The article “Carriers Brace for Increases in Fuel Prices” in the Wall Street Journal prompted me to wonder how the airlines handle these shocks to their costs.
Prior to doing any research, my expectation was that they use the news that oil prices are going up as an excuse to raise prices. After all, as consumers we will accept price increases when we know there is a reason.
According to the WSJ article, they are raising prices. United and American are adding a $20 round-trip fuel surcharge. Now the question is “Are they making or losing money on that $20 surcharge?”
To answer that, I went to the website HowStuffWorks to learn that a 747 burns about 0.01 gallons of jet fuel per person per mile. For a flight across the country and back of about 6,000 miles, each passenger consumes about 60 gallons of jet fuel. According to the IATA fuel monitor web site on Feb. 25, the price of Jet Fuel is $2.838/gallon. According to the WSJ article, the spot price of jet fuel is $3.12 today, a $0.30 price increase over a recent price. If the surcharge is to cover the recent cost shocks the additional $0.30 times 60 gallons per person shows the airlines face an extra cost of $18 per person per round trip flight across the US.
This seems like the airlines are just covering their costs plus adding a little extra for the uncertainty of future oil prices.
The two real lessons to take away from this situation:
1. Raising prices is best done when there is public awareness of your increases in costs.
2. You still have to compete. In the article both United and Delta implemented surcharges. If the other airlines do not follow their lead you can be certain these two will pull their increase back.