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November 13, 2009

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Linkage between fuel charges and costs

CHINA'S top economic planning body yesterday introduced a mechanism that links fuel surcharges on domestic air routes to fuel costs to better reflect price movements.

Domestic carriers can impose the fuel surcharges when the jet fuel price hits 4,140 yuan (US$606) per ton, and suspend the fee when the price falls below that level, the National Development and Reform Commission said on its Website yesterday.

Airlines must incur at least 20 percent of the increased costs so that they will set different fuel surcharges, the NDRC said.

"Passengers can have more options under the mechanism, which will fuel competition among airlines to form a market-oriented system," the NDRC said. The mechanism will take effect tomorrow.

The NDRC has worked out a formula for the surcharges which will be valid till April 2010.

The jet fuel cost is calculated as the weighted average of the ex-factory price jet fuel price and imported fuel price, said the NDRC, which raised ex-factory prices for jet fuel by 320 yuan per ton to 5,190 yuan on Tuesday.

Based on the current fuel cost, the surcharge will be about 20 yuan for routes shorter than 800 kilometers and 50 yuan for longer distances.

Airlines must suspend or reduce the surcharge within five days after jet fuel costs drop as part of the NDRC's efforts to protect passenger interest.

Fuel costs are the biggest component of an airline's expenses, accounting for more than 40 percent of total costs.

"The benchmark price is equivalent to US$60-US$70 a barrel of global crude oil, and the mechanism can help carriers transfer most of their fuel costs to passengers," said Li Lei, an analyst at China Securities Co.

The NDRC approved fuel surcharges in August 2005 when ex-factory prices reached 4,740 yuan per ton. In January this year, the NDRC suspended the surcharges due to a fall in kerosene prices as world oil prices dropped. Since then, world oil prices have been on the upswing.

The NDRC has raised jet fuel prices four times this year after international crude oil prices more than doubled from a low in February to US$80 a barrel.


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