What is a fuel surcharge? How is this calculated? Is it a tax? Why it is not added to the ticket price? What are the tax implications? Is someone evading tax? Is there a scope of rigging this? What are the international practices?
I do not claim to be an expert on either of the above subjects but would try to answer some of them by some research on the internet.
What is fuel surcharge? How is it calculated?Fuel Surcharge is a fee added to tickets by an airline to cover increased fuel costs. It is usually added to ticket price as if it were a tax. A surcharge is actually an extra fee added onto another fee or charge.
Let’s take an example to understand what this fuel surcharge is. Please note that all figures used in this example are only illustrative.
1) First the extra cost of fuel (Aviation turbine fuel (ATF)) per month is worked out by multiplying an airline’s average fuel consumption per month by the increase in fuel cost.
2) Then this extra cost per month is calculated as a percentage of the average sales per month so as to cover the increased fuel costs to give us the fuel surcharge %.
Example:
If the fuel price increased by 50 paisa per litre and the average consumption per month was 1000 litres per month, the extra fuel cost incurred would be:
1000 litres x 0.50 = Rs. 500.00
Assuming that the average revenue per month based on 1000 litres of fuel consumption is Rs. 10,000.00, the fuel surcharge recovery percentage would be calculated as follows:
Rs. 500.00/Rs. 10,000.00 = 5.000%
Thus, as can be seen the example above, it must be variable with the change in fuel prices (for the sake of convenience, we can take the median fuel price of the last month to fix surcharge for the next month).
Brief History of fuel surchargeFuel surcharge actually came about as a means for "common" carriers to increase their "tariff" rates. At one time, common carriers had to file, or publish, their rates (ticket prices were fixed between sectors for different consumer classes and this was published and submitted to regulatory authorities). Common carriers could only charge their published tariff rates--no more, no less. When fuel charges increased, the common carrier was able to file a supplement to its tariff showing the actual fuel surcharge. In order to have a fuel surcharge, you must have a base price. The base price for common carriers was its published tariff rates. Today, the term “fuel surcharge” is used and misused by whomever it will benefit. In reality, there is no such thing as fuel surcharge, as common carriers can now enter into contracts with consumers at variable prices (This was allowed in line with international trends to improve seat occupancy in aircrafts.)
Is it a Tax?
Let’s understand tax.
A tax is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (for example, secessionist movements or revolutionary movements). Taxes consist of direct tax or indirect tax. A tax may be defined as a "pecuniary burden laid upon individuals or property to support the government [ . . .] a payment exacted by legislative authority. A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is any contribution imposed by government [ . . .] whether under the name of toll, tribute, impost, duty, custom, excise, subsidy, aid, supply, or other name.
Taxation has four main purposes or effects: Revenue, Redistribution, Repricing, and Representation.
The main purpose is revenue: taxes raise money to spend on roads, schools and hospitals, and on more indirect government functions like good regulation or justice systems. This is the most widely known function.
A second is redistribution. Normally, this means transferring wealth from the richest sections of society to poorer sections, and this function is widely accepted in most democracies, although the extent to which this should happen is always
controversial.
A third purpose of taxation is repricing. Taxes are levied to address externalities: tobacco is taxed, for example, to discourage smoking, and many people advocate policies such as implementing a carbon tax as a way of tackling global warming.
A fourth, consequential effect of taxation in its historical setting has been representation. The American revolutionary slogan "no taxation without representation" implied this: rulers tax citizens, and citizens demand accountability from their rulers as the other part of this bargain.
Having understood Tax from the above, it is explicit that this fuel surcharge is not a tax as it does not fit in the definition detailed above nor does it fits into the purpose for which tax is collected as listed above.
Why it is not added to the ticket price?
The airline companies have found a deceiving marketing technique to split the price of an airline ticket. They divide it into two components: something called the fare and the other as they call as “taxes”. As has been proved above this term is misleading. As the tax is just the fraction (Rs. 225 fixed) of the entire travel fee. Airlines by doing this little manipulation save on commission payouts to travel agents, when they hike surcharge and taxes as they keep their base fares low. The tax and surcharge component directly goes to the airline company who pass on only the passenger service fee (PSF) to the government.
Also it acts as a good marketing gimmick, since airlines are free to announce that their ticket charge is Re. 1 (or the like), while they actually are bound to pocket at-least Rs. 1100 in the deal. Is this right? Ethically not surely, legally I don’t know. But I believe, if it’s wrong ethically, it can’t be on the right side of the law either.
What’s happening with the surcharge (tax as some airlines like to call it) scene in domestic circuit?Airlines have decided to increase fuel surcharge by Rs 150 in first week of August 07. Only last month, they had increased fuel surcharge by Rs 50. Starting next week, air passengers will have to pay Rs 1,100 as fuel surcharge, up from Rs 950 last month. With this, the tax and surcharge component in an air ticket can vary between 50% and 100% of the total airfare.
Taxes and surcharge can add up to anywhere between Rs 1,400 and Rs 1,600 per ticket, depending on the airline. While the state-owned carrier Indian does not charge any congestion fee, most airlines charge it under various heads.
Tax and surcharge include passenger service fee (Rs 225), fuel surcharge (Rs 1,100), transaction surcharge (Rs 50-100) and the congestion fee (Rs 150).
Interestingly, over the past one year, taxes and surcharge have in-creased from around Rs 750 to cross the Rs 1,400-mark. During the same time, airlines have kept their base fares competitive with expansion in seat capacity. Taking into account that the fact that the passenger service fee has remained constant (Government’s share), all the increment has actually been in the surcharge component.
