Shippers refuse to be fooled by Fuel Surcharges

8 July 2005

With press headlines reporting the continued upward direction of world oil prices one could be forgiven for thinking the surcharge announcements of shipping lines and air carriers reflected those headlines. However, the ESC is becoming increasingly sceptical on this point, and believes some carriers are using the headlines to impose surcharges higher than they need to be.

The rationale of the surcharge is widely considered to be the compensation for an abnormal rise in the price of fuel that wasn't valid at the time a contract was negotiated. It should just cover that cost and nothing else, but evidence suggests that this may not always be the case.

Independent assessments, such as that conducted by Dynamar B.V., suggests that these additional profit generated by shipping lines through their fuel surcharge mechanism, referred to as the Bunker Adjustment Factor (BAF), can amount to more than one million US dollar per ship per roundtrip, or hundreds of millions for industry as a whole .

In airfreight the surcharges on fuel can represent 50% or more of the total freight rate and in some cases the surcharges are even higher than the actual airfreight rate itself. In such circumstances the rationale of the surcharge must be seriously questioned. Furthermore, despite different airlines having very different operational characteristics and economies they invariably seem to set nearly identical levels of fuel surcharges. This raises the suspicion among many shippers that, rightly or wrongly, these surcharges represent some form of price agreement.

Members of the ESC Air Transport Council have raised several questions concerning the methodology by which fuel surcharges are calculated:

• Fuel surcharges for passenger air transport are based on the oil price of 2004, and yet the fuel surcharge index is based on the oil price of June 1996 when trade was at 18-20 USD per barrel. This figure seems totally unrealistic in view of today's oil price; why can it not be changed
• It is well known that air freight carriers hedge on fuel. The 2004 Airline Business Magazine claimed that Lufthansa had hedged 80 - 90 % of its fuel requirements and saved EUR 90 million in the first half year of 2004 as a result; so why are fuel surcharges required.
• Why cannot fuel surcharges be differentiated between long haul and short haul flights, rather than the 'one surcharge fits all' approach, and effectively avoid short haul flights subsidising the fuel costs of long haul flights.

The ESC would want to discuss the methodology of calculating fuel surcharges with the airlines in order to implement more transparency. Meanwhile ESC urges shippers to be cautious when confronted by notices of fuel surcharges - regardless of what the headlines say.

For further information contact: Nicolette van der Jagt, Secretary General of the ESC - Brussels 00 322 230 2113