Virgin, BA Tussle as Price Fixing Probe Eyes Airline Fuel Charges

According to the Daily Mail, the current price-fixing probe into fuel surcharges on lucrative transatlantic routes started on a tip from Virgin Airlines, who alerted authorities about attempts by British Airways to bring them into a illegal pricing agreement. BA has raised fuel surcharges from £5 to £70 (over $100) on some routes. How much do these additional charges mean? An earlier Daily Mail article noted that “One rival calculated that BA coined in £470 million from the fuel surcharge in the last financial year – more than the firm’s profits after tax.”

Airlines frequently use fuel surcharges to stealthily raise prices. As with all prices hikes, airlines want to know whether rivals will follow, meaning that the price increase will likely stick, or not, meaning the price leader often has to reverse itself quickly. Both Virgin and BA have raised fuel surcharges several times, more or less in lock step. The price leader will often issue a press release or other public comment on the cost of fuel, providing a signal to rivals that they should follow. What may have happened in this case is that BA called Virgin to ask in advance what their likely reaction would be, which is quite over the line, and also gave Virgin a strong card to play in their sometimes bitter rivalry.

British Airways faces fines up to £850M(see annual profit figure above) and employees found guilty could face jail time. American Airlines and United Airlines are also under investigation.

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