Tuesday, February 23, 2010

Neutrality of Fuel Surcharge

Blog reader's interested in China's growing aviation sector may be interested to read Qiang Gong & Xingli Fan's The Neutrality of Fuel Surcharge, 1 Global J. Bus. Res. 1 (2007) (available from SSRN here).  From the abstract:

Airline companies usually collect a fuel surcharge rather than increase airfares when fuel prices surge. This paper initiates a theoretical model to analyze the properties of fuel surcharges. We show that the role of fuel surcharges is neutral under the present fee collection scheme, which means that the fuel surcharge policy cannot help the airline industry improve its profits. In addition, the equilibrium results of air fares with fuel surcharge policies are identical to that of the fuel-cost-driven air fares without it. Therefore, the effects on social welfare are the same. We also offer an analysis to clear up the common misunderstanding in which the fuel surcharge policy was in favorable to the airline companies at the expense of the consumer welfare. The empirical facts from Chinese airlines support our theoretical findings.


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