Hate Surcharges? Just Wait; the First Domino Already Fell

A resident of Austin was complaining on a local TV station about continuing energy surcharges — on prices of airplane tickets, electricity, and other things — at a time when oil prices have tumbled.

Presumably, instead of raising nominal prices, companies imposed surcharges last year to convince customers that the increases were temporary; but with the average variable cost of production down, why hasn’t competition forced prices down?

My advice to the woman is: wait, it will. We saw recently that US Airways backed down from charging for soft drinks; and I expect that as product demand declines further, some firm will break ranks and cut out surcharges — and others will follow shortly.

Consumers seem generally convinced about the existence of conspiracies; yet experience repeatedly shows us that it doesn’t take very many firms to get to a competitive solution — including the removal of surcharges when input prices fall back down.

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  1. jp says:

    This doesn’t take into account the fact that airlines have been crying poverty for years, cutting back on virtually all services and laying off staff. I have always fully expected that these “surcharges” were permanent price increases.

    My interpretation is, one airline added a surcharge, people continued to buy plane tickets (perhaps partly because of loyalty programs or because of regional limitations on service), so other airlines followed suit because it appeared people were willing to accept them. Now fuel costs have dropped, but with the economy falling apart and airlines (at least claiming to be) on the brink of collapse, I would be very surprised, nay, shocked, to see any of them drop any fees, as they are presumably a significant source of revenue.

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  2. Valpey says:

    Surcharges are very different from charging for soft drinks which requires passengers to have a handful of dollar bills and the unpleasant experience of having to choose to pay $2 for a can of coke which they know costs 50 cents and they are used to getting for free. This is a magnified unpleasantness which can potentially carry over to an overall bad customer experience the likes of which could send a customer to a competitor next time. Citing this change is a bad example.

    Most surcharges are folded into the price of a ticket (or other service) and are actually paid much later via the credit card the tickets were purchased on.

    The in-between situation is the per-additional-checked-bag surcharge. Presumably exeryone saves money if the plane is lighter (requiring less fuel) when fewer people check bags and they get to advertise lower prices.

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  3. Perhaps says:

    But within a day of US Airways removing beverage prices, they added a non-monetary surcharge elsewhere. As would be predictable to anyone who has flown with them since they enstated baggage check fees, they’ve now had to decrease the allowable size of carry-on bag. You may not have to pay for an orange juice, but that’s being offset by having to either carry a smaller bag or pay a $15 check fee you didn’t previously. For my own part, I expect it will end up costing me more.

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  4. Fleur says:

    I’d have to disagree with the writer. I believe that the only reason surcharges imposed as a result of the oil crises should have been removed as soon as the price of crude took a steady downward slope. I believe the only reason surcharges are slow to be removed is that there is insufficient media interest or persistence. It’s not until there is a public (media) outcry that these types off additional fees are reviewed.
    Fleur

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  5. Caitlyn says:

    interesting that Southwest still has both free drinks and free checked luggage (no surcharge for either the first or the second checked bag) *and* cheaper fares (usually). I took a Southwest flight this past weekend and we were discussing it.

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  6. Matthew says:

    I’ve been flying Southwest too. What are these fees and surcharges of which you speak? :)

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  7. Kevin says:

    I imagine many of these companies procure a portion of their supply through either long term contracts or they have purchased hedges against further price increases. Accordingly, their fuel acquisition costs could fall much more slowly than the daily market price.

    Some may recall that it was a successful hedging strategy that enabled Southwest and JetBlue to maintain margins when fuel costs went up. Search Google and you’ll see stories from last month of Southwest having to write down earnings due to losses on fuel hedging as prices declined.

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  8. Otter says:

    This is why I only use travel websites that list the total ticket price. Many list the base price and surprise you with additional fees at checkout.

    As far as Southwest goes, they contracted their fuel prices WAY before the gas crunch. If they hadn’t, their prices and surcharges would have gone up as well. To think otherwise and praise them as saints is very naive.

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