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Fuel surcharges blossom again at Southeast Asia budget carriers

Luc Citrinot, eTN  May 05, 2011

BANGKOK (eTN) - Last Tuesday marked an end to a marketing trump that AirAsia had been branding for over two years. In November 2008, the AirAsia group proudly announced to remove fuel surcharge from passengers’ ticket. A year later it also took the decision to withdraw administration fees. The announcement had a great impact on travelers who thought they would only have to pay for the price of the ticket.

But - “trick or treat” - on May 3, 2011, Air Asia reintroduced its fuel surcharge. In an official communication, the carrier indicates that the measure is only temporary to offset escalating jet fuel prices. In 6 months time, jet fuel reached new heights, almost doubling from its 2010 average level of US$88 to over US$140 per barrel last week.

Fuel surcharge is a sensitive issue on Asian travel patterns as it can be a double-edged sword. Rising fuel surcharges from legacy carriers is likely to fuel up a boom in demand from Asian middle classes still keen to travel by opting eventually for budget carriers instead of full-service airlines. Despite also introducing fuel surcharges, budget carriers’ fees will still remain lower than the ones charged by legacy airlines.

However, any increase in the total fare being fetched at the end could also impact the Asian consumer. Budget carriers are becoming attractive alternatives to road transportation to the middle-class – including the lower-tier segment. Fuel surcharge could then rapidly depress the demand in countries with a big chunk of those lower income segments. It probably explains why AirAsia decided not to impose fuel surcharge on domestic flights within Indonesia and Thailand but only in Malaysia, where the middle-class can still afford to pay a small additional fee. After still explaining to maintain its policy of zero fuel surcharge at the end of January, Manila-based Cebu Pacific decided to reintroduce fuel surcharge by mid-March on international services, explaining it to be unable to support rising charges. It was then forced 10 days later to also apply a modest fuel fee on domestic flights, between P. 50 (US$1.07) and P. 200 (US$4.30) per segment. Talking to local media, Cebu Pacific Vice President Marketing Candice Iyog explained that it will still offer the lowest fares of any airlines in the Philippines, even including the fuel surcharge.

Malaysian domestic and international flights of up to 2 hours show from now an additional fuel surcharge of RM 10 per segment (roughly US$3.30), increasing by RM 10 for any additional hour of flight up to 4 hours. For AirAsia X, the surcharge ranges from RM 50 to RM 90 (roughly US$17 to US$31). The budget airlines group is prompt to promise to again abolish the surcharge as soon as prices will drop. The charged fee remains relatively low. AirAsia indicates that growing ancillary revenues – meals, luggage fee, pre-check-in or seat assignment, online shopping or insurance - help to offset the effects of fuel price hikes. In a financial statement, the airline group estimates that every RM 1 (U$30) spent by passenger provides approximately US$1/barrel of buffer.

Tiger Airways is still not charging additional fees for the fuel increase. The airline indicates to have integrated rising fuel prices into its forecasts. Ancillary services at the carrier have already reached 20% of Tiger’s total revenues and have also a buffer effect on air tickets. Meanwhile, the airline indicates to have slightly increased its average fare to partially balance for soaring jet fuel costs.

For both AirAsia and Tiger Airways, fuel has the highest share in total expenditure: for the first quarter of FY 2011 for AirAsia, it averaged 38.2% - even 39.3% of Indonesia AirAsia - while for Tiger Airways, it stood at 38.1% of all expenditures for the third quarter 2010-11. For the Qantas Group – to which low cost brand Jetstar is integrated - fuel costs per unit stood at 31.6% for the first half year of FY 2011.

The biggest hope for passengers would be an end to the ongoing conflicts in the Middle East, which could bring a temporary relief to the escalation of fuel prices. But as experts say regularly, demand for oil will continue to grow quicker than supply, high prices and fuel surcharges are likely to become permanent features of air transport. Better to get used to it now!

Fuel surcharges blossom again at Southeast Asia budget carriers
Photo by Luc Citrinot

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