Jet Fuel Surcharges To Stay

January 22, 2006
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Airline and air carrier surcharges seem to have become an aviation industry standard. Many of the major airlines and air cargo carriers initiated a surcharge in February 2000 to combat escalating fuel costs, and surcharges are nearly universal across the industry today.

Surcharges are based on an index of average fuel prices published monthly by the U.S. Department of Energy, so they’re closely linked to current fuel prices and thus adjust quickly up or down to changes. A surcharge is based on the “spot price” — the current delivery price — of jet fuel in a specific market.

“Fuel is obviously a huge operating cost, so the surcharge that we have in place is based on the U.S. Gulf Coast Index,” said Carla Boyd, spokesperson for FedEx Express. “The way we have it set up there is a bit of a lag, but the surcharge adjusts directly to what’s going on with fuel prices.”

FedEx Express, for instance, presently has an 11 percent surcharge on air cargo; Overseas Courier Service has a 13 percent surcharge; DHL Express has a 15 percent surcharge; and UPS has an air and international fuel surcharge of 12.5 percent.

Boyd said that at Fed Ex Express the trigger point for a surcharge is when the price of a gallon of kerosene jet fuel hits 66 cents, so anything above 66 cents triggers a 0.05 percent fuel surcharge. The surcharge rises 0.05 percent for each 4-cent increase above 68 cents, she said.

Besides weighing heavily on the air cargo carriers, rising jet fuel prices are crushing the already beleaguered airlines and could prove to be a “knock-out blow” for some of them, according to John Heimlich, Air Transport Association vice president and chief economist. Last year, U.S. airlines lost $8 billion, and the price of oil remains the single biggest challenge to the future of aviation. Transport association members carry more than 90 percent of U.S. airline passenger and cargo traffic.

Heimlich discussed the high jet fuel cost issue in an association state-of-the-industry question and answer session in January, as well as in his  recent report: “Energy Matters: Combining the Fuel-Related Challenges Facing U.S. Airlines.”

A barrel of jet fuel averaged $72 a barrel in 2005, and the price continues to remain above $70 a barrel. Jet fuel finished 2005 at $75.29 a barrel, while crude was going for $61.06 a barrel, and that momentum carried over to the new year, Heimlich pointed out.

“At a consumption rate of 19.5 billion gallons per year, every penny increase in the price of a gallon of jet fuel drives an additional $195 million in annual fuel costs for the U.S. airlines,” Heimlich reported. “So if the price were a dollar higher over the course of a year, we’re talking about a $19.5 billion increase in expenses.”

Heimlich said fuel prices are influenced by a myriad of global and local factors, but are closely aligned with the price of crude oil. The price of crude, he said, is being driven primarily by a robust global economy, increasing supply tightness, geopolitical insecurity, unique production and demand factors, as well as the devastation inflicted by hurricanes Katrina and Rita. In fact, the hurricanes collectively wiped out 25 percent of the country’s daily jet fuel production — nearly 400,000 barrels a day — due to the damage they wreaked on Gulf Coast refineries and pipelines, he said.

“The technical specifications for jet fuel make it more complex to refine. U.S. buyers have also been somewhat disadvantaged in recent years versus their foreign counterparts, due to a relatively weak dollar,” Heimlich said.

Heimlich said the trends in crude oil prices are only part of the reason for soaring jet fuel prices, which have been outpacing crude prices for a while. There also are issues with refining capacity, product distribution, market speculation, and competition with other products in multi-product pipelines, he said.

To make matters worse, unlike other modes of transportation, there’s no alternative to jet fuel. Heimlich said it’s unlikely we’ll see an alternative means of fueling a jet engine in this century. 

What would it take for jet fuel prices to return to historic norms? Heimlich told the Business Journal that he’s not sure they ever will return, but said it’s clear that investment in capacity, geographic diversification of refineries and mitigation in demand for crude — such as conservation and alternative fuels — are all important ingredients. In his estimation, it would probably take at least three years to get

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