A review of some airlines operating on the domestic circuit is listed below:
- Jet & Jet Lite : Rs. 1475. This is over and above on what they call as base fare. Since there is no breakup of this figure available on the website (I couldn’t find it even after thorough struggle), when one books the ticket, I would try to put it in perspective based on this so-called tax collected by all airlines. Rs 1475 splits into Rs. 1100 for fuel surcharge component, Rs. 225 as Passenger service fee (the government component) and Rs. 150 is passenger service fee or congestion surcharge, whatever the company wants to call it. Congestion surcharge is levied irrespective of sector of booking or whether there is congestion at the airport or not. Point to note is the entire Rs. 1475 is listed as a tax by the company, whereas the tax component is only Rs. 225 out of the entire fee.
- Indian Airlines & Air India: Rs. 1325. Break up: Rs. 1100 as fuel surcharge and Rs. 225 for passenger service fee. At-least in government carriers this is listed as such (nor in the garb of tax).
- Spice Jet. Rs. 1575. The booking page has a link for break-up of taxes. It reads and I quote “breakdown of the taxes and fees applied to your purchase” Rs. 1100 – Fuel Surcharge; Rs 225 – Passenger Service Fee; Rs. 100 – Transaction Surcharge (Whatever it means) and Rs. 150 –Congestion Surcharge. Again I must point out; this airline also claims that the total tax collected is Rs. 1575. Also congestion surcharge is levied irrespective of sector of booking or whether there is congestion at the airport or not.
- Kingfisher Airlines: Rs 1475: Estimated Break up (Not given on the website): Rs. 1100 as fuel surcharge and Rs. 225 for passenger service fee and Congestion Surcharge of Rs. 150. Collected as Tax from consumers. Congestion surcharge is levied irrespective of sector of booking or whether there is congestion at the airport or not.
- Air Deccan: Rs 1475: Break up: Rs. 1100 as fuel surcharge and Rs. 225 for passenger service fee and Congestion Surcharge of Rs. 150. Collected as Tax again from the consumers. Congestion surcharge is levied irrespective of sector of booking or whether there is congestion at the airport or not.
- Go-Air: Rs. 1575. Breakup listed: Rs. 1100 – Fuel Surcharge; Rs 225 – Passenger Service Fee; Rs. 100 – Passenger Handling Fee (Whatever it means again; I would not liked to be handled anyway) and Rs. 150 –Congestion Surcharge.
- Indigo: Rs. 1575. Breakup listed: Rs. 1100 – Fuel Surcharge; Rs 225 – Passenger Service Fee; Rs. 100 – Transaction Surcharge; and Rs. 150 –Congestion Surcharge. Total amount listed as tax.
What are the tax implications? Is someone evading tax?
As can be seen from the above analysis, actual tax collected on each ticket is Rs. 225 only, which is passed on to the government irrespective of the ticket cost (basic fare). To the next question, in my opinion, airlines are evading tax, since it is being collected in the name of tax.
Is there a scope of rigging this?
As is very logical, fuel spent in a flight depends on various factors like flight distance, flight model (weight, efficiency etc.), altitude at which it flies, flying time, speed of the aircraft, age of the aircraft etc. and thus is variable. Hence, the surcharge would also be variable, since it would be a fraction of fuel spent. Keeping all other factors constant (same aircraft, altitude at which flight flies, its speed and other similar variables), fuel surcharge would thus be constant for a particular sector. It can’t be same for different airlines for sure. The only way this would be a constant for all airlines is by collusion or cartelization, which is the case of my article.
Cartelization
The Competition Act, 2002 (the Act) defines cartels as agreements between enterprises (including association of enterprises) not to compete on price, product (including goods and services) or customers. The objective of a cartel is to raise price above competitive levels, resulting in injury to consumers and to the economy.
For the consumers, cartelization results in higher prices, poor quality and less or no choice. A cartel is said to exist when two or more enterprises enter into an explicit or implicit agreement to fix prices, to limit production and supply, to allocate market share or sales quotas, or to engage in collusive bidding or bid-rigging in one or more markets.
Some of the conditions that are conducive to cartelization are:
- high concentration - few competitors
- high entry and exit barriers
- homogeneity of the products (similar products)
- similar production costs
- excess capacity
- high dependence of the consumers on the product
- history of collusion
As can be seen from the above, almost all the above conditions co-exist in the aviation sector and which have resulted in a cartel where in all airlines (including state run) are fleecing customers under the garb of FUEL SURCHARGE, which as illustrated in an example above is a variable and can’t be same for all airlines unless, they collude.
What are the international practices?
Looking fuel surcharge in an international context shows that this practice is followed across, but with a difference, it is variable (as a percentage of fixed fare) and goes up as well as down based on the ATF prices, and is applicable where ever the fares are fixed. But there are aberrations which are often reported in international media.
A few days back a nexus was unearthed between Virgin Atlantic and British Airways. They too were charging a similar fuel surcharge on their long haul flights. British Airways was fined nearly $550 million by British and US authorities for fixing the prices of fuel surcharges on long-haul flights on Aug 1, 2007. Virgin Atlantic, although an equal partner in crime, escaped since it turned approver, and got the immunity, making a mockery of the law.
I demand an impartial and unequivocal inquiry into the fuel surcharge fixing by various airlines operating in Indian aviation sector to unearth the implicit nexus and cartel operating to fleece unsuspecting customers.
Your comments as always are welcome :)
