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Wolff & Samson PC
Counsellors At Law Corporate Travel
Among the many challenges faced by commercial carriers today is the escalating price of aviation fuel. As of the time of this writing, the price of the highest quality crude oil had breached the $47 a barrel barrier, with supply instability in southern Iraq, Russia and Venezuela continuing to exert upward pressure on price. How much higher will the price of oil climb in the near future and what can carriers do to control this spiraling cost?The ever-present threat of terrorism makes prognostication about the world’s oil supply and oil prices a perilous undertaking; however, the course that carriers intend to pursue and, in fact, are pursuing in this environment is more apparent. The New York Times reported on August 10, 2004 that British Airways and Virgin Atlantic Airways increased their fuel surcharge on longhaul routes to £6 or approximately $11 per sector; other carriers will likely follow suit. Many of the corporate travel managers that I represent and other industry professional with whom I have spoken accept the fuel surcharge as an inexorable part of the new world order. This resignation or, perhaps, understanding of the carriers’ desperate situation discourages travel managers from challenging the fuel surcharge, even though most every other facet of the commercial relationship with a preferred carrier is fair game for negotiation. Should corporate consumers be so accepting of the fuel surcharge? Fuel is a line item on an airline’s budget, as are the cost of labor and insurance premiums. But the industry has never witnessed a “Pilots’ Wage Increase Surcharge” assessed by an airline; to offset the rising cost of labor, carriers have traditionally raised their published fares. Why don’t the airlines use that same tack to combat rising fuel costs? The answer may be found in the terms of the preferred carrier agreements to which the airlines are parties. Airlines typically agree contractually to provide their best corporate customers with a combination of fixed fares on specified routes and steep point of sale discounts off of the airlines’ published fares. For routes on which a fixed fare has been granted, an airline’s attempt to raise such fares by the £6 fuel surcharge noted above would likely meet resistance on the grounds that it is contrary to one of the fundamental promises that the airline made—to keep fares at the same level for the period stipulated in the contract. For routes on which a corporate customer enjoys a point of sale discount, the revenue realized by a carrier from an increase in published fares would be diluted to the extent of each corporate customer’s discount; rather than realize the full £6, the airline may only realize, say, 60% of that amount. Similarly, an increase in fares, rather than a fuel surcharge, to offset rising fuel costs would result in each customer generating greater flown revenue on its preferred airlines. Under contracts offering back-end rebates based upon the level of flown revenue on a carrier, a fare increase would result in a smaller net benefit to a carrier than would a fuel surcharge. Bottom line: the fuel surcharge allows an airline to arrive at a result which, under the terms of most preferred carrier agreements, would be difficult if not impossible to achieve. How should a corporate customer deal with the prospect of a fuel surcharge or an increase in an existing surcharge? Head on. Travel managers should ask enough questions of the carrier to ascertain its plans about the surcharge. For example: Armed with answers to these questions, a corporate travel manager is in a position to engage in intelligent negotiations with the carrier. A starting point for the negotiations may be to request some minimum time period during which a surcharge will not be imposed or increased, irrespective of the price of crude oil or the level of the surcharge assessed by the carrier in the market generally. In addition to or in lieu of this embargo period in which a surcharge may not be imposed or increased, a corporate travel manager may demand that any future increase in the surcharge be tied to an increase, above a certain threshold, in a clearly identified benchmark of the cost of fuel. Another reasonable request would be to demand at least 60 days’ prior written notice of any planned increase in, or the imposition of, a fuel surcharge; the 60 days should provide the travel manager ample time to explore other available options. For those travel managers and companies who are unwilling to assume the risk of an increase in the fuel surcharge, a more aggressive approach may be in order. In negotiating with carriers, the travel managers could take the position that the carriers are better able to anticipate and protect against future increases in the cost of fuel; that is a risk that the corporate customer expects the airline to assume, and the corporate customer will not agree to pay a new, or any increase in a, fuel surcharge. Accordingly, the carrier should be advised to offer fixed fares and discounts off of published fares at a level that accounts for the risk of rising fuel costs. As a note of caution, if not all carriers are amenable to offering fares with a guaranty that a fuel surcharge will not be imposed or increased, it may be more difficult to make an “apples-to-apples” comparison of the bids or pricing submitted by the various carriers. In conclusion, the cost of aviation fuel and the trend of escalating fuel prices require that travel managers include this topic among the issues discussed and negotiated with airlines.1 © |