As gas prices flirt with the $4-per-gallon mark for the first time since 2008, the travel industry is anxiously bracing for signs of what impact higher fuel costs will have on summer travel.
While airlines have been steadily increasing fuel surcharges for transatlantic flights and raising domestic airfares to cover costs, tour operators and cruise lines interviewed for this report said they are still absorbing the additional costs. None were yet willing to say they planned to implement fuel surcharges this year.
As for how the higher gas prices will affect drivers this summer, a recent AAA survey of 1,024 adults, conducted March 1 through 4, found that 52% of respondents were already driving fewer miles because of current gas prices and that 64% would reduce their mileage in the future if gas prices remained at their current levels.
In addition, 14% of respondents said they were already using public transportation more regularly, and 23% said they would increase their use of public transit if gas prices remain at their current levels.
For the moment, at least, all bets are that pump prices will remain stuck at, or close to, their current levels.
Last week, the U.S. Energy Information Administration released its Short-Term Energy and Summer Fuels Outlook, which predicted that regular-grade gasoline prices will average $3.95 during the summer driving season, April to September, a 6.3% increase over last summer.
“Fuel represents a little more than 10% of our operating costs, so it’s a big deal,” said Victor Parra, president and CEO of the United Motorcoach Association.
He said that while bus and coach companies will try to implement fuel surcharges if necessary, many clients, such as schools on tight budgets, “just don’t have the funding. It forces our guys to eat those costs.”
The bottom line is that it’s going to be more expensive to travel this summer.
But the most immediate challenge remains airfares, with airlines adding fuel surcharges of up to several hundred dollars to already-escalating transatlantic fares. While domestic carriers don’t break out the cost of fuel, air analysts say rising costs of flights at home are also attributable to higher barrel costs.
“It’s possible that as you get into May and June, you’ll see [further] increases in fuel surcharges,” said airline industry analyst Bob Mann of R.W. Mann & Co. “They would go up as high as the market would bear.”
The question is: How much can the market really bear? Tour operators are all reporting that airfares have already become the biggest hurdle in finalizing summer vacation bookings.
Trafalgar President Paul Wiseman said, “The biggest negative impact by far for us is the airline fuel surcharges, which are relentless. The average fuel surcharge on Europe now is $400 per person.”
Collette Vacations CFO John Galvin concurred that airfare is creating sticker shock.
“Airlines are definitely increasing fuel surcharges at a fairly healthy clip,” Galvin said. “It’s definitely of concern to us, and it’s increasing the cost of travel.”
Moreover, at the same time that sales become harder to close because of rising airfare, operators are eating the additional costs of fuel within their own operations.
Tauck Vice President Jeremy Palmer said, “When setting our prices for the coming year, we do our best to anticipate where costs may rise, whether those costs involve fuel, foreign exchange rates, etc. If our predictions are off, we feel it’s more appropriate for Tauck to take the hit rather than passing it along to our guests.”
Operational costs aside, Parra is concerned about the financial well-being of travelers as fuel prices continue to strain everyone’s budgets.
“In our business, we’re very much dependent on the discretionary spending of the consumer,” Parra said. “The consumer has to feel that they’re in a financially reasonable position before they’re going to spend money on a tour or a charter vacation.”
Cruise lines resist surcharges
None of the major cruise lines have implemented fuel surcharges even though per-barrel oil prices have long since surpassed the baseline price they use to determine if an extra fee can be charged.
Carnival Cruise Lines, for example, reserves the right to add a fuel supplement when the price of light sweet crude exceeds $70 per barrel on the New York Mercantile Exchange Index. A statement on its website indicates that a surcharge of up to $9 per person per day can be added when that price threshold is reached.
Yet, despite the fact that price of oil has exceeded that level for several quarters, the line early this month posted a statement on its website saying, “In light of the economic situation, we presently have no plans to institute a fuel supplement. We will continue to monitor the situation in the markets and review our position as the situation warrants.”
Carnival previously charged a fuel supplement from June to December 2008.
Norwegian Cruise Line sets its threshold at $65 per barrel of West Texas Intermediate Fuel. Its website states that a per-person, per-day surcharge of $10 can be added. But, like Carnival, the line hasn’t made the move. It last implemented a fuel supplement in late 2007.
Rising airfares, resulting in part from fuel costs, are causing some corporate meetings to move to ships based in drive-market ports in the U.S., said Jo Kling, president of Coral Gables, Fla.-based Landry & Kling Events at Sea.
“These costs squeeze what’s left over in a budget, causing more localization of meetings and shortening them to three to five nights, vs. five to seven nights,” she said.
“Fortunately the ‘homeland cruising’ trend that evolved after 9/11 has increased the number of ships sailing from 20-plus ports around the coastal U.S.,” Kling said. “So there’s quite a drive market for cruising to offset or eliminate air all together.”
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