testimony

Before the U.S. House of Representatives Transportation and Infrastructure Committee Subcommittee on Aviation

Regarding Airline Fuel Surcharges

October 11, 2000

Mr. Chairman and Members of the Committee, my name is Kevin Mitchell.  I am Chairman of the Business Travel Coalition (BTC), which represents the business travel interests of major corporate buyers of commercial air transportation services as well as the 21,000 independent business travelers who are members of the Commercial Travelers Association.  Thank you for inviting me this morning.

In preparation for this morning’s testimony, BTC secured the input of many seasoned Corporate Travel and Purchasing Managers.  I would request that BTC survey results be included in the record.

Suppliers in industries that face upward spikes in the cost of feedstocks, such as jet fuel, have alternative courses of action available to them. 

One is to partially offset a cost increase by reducing expenses in other areas, and to absorb the balance of the increase as a cost of doing business.  Futures contracts can play an important role. 

One Travel Manager who responded to BTC’s survey stated, “I work for a newspaper company that must undertake hedging to protect raw newspaper prices.  Raw newspaper is the company's third largest expense and prices are rising this year.  I have yet to see the newspaper raise the cost of subscriptions or add a surcharge to cover the rising costs.”

Another alternative is to sit down with your customers and work out a fair and rational plan for sharing in the cost burden.  Here is how one Purchasing Manager at a large pharmaceutical company described how buyers and suppliers address upward spikes in cost in other commodity areas: 

“We are open in concept to the use of surcharges during periods of extraordinary market crisis as long as they are administered fairly and even handedly.  We have price escalation and de-escalation clauses in many commodity areas where prices of feedstocks fluctuate often. 

When this issue arises within our supply base we discuss the nature and extent of the impact on the supplier and agree on benchmark costs for the feedstock involved.  We agree on a mechanism by which the surcharge will go up as the feedstock price increases and how we will reduce it when the feedstock drops back to the benchmark level, or below.  We would not look favorably at an open-ended imposition of a surcharge.”  Mr. Chairman, what this Purchasing Manager describes is supplier-buyer partnering premised upon win-win outcomes.

A third course of action is to impose your will upon your very best customers in lockstep with your competitors wherein, for example in this case, a surcharge is a) loosely linked to actual fuel cost increases, b) is disproportionately applied to business airfares and c) causes a burden on your best customers.  Some major airlines have imperiously imposed their will in this fashion twice this year. 

One Travel Manager states: “I find it offensive that the airlines can simply raise rates or impose surcharges whenever they feel the need.  When other suppliers take this tact, we have the option of re-directing our business.  However, with the airlines, once one of them does this - the others follow like lemmings - leaving us with no alternatives.”

Indeed, with the January, 2000 surcharge, one major airline purchased sufficient forward fuel contracts as to render the then current fuel price increases virtually immaterial to its earnings.  Yet, it too imposed the surcharge to remain "competitive." 

Another corporate travel executive made this observation, “You can't put enough quotes around the word ‘competitive.’  Since when do you raise your prices to become more competitive when supposedly your forward-thinking strategy somewhat insulated you from an uncontrollable cost increase that the rest of your competition was experiencing? Wouldn't you want to take advantage of your insightful budget planning and hold your prices while your not-so-forward-thinking competitors were forced to raise theirs?  As far as I'm concerned, this is more soft evidence of collusion among the carriers.”

Mr. Chairman, like so many problems that have come before this Committee recently, such as record level business airfares and eroding passenger service levels, a major systemic cause underlying airlines’ mistreatment of their best customers through these surcharges is a lack of sufficient competitive choices and alternatives in what has become an excessively concentrated industry.

One BTC participant approached his primary airline supplier in February after this year’s first fuel surcharge was imposed to put into place contractual language that would address future upward and downward spikes in fuel costs in a win-win manner.  The airline did not say no, it said Hell No!  This is the type of market power some airlines exercise. 

Another BTC participant, whose company spends $140 million dollars annually on air transportation services, expressed that they spend in excess of $40 million dollars with each of twelve different suppliers across a variety of commodity groups.  They stated they had excellent relationships with every supplier except for their primary airline supplier.

Members of the Committee, if corporations with large purchasing volumes and centralized travel management expertise are treated poorly by airlines, what does this suggest about how the other nine million smaller U.S. businesses are being treated?

With respect to this current fuel surcharge, BTC is advocating three priorities:

1.       BTC is spearheading an industry-wide initiative to encourage all Travel and Purchasing Managers to immediately enter into discussions with their airline suppliers for the purpose of agreeing on a contract addendum that addresses large swings in fuel prices.  BTC participants have developed a boilerplate addendum that protects all parties.  It was distributed today to 1,300 corporate buyers of air services to help jumpstart an urgently needed industry dialogue.  A copy of this addendum is included in my written submission.

2.       DOT studies have demonstrated that it is the presence of low-fare carriers that makes the difference in disciplining major airlines’ policies.  For example, where major carriers compete head-to-head with Southwest Airlines, they do not impose a fuel surcharge.  To achieve a functioning competition in air transport, a constant influx of new entrants is required, especially now that it is known that some major airlines desire to consolidate the industry even further.  The DOT Competition Guidelines represent the least intrusive means government can adopt to assure investors in startup airlines that the government will not allow unfair or exclusionary practices.  I urge this Committee to join State Attorneys General, who are members of the Airline Competition Working Group, in their long held belief that these DOT Guidelines need to be issued.

3.       The Justice Department should move to block the proposed United Airlines-US Airways merger.  It is a bad idea at a bad time.  BTC has launched www.AirMerger.com to broaden public policy debate and ensure that federal government policy makers weigh the strategic concerns of airline customers in their final determination about this merger.  BTC will conduct air competition symposia around the country this fall and plans a major Washington, DC Summit and Customer Referendum on the merger in February similar to its September, 2000 Internet Air Competition Summit.

Thank you for your interest in the views of the customer of the air transportation system with respect to this important air competition issue.