Fuel surcharges

Andrew Norton looks at the introduction of fuel surcharges. It started with airlines but that was all about stopping travel agents from getting commissions. The Age reported another red herring:

AMP Capital Markets head of investments Shane Oliver said spiralling fuel costs meant airlines were no longer alone in charging extra for fuel.

“Fuel costs have increased to the point where it is very difficult for companies to absorb them, particularly industries that are heavy users of fuel,” he said.

Businesses were adopting fuel levies because they offered greater price transparency, he said.

Sheer nonsense. If price transparency were a key consideration, a firm would break down its price to show the contribution to all input suppliers — employees, management, IT, fuel and shareholders! There is no reason for fuel to be special.

In any case, price transparency only matters if the consumer can substitute away from the particular input. That is, it requires a valuable price signal. For instance, credit card surcharges allow consumers to choose another form of payment and save themselves and the retailer money. A transport charge is only valuable if consumers can opt for their own transportation. That is why these examples of surcharges are not to do with transparency or anything good for consumers. Even for airlines, you can’t offer to bring your own fuel! In any case, how do we know such surcharges are cost reflective.

It seems to me that firms are using this as a ploy in negotiations. “Sorry but our costs have increased and so we will give this to you as a ‘surcharge’ rather than what we would normally do and just increase prices.” Buyers need to beware of these and not just accept them.

And there is another thing. Usually, price increases might not be transparent between competing firms. Surcharges could well operate like a device to send a signal to competitors as much as to consumers. But I don’t think that this transparency is what Oliver was referring to.

One thought on “Fuel surcharges”

  1. Yep. I notice though that some airlines are introducing luggage surcharges (for taking any check-in luggage at all) so I suppose that is a more sensible surcharge as you can substitute away from it.

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