid of them.
Plus, they tend to buy their oil ahead of time, so they have a lot of oil in stock that they bought at a higher price.
Isn’t that unfair to consumers?
Definitely. It’s not fair. Strictly speaking, they should be reacting to market competition. But the industry isn’t that competitive, as there are very few airlines. They can get away with keeping their prices high – because they all do it. They can’t actually talk together about keeping prices high, as that would be illegal collusion – but they can use fuel surcharges as a tacit signal. There’s a mutual understanding. And in the end, it’s in the airlines’ interest to reduce the price slowly, and increase prices quickly.
So will the surcharges go away eventually?
The airlines will most likely decrease the surcharges – but not get rid of them altogether. That would only be if the price of oil stayed this low for a long time – which I doubt. The demand is still there, as the global population keeps increasing, and the middle class in China and other developing countries keeps growing, but the supply is more limited, as oil isn’t renewable. And with growing environmental concerns, governments are more inclined to tax oil, which would keep it expensive for the airlines. So fuel surcharges are here to stay.