CAD announces time-limited resumption of cargo fuel surcharge
Aviation fuel surcharges allow airlines to partially recover the increase in operating costs due to the fluctuation of aviation fuel prices. In view of the fact that the then aviation fuel prices had greatly decreased, the CAD no longer approved of airlines levying a PFS and CFS for flights originating in Hong Kong from February 2016 and April 2016 respectively until further notice. During the time of suspension, the CAD engaged a consultant to conduct a consultancy study on the regulation of fuel surcharges.
According to a CAD spokesman, based on the initial findings of the CAD's consultant, it was noted that there is a global trend of deregulating fuel surcharges to enhance competition, which echoes Hong Kong's progressive liberalisation policy in the context of the air services regime. In terms of whether fuel surcharges are to be de-regulated in the long run, the CAD would need further study and consultation with stakeholders. The oil price increased by almost 80 per cent from January 2016 to January 2017, impacting greatly on the aviation industry, particularly the air cargo market which largely operates on a long-term contract basis. In view of that and in response to the concerns of the industry, the CAD has agreed to implement a time-limited arrangement of allowing airlines to levy a CFS for flights originating from Hong Kong, with a view to maintaining the competitiveness of Hong Kong's aviation industry and its status as an international aviation hub.
Cargo fuel surcharge
In the local air cargo industry, a significant portion of cargo being flown out of Hong Kong International Airport is covered by the Block Space Agreement, which typically lasts for one year. There are also agreements that last longer. In other words, there are some agreements in force under which the cargo rate is set on the assumption that a separate CFS could still be levied. With the suspension of CFS, the possible uncertainty in the calculation of cargo rate may cause confusion. In view of this unique industry practice, the consultant recommended the CAD to allow the levying of a time-limited CFS, so as to allow the industry sufficient time to make relevant preparation for the possible deregulation of fuel surcharges in the long run, including but not limited to the development of new business and commercial strategies, the re-negotiation of contract terms with commercial partners all over the world, and the making of relevant legal, accounting and logistical arrangements.
Taking into account the consultant's recommendation and the views of industry players, the CAD will allow airlines to levy a CFS for flights originating from Hong Kong from April 2017 to end-2019. During this period, the monthly maximum level of CFS will be calculated based on the following formula:
CFS = (Prevailing Oil Price (Brent Oil) – Baseline of US$46 per barrel of Brent Oil) x Unit Fuel Consumption x Recovery Rate of 80%
Airlines are allowed to levy a CFS for cargo flights originating from Hong Kong if and when the prevailing Brent Oil price is above the baseline of US$46 per barrel. The baseline of US$46 is the 12-month average price level of Brent Oil i.e. from February 2016 to January 2017.
The CAD spokesman emphasised that the CFS level determined by the CAD based on the formula serves as a maximum level of CFS that airlines are allowed to levy. Airlines may choose to levy a lower CFS than the published maximum level or choose not to levy any such surcharge at all, based on their own circumstances and business strategy. As such, we believe there is a sufficient element of competition in the market.
Under the new arrangement, airlines would not be required to apply to the CAD on a monthly basis to levy any CFS which is the same or lower than the published CFS level. To enhance transparency, the CAD will announce on its website (www.cad.gov.hk/english/cargo_fuel_surcharge.html#new) every month the prevailing oil price and the corresponding CFS level.
Further details of the formula are set out at Annex.
Passenger fuel surcharge
According to the initial findings of the CAD's consultant, unlike the air cargo market, a long-term contract is not as common in the passenger market. Generally speaking, airlines will offer different tickets and products at varying prices based on their different market strategies e.g. tickets at peak and non-peak season, one-way or round-trip ticket, tickets and accommodation packages, etc. This reflects that pricing in the passenger market is far more flexible than in the cargo market. As such, the CAD considers that the suspension of a PFS for flights originating from Hong Kong should remain unchanged until a further decision is made after the study on the long-term arrangement of fuel surcharge regulation to be conducted by CAD.
Further study on the long-term way forward for fuel surcharge regulation
After the announcement on the suspension of fuel surcharges last year, the CAD engaged a consultant to research international practices and trends on the regulation of fuel surcharges and to advise on Hong Kong's regulatory regime of fuel surcharges. During the conduct of the study, the consultant engaged with members of the industry and relevant stakeholders. Findings of both the consultant and the CAD show that whilst there is a trend of progressive deregulation of fuel surcharges, the approaches are different. For example, it was noted that some airlines from individual countries:
- impose a separate CFS on top of the fare according to their own operating costs and pricing strategy; or
- do not separate the fuel surcharge but reflect fuel costs in the overall ticket price.
The CAD is of the view that while the approaches are different, the overarching principle is to enhance transparency while encouraging competition. Taking into account the local circumstances of the aviation industry, the CAD's upcoming study will look at whether fuel surcharges are to be de-regulated in the long run and which mode of operation would be the most optimal. When conducting the study, due regard will be given to the following:
- the new regime should be conducive to maintaining Hong Kong's status as an international aviation hub;
- adequate room should be available for airlines to recoup their fuel costs; and
- the need for transparency for better consumer protection in both cargo and passenger markets.
The CAD expects that the study will take about 12 months to complete and the Department will then consult stakeholders on the proposed way forward with a view to formulating the relevant policy.
For further details on the new CFS mechanism, please refer to CAD's website:
Ends/Friday, March 10, 2017
Issued at HKT 18:10
Issued at HKT 18:10