Volatility in fuel costs, culminating in recent price spikes, impelled airlines to adopt two important short-term tactics: one to increase revenues by applying fuel surcharges, the other an attempt to iron out volatility by adopting increasingly complex hedging mechanisms. Longer term strategies aim to improve fuel efficiency, not simply to control costs but also in response to environmental imperatives. Fuel surcharges on scheduled air fares were introduced by some major carriers in 2004. They have been implemented enthusiastically by most network airlines in
Europe, although low-cost carriers have often preferred to recover costs through airfares and the generation of ancillary revenues. The surcharges have increased in scope and scale with increases in the fuel price. They can be modulated by sector length and class of travel. British Airways’ system of surcharges has changed from a blanket GBP2.50 per passenger in May 2004 to a current system where a business class passenger can be charged an extra GBP133 for a long-haul flight. Analysis suggests current surcharges can generate up to 50% of the nominal cost of fuel. Fuel hedging attempts to manage fuel price risk. The complexity of hedging operations has increased with the sophistication of financial instruments available. Airlines are not restricted to simply assuring fuel will be delivered at a known price in the future, but may use a combination of financial derivatives to protect themselves from locking into fuel prices which may prove disadvantageous. Most European airlines have adopted hedging mechanisms to a greater or lesser degree in recent years. Dollar revenues give some European airlines an element of protection from the concomitant risk of exchange rate movements, but other airlines may employ
additional hedging to protect against such movements. Other short-term to medium-term responses by airlines focus on increasing fuel efficiency through improved operational profiles, while enhancement of...