Why levy fuel surcharges when oil prices are down?

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Oil prices are the lowest in more than a decade but air fares have not fallen in tandem and travellers are asking why.

With the exception of a few countries, including China and Japan, where fuel surcharges are regulated by the government, airlines everywhere else are free to make their own decisions.

There are several reasons why many, including Singapore Airlines (SIA), have not cut their charges.

This is more than double the current price of jet fuel.

Apart from hedging, the impact of sharp falls in some currencies against the US dollar over the past 18 months has also offset the drop in oil prices.

The other reason airlines have not cut surcharges is that they don't see the need to.

  • Reader Brent Morgans wrote to askST on why airlines are still levying fuel surcharges when crude oil and jet fuel priceshave been declining. Aviation correspondent Karamjit Kaur explains why fuel surchargesare being imposed.

Hedging, where airlines lock in a portion of their required future needs at an agreed price, is a key factor. What this means is that the fuel price the airlines are paying today are often based on prices they had committed to before the fall in oil prices.

So even though oil prices have fallen, airlines are still not experiencing the full benefits of the lower oil prices. SIA, for example, has hedged 50.7 per cent of its fuel needs from last October to this March at an average price of US$93 per barrel.

Aviation analyst Shukor Yusof of Endau Analytics said: "Indeed, ticket prices at many full-service carriers remain firm and the airlines understandably show little desire to slash fares when demand continues to be strong."

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A version of this article appeared in the print edition of The Straits Times on January 30, 2016, with the headline 'Why levy fuel surcharges when oil prices are down?'. Print Edition | Subscribe