Surcharge management of kerosene and CO2 costs for airlines under the EU's emission trading

We develop a fuel surcharge model for air transport in relation to kerosene and CO2. Price increases, however, induce demand reactions, which in turn may affect profitability. We incorporate demand reactions in our model to calculate an optimal kerosene and CO2 surcharge. We use a numerical example for an illustrative airline network and show that prices on inelastic long-haul routes are faced with the highest price increases, whereas elastic short-haul routes see relatively mild price increases. We compare our results with a traditional surcharge management approach and find them about 5% better.