A WestJet plane is pictured over Toronto Pearson International Airport on May 18, 2014.Matthew Sherwood/The Globe and Mail
Airline fuel surcharges should begin falling as the drop in the price of oil works its way through the aviation fuel system, says Tony Tyler, director general of the International Air Transport Association.
"In many cases, airlines operate now with a basic fare and a fuel surcharge of some kind and the fuel surcharge in many airlines is directly linked to the price they're paying for fuel," Mr. Tyler, whose organization represents the global airline industry, told a small group of reporters in Toronto. "You'll see the fuel surcharge very quickly come down."
The price of jet fuel in Canadian dollars has fallen 20 per cent this year, a positive development for Air Canada and WestJet Airlines Ltd. that has helped offset the indirect negative impact they face from declining oil prices. That impact is the decline in the value of the Canadian dollar.
Prices for aviation fuel lag the price of oil by about a month and many airlines have hedged their fuel costs, Mr. Tyler said, but competition and consumer pressure should lead airlines to reduce their fuel surcharges.
Some airlines put fuel surcharges in place early in the 2000s, when the price of a barrel of oil began surging to the $150 (U.S.) level it hit on the world market in 2007. Crude oil futures for December purchase closed at $81.42 a barrel on world markets Tuesday.
Air Canada, for example, initiated a fuel surcharge on international flights in 2002, spokesman Peter Fitzpatrick said Tuesday.
Whether it will come down is not a topic the airline is willing to discuss, but currency fluctuations, hedging, market conditions and refining costs all have an impact, Mr. Fitzpatrick said.
"We are closely monitoring the situation, though, and market conditions and competitive factors do play a role in setting prices," he said.
The airline's website shows a fuel surcharge of $476 (Canadian) on a flight between Toronto and Paris next month that makes up more than half of the total $825.30 fare.
WestJet has no fuel surcharges, spokesman Robert Palmer said.
In Canadian dollar terms, the price of jet fuel has fallen to 72.4 cents a litre from 83.7 cents a since July 29, which is the last day on which crude oil was trading above $100 (U.S.) a barrel, said David Tyerman, who follows the airline industry for Canaccord Genuity in Toronto.
Investors and consumers need to watch what happens to fares in the coming months, said Raymond James Ltd. airline analyst Ben Cherniavsky. "My bet is they will soften as capacity growth remains competitive and the airlines now have some more wiggle room to discount with fuel costs coming down."
The decline in oil prices is generally good news for the airline industry, Mr. Tyler said, but the causes of it are worrisome, notably declines in the European and Asian economies.
"We do have to take account of that fact," he said. "If economies wobble then the top line gets affected quite heavily in the airline business."
Senior U.S. airline executives are basking in the positive impact the drop in aviation fuel prices is having on their bottom lines, but they're reluctant to drop fares because they have seen how volatile oil prices can be.
"You go back to 2008, there was a very sharp spike in energy prices," Southwest Airlines Inc. chief executive officer Gary Kelly said. "All carriers tried to raise fares. Five went bankrupt and aren't here any more."
Lowering fares one day, raising them the next if the price of oil goes back up "would be absolutely the worst thing that we could do," Mr. Kelly said on the airline's third-quarter financial results conference call last week.
Richard Anderson, CEO of Delta Air Lines Inc., said short-term changes in crude prices are not going to change the airline's assumption that aviation fuel prices will stay on an upward trajectory over the long term.