Archive for July 9th, 2008

Should companies impose fuel surcharges?

Four years ago I puzzled in a Catallaxy post as to why airlines had started imposing fuel surcharges. Why didn’t they just add it to the fare? That mystery has now been cleared up. They add the surcharge to flights redeemed on frequent flyer points and only pay travel agents commissions on the base fare. Particular characteristics of the airline industry make surcharges more lucrative for airlines than fare increases of an equivalent amount.

But now The Age reports that the practice is spreading to other industries:

From construction material suppliers and trucking companies to florists, businesses are considering imposing a special levy to offset fuel prices.

There are less aribtrary ways of imposing surcharges than the way airlines do it. FedEx, for example, has a scheme based on monthly movements in actual fuel prices, rather than the flat dollar amounts imposed by airlines without any direct link to fuel costs. With the FedEx scheme, falls in fuel costs are passed back to customers.

But overall I think this is a bad practice. The claim by Shane Oliver in The Age that businesses were ‘adopting fuel levies because they offered greater price transparency’ seems doubful to me. The only transparency I am interested in is how much, in total, I have to pay – I don’t want to have to think about industry cost structures when deciding whether or not I can afford to make a purchase. One of the annoying things about daily life in North America is that you have to do extra mental arithmetic in adding taxes and tips before making purchase decisions.

I doubt surcharges are really good for business either. When booking airline tickets I always getting the feeling I am being conned with the surcharge, despite not feeling the same way about the wide price differences between the same seats on the same flight, but with slightly different terms and conditions.