Why levy fuel surcharges when oil prices are down?

askST is The Straits Times' new reader engagement programme where readers will be able to tap ST's experienced pool of correspondents and their contacts for information on topics ranging from personal finance and education to entertainment and health matters.

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."


Why It Matters

Every day on Page 2 of The Straits Times, reporters write about why certain news reports matter to readers. This is a weekly round-up of the columns.

Singapore needs to be in the film business because they tell Singapore stories, senior film correspondent John Lui said. This year's list of made-in-Singapore films would be shorter if the Media Development Authority did not fund local productions, and the industry needs that support to grow. http://str.sg/Zjsu

Malaysia's Attorney-General may have exonerated Prime Minister Najib Razak from wrongdoing in the long-running 1MDB scandal, but Malaysia bureau chief Shannon Teoh said Datuk Seri Najib has much to do before national elections in 2018. Chief among his worries are the economy and the rising terror threat in the region. http://str.sg/ZjMz

Economics correspondent Chia Yan Min addressed speculation about the Monetary Authority of Singapore's (MAS')monetary policy in the light of falling consumer prices. Without a sharp slowdown in growth prospects or clear signs of a recession, she concluded that the MAS is likely to maintain its exchange-rate policy. http://str.sg/Zjpn

Cross-border ties between extremists across South-east Asian countries have intensified, Indonesia bureau chief Francis Chan noted, as signalled by the arrest of a Malaysian with ties to an Indonesian militant in Syria. Indonesian Bahrun Naim had hopes of being the Islamic State in Iraq and Syria's point man in the region, and the arrest could indicate a ramping up of terror campaigns. http://str.sg/Zjwt

Senior sports correspondent Rohit Brijnath wrote about the recent scandal over match-fixing in tennis and noted that this is just the latest in a string of corruption scandals in sport, following the Fifa arrests and doping revelations in athletics. "Competition without integrity undermines the very idea of sport," he said, which is why the Tennis Integrity Unit must be empowered to root out any corrupt players or officials in the game. http://str.sg/ZjoZ

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