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Fuel for thought

The price of oil is a constant threat to profitability, but air freight’s fuel surcharges can be a legal problem as well as a competitive one, as Rob Coppinger discovers

On 17 March, the European Commission (EC) announced that it would be fining 11 air freight airlines €776.5 million ($830.3 million) for operating a fuel surcharge-related price fixing cartel. The airlines are accused of fixing fuel and security surcharges in the air freight services market for flights from, to, and within the European Economic Area (EEA) from December 1999 to February 2006. The EEA includes 28 European countries from Ireland and Spain to Bulgaria and the Baltic states. All the airlines deny the accusation.


Surcharges are supposed to be the industry’s mechanism for managing fuel volatility, which IATA states can be up to 30% of an airline’s costs; but for 11 airlines that surcharge might now cost them, on average, €70.5 million. 


The companies facing the fines are Air Canada, Air France-KLM, British Airways, Cargolux, Cathay Pacific, Japan Airlines, LAN Chile [now known as LATAM Airlines], Martinair, Qantas, SAS and Singapore Airlines. A 12th cartel member, Lufthansa, and its subsidiary, Swiss International Air Lines, received full immunity from fines. The fines were originally announced in 2010, but a legal procedural error meant that the EU had to withdraw them until recently when it overcame the complications.


“That [fine] has put the issue of fuel pricing back on the agenda,” Alex Veitch, Head of Global Policy at the UK-based Freight Transport Association, tells Airline Cargo Management. “It might go to appeal, it depends on what the airlines want to do.” 


While the period of alleged cartel operations was more than a decade ago, the dramatic increases in oil price from 2011-13, a 2014 average of $100, and a barrel of crude’s subsequent fall during 2015 until early 2016, has both challenged the industry and given it an opportunity for better profits. 


In that period, some airlines moved to all-in pricing. “The climate [in which] many [airlines] did the swap was when fuel was significantly lower than where it is today, $52 a barrel,” Richard Forson, Chief Executive Officer and President of Cargolux Airlines International, tells Airline Cargo Management.


All-in-one pricing has been the preference of many shippers. Veitch says: “The all-in-one rate charge comes up a lot from shippers. I saw a couple of airlines had moved to all in.” The shippers want a simplified pricing for themselves and their customers. 


However, Forson points to the fact that, ultimately, “an all-in-one pricing would have to be adjusted for the rising fuel price.” He explains that with an all-in-one price and a rising oil price, if an airline has done a deal with a shipper at a fixed price then it is the airline that carries the risk.


It is because of this risk that most airlines are still using surcharges, as Veitch explains: “I have found that quite a few cargo airlines are charging a fuel charge with transparent pricing, the methodology behind it.”


It has been the lack of transparency that has long concerned shippers and is partly behind the alleged actions that led to the original EU fines being announced in 2010. The EC is reinstating the surcharge-related fines at a time when fuel has been a more stable factor after a rapid rise in 2016. >>

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