Pain at the Pump Easing, So Why Am I Still Paying Surcharges?

While prices at the pump have been on a steady downturn since mid-August, experts say it may be a while before their evil counterparts — surcharges and fees placed on consumer goods — disappear.

As consumers felt the pinch of skyrocketing gas prices last summer, many also felt the squeeze in unexpected places: airline tickets, bottled water deliveries and goods transported by truck. A variety of businesses passed along their increased fuel prices to consumers in the form of an added cost.

“Virtually any company that had the leverage to do so and had a transportation component to their business added surcharges,” said Dr. Kent Moors, a professor and director of the Energy Policy Research Group at Duquesne University in Pittsburgh. “The most visible have been the trucking companies, the airlines and anyone who has short-haul requirements.”

So if the price of fuel is decreasing, when will related surcharges follow suit and fall or drop off completely?

“It’s a difficult situation for companies. Most apply charges that extend a bit beyond cost, to cushion later vacillations or to make up for past costs,” Moors said.

Cameron Gammill, who splits his time between Nantucket, Mass., and Connecticut, noticed a fuel charge at Island Air, on which he flies at least four times a week. But it didn't get him fired up.

“I understood it because I noticed the fuel prices in general,” he said. “I thought it was fair.”

Island Air added a $2 surcharge on its commuter bookings. Other travelers were also understanding about the added cost.

“In light of what [travelers] were paying at the pump, they were not coming at us with both barrels loaded,” said Philip Geraci, manager of the Hyannis Station for Island Air. “It became a question of, how are we going to keep the doors open? … It’s something you have to pass on in some way, or there’s not enough money to operate the airplane.”

Island Air has yet to reduce its surcharge, even as oil and gas prices drop, because it says it has yet to feel prices on its jet fuel come down.

Small businesses aren't the only ones who pass higher costs onto consumers. Most major airlines, both domestic and foreign, also institute fluctuating surcharges or taxes based on the cost of airline fuel. But by early October 2006, many of the overseas airlines including Virgin Atlantic, Lufthansa, Qantas and Singapore Air, were already reducing their surcharges in response to falling fuel prices.

Some larger carriers even managed to avoid some of the sting of higher prices through savvy buying when prices were lower. Major airlines purchase their jet fuel on the futures market, and Southwest Airlines scored a coup by locking in 85 percent of their fuel at $26 per barrel in 2005. In comparison, Air Tran was one carrier that didn't fair as well, even though it had an estimated 75 percent of its fuel hedged at $50 per barrel.

“Based on the hedging they did, [Southwest] had an advantage in the marketplace, forcing others to lower their surcharge or their overall prices,” said David Ownby, director of the petroleum and chemical industry services practice at LECG in Houston.

Smaller airlines, such as Island Air, are unable to stockpile jet fuel or buy on the futures market, leaving them much more vulnerable to rising fuel prices.

“If you’re an end user dependent on fuel, you take it on the chin because you have to pass the increase on to customers,” said Moors. “It tends to hit local distributors and businesses the worst.”

Another industry that delivers the "double pump" from fuel costs is shipping. FedEx fluctuates its fuel surcharges based on the prices for jet fuel (for express shipments) and diesel fuel (for ground shipments) as published by the U.S. Department of Energy. Changes to the fuel surcharges are re-evaluated and applied once each month.

Taxi and limousine companies also feel the squeeze to pass on surcharges.

“Most livery companies have added a fuel surcharge nationwide in response to rising gas prices,” said Alan Shanedling, president of the Greater California Livery Association and operator of Fleetwood Limousine Co. in Calif. “Usually, [it's] a percentage tied to the base billing rate hourly charge or the flat airport rate.”

While gas prices were surging in California, customers generally understood, he said.
“Everybody felt it,” he said. He has reduced Fleetwood’s surcharge with the recent decrease in gas prices, but it’s not gone.

“It’s an arbitrary number, to be honest with you,” Shanedling said. “But it’s an estimate of what our costs are and not trying to lose money.”

Not all see the surcharges and added fees as evil.

“If it’s a fair valuation, it’s better for the consumer to pay the surcharge then to face higher overall costs,” Ownby said. “The price of crude oil is fluctuating so fast and the volatility is so great, you’d be hard-pressed as a business owner to set your prices based on fuel costs.”

And there is some light at the end of the tunnel. Ownby predicts that fuel-price related surcharge in the U.S. should drop nearly 50 percent two months from now, if prices remain where they are today.

“I think it’s a fair system,” he said. “I don’t believe people are making money on the surcharges. These are not companies with ties to the oil industry.”