Are Airlines Overcharging for Fuel?

Hopefully, the current low oil price will let the airlines lock in lower fuel prices for the next couple of years and competitive pressures will start to result in lower ticket prices next year.[3]

1: http://www.economist.com/blogs/gulliver/2015/01/fuel-hedging...

2: http://www.standard.co.uk/business/ryanair-boss-keeps-losing...

3: http://uk.reuters.com/article/uk-airlines-fuel-hedging-idUKK...

Worse yet - most airlines bet the wrong way on the movement of fuel prices and locked in expensive hedges that they've made huge losses on now.

Southwest were praised for locking in fuel prices when oil rallied[1] but since the market turned they have lost $1.8 billion on their positions[2] Ryan Air locked themselves in for 3 years at ~$800-1000 per ton[3] Delta lost over $2 billion, United over $600 million[4]

Fuel was traditionally 20% of an airlines cost base but peaked up to 35% (see this[5] super interesting chart). The surcharges are noticed because a lot of airlines have restructured ticket pricing to the point where the 'base fare' is only 40-50% of ticket cost. One reason for this is that a lot of reward programs were restructured so that only the base fare is redeemed while the surcharges are paid (effectively devaluing frequent flyer miles)

But there is an even simpler reason why you likely weren't being overcharged for fuel: you were flying Qatar airways. The new batch of airlines from the gulf states have been making huge losses in an attempt to buy market.

[1] http://abcnews.go.com/Travel/story?id=5918252

[2] http://www.usatoday.com/story/money/cars/2016/01/25/airlines...

[3] http://www.reuters.com/article/us-airlines-fuel-hedging-idUS...

[4] http://www.bloomberg.com/news/articles/2015-11-25/airlines-b...

[5] http://imgur.com/z874RuC.png

Competition is fierce enough to drive down those costs over which airlines have any control at all. I think that for any route worth its salt the prices are close enough to what's actually sustainable for the airline and not necessarily that much higher. This is very different for more remote and less-used routes where one or two company might enjoy a geographical monopoly.

The thing is that the airlines make sure there's always something you can buy from at a crazy prize. The classic example might be the first class ticket for the next departing flight. Even each first class and business seat allows the airline to give a small discount for all economy seats because people are willing to pay a different price for things they value differently. Further, because seats are sold one by one, even economy seats can cost double or half depending on when and how you're buying them.

Personally, I book my flights somewhat in advance, picking a combination of flight times and prices that I find tolerable myself. The limits are all subjective and can change. But I don't care if I paid five dollars/euros/pounds more or less because of "passenger civil aviation security service fee" because the major factor for how much I end up paying is how the market works for airline tickets. If the fee was 2 pounds or 20 pounds, I might still be paying the same price. Or I could be paying a hundred pounds more (or less) for the ticket even if the fees would be a few dozens pounds less (or more).

Part of the reason they do this is because it allows them to book revenue for "free" award tickets: since your miles only cover the ticket component of the package and none of the fuel surchages, they can wring money from passengers who would otherwise be dead weight on the balance sheet.

I recently booked an award ticket on BA metal (I know, mistake -- but it was an emergency) that cost me something like $500 in fuel surcharges and assorted taxes. As it turns out, in airline speak free doesn't actually mean free.

They make any profits with business class and first class tickets. These are the seat prices which may reflect the costs to operate. Economy seats are there to fill up the plane. They can run the flight and still make a profit if all the business class and first class seats are taken and no economy seats are there. This is why the adverts you see on TV are never about the economy class, but all about the business / first class / luxury class. Airlines only compete with each other on these luxury seats, they don't compete with economy seats.

The interesting part from the carrier point of view relates to how an airline prorates out the total amount collected in codeshare or interline agreements, and whether corporate discounted fares offered apply to the YQ portion or not (hint they usually don't) and whether all governments have caught up in taxing these in the same manner as a regular fares. I would think of it as a construct for creative accounting more than anything else.

I pity the airlines and wonder where do they make money from.

Efficiency numbers quoted are per pax for full planes (I guess considering the max legal amount of seats)

Also, the Qatar 787-8 has 254 seats, 232 in Economy

Wait til 2017 for the real savings.