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Quirk in new pricing system benefits air travelers
By Yang Jian |
December 14, 2011, Wednesday
|
Print Edition
Print Edition
JASON Wang, who works for a Shanghai wholesale grocer and needs to fly to company headquarters in the southern city of Guangzhou at beginning of every month, is now dodging increased airline fuel surcharges, thanks to a quirk in a new pricing system implemented by China's top planning body.
On December 1, Wang bought a round-trip ticket to Guangzhou on China Eastern Airlines for 2,050 yuan (US$324). Had he waited another week to buy the ticket, the price would have been 20 yuan more for a round-trip because of higher surcharges that the airlines blame on rising jet fuel prices.
The current fuel surcharge on domestic routes longer than 800 kilometers is 140 yuan per passenger, while the surcharge on shorter routes is 70 yuan, according to online travel agency Ctrip.com.
"I don't want to pay more for a ticket," said Wang, 26. "The surcharge doesn't mean anything to us passengers."
On November 1, the National Development and Reform Commission and the Civil Aviation Administration of China issued rules for a revision in the system governing fuel surcharges.
The new system allows domestic airlines to increase fuel surcharges only from the sixth day of a month because that's when fuel costs rise.
Even then, airlines are allowed to adjust fuel surcharges only when the ex-factory price fluctuates more than 250 yuan a ton. The ex-factory price is the price at the docks when fuel is delivered.
Before the ruling, domestic airlines could adjust surcharges every month when there was any movement in jet fuel prices. The carriers typically increased surcharges at the beginning of every month but were slow in cutting prices when the ex-factory price fell.
For passengers like Wang, who travel at the beginning of every month, ticket prices always incurred the higher surcharge and always missed out on any declines.
The new rule aims to pare ticket costs and prevent airlines from charging higher prices during domestic holidays, such as Labor Day and National Day, which both fall within the first six days of a month, according to NDRC.
"Passengers will benefit because they will enjoy every cut in the surcharge and they will be able to buy tickets ahead of expected rises in surcharges," said Li Lei, an analyst at China Securities Co.
Li estimates there should be no more adjustments in surcharges for the next two months because international oil prices have tended to be stable of late.
In December, the ex-factory fuel price rose to 7,655 yuan a ton from 7,279 yuan in November.
Oil prices have increased sharply this year, rising from around US$90 to well over US$100 in the second and third quarters.
The benchmark West Texas Intermediate light sweet crude ended the trading week in New York at US$99.41 a barrel last Friday.
Brent crude, which is considered a more reliable indicator of fuel prices, closed the week at US$108.47 per barrel in London.
Oil industry analysts are generally predicting stable prices in the next few months, citing slowing consumption in the United States and Europe.
"The new surcharge mechanism will have some impact on the airlines because carriers will have to absorb cost increases if jet fuel prices rise by less than 250 yuan," said Zhang Wu'an, a spokesman for Shanghai-based Spring Airlines.
Fuel costs are the biggest component of an airline's expenses, accounting for nearly 40 percent of operating costs, according to analysts.
Airlines raise fuel surcharges when their procurement cost - that is, the weighted average of the ex-factory price and the imported price of jet fuel - goes up. Generally, airlines absorb 20 percent of the increased cost and the rest is passed on to passengers, according to analysts.
Some see the government's latest policy on surcharges as part of a broad, long-term plan to deregulate oil-product pricing and bring it more in line with market forces.
"The government's revision of the surcharge mechanism can be seen as an experiment in free-market pricing of oil in China," Luo Zhuping, board secretary of China Eastern, told Shanghai Daily in a phone interview.
"The new mechanism links surcharges more closely with jet fuel prices, which can be viewed as more market-oriented," said China Securities' Li. "That comes after a freer pricing scheme for jet kerosene introduced last August."
The government first began allowing airlines to impose fuel surcharges on domestic and foreign routes in 2000, but suspended that right in 2004. The airlines were given the right again in August 2005.
In 2009, the NDRC introduced a mechanism that linked fuel surcharges on domestic air routes with fuel costs.
The current fuel surcharge level is the second highest on record. In July 2008, fuel surcharges reached a record 150 yuan on routes longer than 800 kilometers and 80 yuan on shorter routes. That occurred when the benchmark Brent crude hit US$147.50 a barrel.
On December 1, Wang bought a round-trip ticket to Guangzhou on China Eastern Airlines for 2,050 yuan (US$324). Had he waited another week to buy the ticket, the price would have been 20 yuan more for a round-trip because of higher surcharges that the airlines blame on rising jet fuel prices.
The current fuel surcharge on domestic routes longer than 800 kilometers is 140 yuan per passenger, while the surcharge on shorter routes is 70 yuan, according to online travel agency Ctrip.com.
"I don't want to pay more for a ticket," said Wang, 26. "The surcharge doesn't mean anything to us passengers."
On November 1, the National Development and Reform Commission and the Civil Aviation Administration of China issued rules for a revision in the system governing fuel surcharges.
The new system allows domestic airlines to increase fuel surcharges only from the sixth day of a month because that's when fuel costs rise.
Even then, airlines are allowed to adjust fuel surcharges only when the ex-factory price fluctuates more than 250 yuan a ton. The ex-factory price is the price at the docks when fuel is delivered.
Before the ruling, domestic airlines could adjust surcharges every month when there was any movement in jet fuel prices. The carriers typically increased surcharges at the beginning of every month but were slow in cutting prices when the ex-factory price fell.
For passengers like Wang, who travel at the beginning of every month, ticket prices always incurred the higher surcharge and always missed out on any declines.
The new rule aims to pare ticket costs and prevent airlines from charging higher prices during domestic holidays, such as Labor Day and National Day, which both fall within the first six days of a month, according to NDRC.
"Passengers will benefit because they will enjoy every cut in the surcharge and they will be able to buy tickets ahead of expected rises in surcharges," said Li Lei, an analyst at China Securities Co.
Li estimates there should be no more adjustments in surcharges for the next two months because international oil prices have tended to be stable of late.
In December, the ex-factory fuel price rose to 7,655 yuan a ton from 7,279 yuan in November.
Oil prices have increased sharply this year, rising from around US$90 to well over US$100 in the second and third quarters.
The benchmark West Texas Intermediate light sweet crude ended the trading week in New York at US$99.41 a barrel last Friday.
Brent crude, which is considered a more reliable indicator of fuel prices, closed the week at US$108.47 per barrel in London.
Oil industry analysts are generally predicting stable prices in the next few months, citing slowing consumption in the United States and Europe.
"The new surcharge mechanism will have some impact on the airlines because carriers will have to absorb cost increases if jet fuel prices rise by less than 250 yuan," said Zhang Wu'an, a spokesman for Shanghai-based Spring Airlines.
Fuel costs are the biggest component of an airline's expenses, accounting for nearly 40 percent of operating costs, according to analysts.
Airlines raise fuel surcharges when their procurement cost - that is, the weighted average of the ex-factory price and the imported price of jet fuel - goes up. Generally, airlines absorb 20 percent of the increased cost and the rest is passed on to passengers, according to analysts.
Some see the government's latest policy on surcharges as part of a broad, long-term plan to deregulate oil-product pricing and bring it more in line with market forces.
"The government's revision of the surcharge mechanism can be seen as an experiment in free-market pricing of oil in China," Luo Zhuping, board secretary of China Eastern, told Shanghai Daily in a phone interview.
"The new mechanism links surcharges more closely with jet fuel prices, which can be viewed as more market-oriented," said China Securities' Li. "That comes after a freer pricing scheme for jet kerosene introduced last August."
The government first began allowing airlines to impose fuel surcharges on domestic and foreign routes in 2000, but suspended that right in 2004. The airlines were given the right again in August 2005.
In 2009, the NDRC introduced a mechanism that linked fuel surcharges on domestic air routes with fuel costs.
The current fuel surcharge level is the second highest on record. In July 2008, fuel surcharges reached a record 150 yuan on routes longer than 800 kilometers and 80 yuan on shorter routes. That occurred when the benchmark Brent crude hit US$147.50 a barrel.
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