Joost van Doesburg, airfreight policy manager at the Dutch Shippers’ Council (EVO), is on a mission to squash surcharges. Well, he doesn’t really want to do away with them altogether; his quest is to simply have carriers add these extra fees into their base rates.
Surcharges are a relatively new trend. Tariffs on goods historically made commodity pricing the easiest and most fair solution for slapping a fee on shipped goods, but once tariffs were abolished, the industry went to a weight-based system. As fuel prices skyrocketed and extra security processes were tacked on in the early part of this century, carriers set about looking for a way to recoup these expenses.
The solution: add a sliding fee to the base rate that adapted to shifts in the market, but that was not negotiable. Negotiations were left for the base rate, not the surcharges.
Last summer, van Doesburg sent out a survey to his members, along with a few freight forwarders based in the Netherlands, to measure the current climate toward surcharges. Though he knew in a general sense what shippers would say — he’d been hearing their complaints for a while — the survey would form the basis of a colleague’s masters degree, so he sent it out anyway.
“When you let shippers talk about their biggest problems with airfreight, they would always say surcharges,” he says. “Some would say fuel, others would say security, but it is definitely surcharges that are the biggest problem. There is no transparency.”
The survey results form a comprehensive rejection of those fuel and security charges, which carriers have justified as an additional cost of doing business. Van Doesburg says that in regard to the security surcharge — usually a blanket fee of €0.15 per kilo — more than 50 percent of the respondents “did not believe that the amount of this security surcharge was invested in improving the security.”
He calculated out the surcharge fees for one airport, Amsterdam Schiphol, and found that around €108 million a year is collected by carriers in the name of security.
“One really big freight forwarder — and I cannot give his name — said, ‘OK, if they would invest €108 million each year in improving the security, there would be three golden gates surrounding Schiphol Airport,’” van Doesburg says. “If shippers don’t believe it, and freight forwarders don’t believe it, it’s probably not true that they use this kind of money for the reason why they are collecting it.”
Dutch shippers think the security charge is a bit dubious, but carriers take the stance that fuel and security charges create transparency, not take it away, says Bob Imbriani, vice president of corporate development at Team Worldwide. “I think they use them to present to the public that, ‘Well, we’re really not charging any of this. Look at our airfreight rates — they haven’t changed; they’ve really gone down, and all [surcharges] are just reflecting other conditions we have no control over.’”
The one positive aspect of surcharges is that they don’t usually vary across trade lanes. Imbriani says that a carrier’s fuel surcharge rates may be a little different in some regions, “but by country of origin where they set the rates, they’re usually consistent for the whole country, regardless of the destination.”
A number of airlines contacted for this story didn’t wish to discuss their surcharge strategy. The driving forces behind deriving surcharges all seem to vary a bit, though.
United Cargo bases its fuel surcharge on an average fuel cost tabulated using “representative jet fuel spot price markets from around the world,” according to a company brochure. The carrier also reserves the right to apply new surcharge amounts based on market conditions and local governments.
From July to September, according to United Cargo’s calculations, the average jet fuel spot price came to $290 a barrel, which turned into a $0.90 surcharge on each kilogram. This price seemed to echo the industry average. On October 17, the fuel surcharge Cargolux levied came out to €0.90 per kilogram; Emirates SkyCargo levied a $0.90 surcharge per kilogram.
But fuel surcharges actually cover a range of prices. OAG Cargo’s AFRA database for flights in the UK market showed that carriers were charging anywhere from £0.55 per kilogram to £1 per kilogram for fuel surcharges in mid-October.
To examine fuel surcharges further, take the case of China Airlines Cargo. On October 18, the carrier charged £0.67 from Europe to Asian destinations, but only £0.64 to the Middle East and Indian Subcontinent. Move to the U.S. market, and the charge is $1.05 per kilogram (the conversion then was about £0.61 per dollar). According to energy data provider Platts, fuel was at $128.8 per barrel during that period.
The Europe Brent Spot Price for jet fuel reached its peak in the summer months of 2008. China Cargo had risen quite a bit, starting out at £0.37 in May 2006, hitting a peak of £0.87 at the end of July, 2008, and dropping down to a low of £0.34 a year later.
Whatever the price, fuel costs industry officials at all levels significant cash. According to the International Air Transport Association, as of October 14, the impact of the average $127.50 per barrel global fuel price was more than $60 billion.
While fuel surcharge databases easily show the sometimes minute movements in surcharges, Imbriani says these shifts only loosely accompany changes in the price of fuel.
“They fluctuate some, but just like the price at the pump, it tends to go up faster than it comes down,” he says. “You’ll see fuel surcharges go up when fuel goes up, then you hear that fuel prices are coming down, but you don’t see [surcharges] come down as fast.”
The act of hedging — buying fuel at a set price now to use later — is primarily why the fuel surcharge doesn’t react to every change in the price of cruel oil. Van Doesburg doesn’t see anything wrong with this practice, but thinks shippers shouldn’t shoulder the burden when carriers make what amounts to a bad gamble on fuel.
He proposes that if airlines want to continue hedging, they should assume all the risk. If the price of fuel goes down after the airline sets a price, they should be able to keep that money, he said. But if they end up seeing a loss, that’s their problem as well.
One reason carriers are skittish about discussing surcharges is the U.S. Department of Justice’s ongoing price-fixing investigation. As a former assistant chief in the antitrust division of the DoJ, Mark Rosman can understand this feeling more than most.
In 2005, Lufthansa contacted Rosman’s office with a price-fixing mea culpa, and this lead to a seemingly never-ending string of plea deals featuring carriers all over the world. Their crime? Coordinating fuel and security surcharge rates.
Surcharges in themselves are not illegal, and there’s also nothing wrong with one carrier noticing that another carrier is asking customers for a bigger surcharge and following suit. “What is illegal, is the coordination and the direct communication about what their future plans are,” he says.
“Making a unilateral decision to follow somebody, that’s OK,” he continues. “But once the communication starts about what the intentions are, about what the expectations are about what each carrier is going to be doing, then you’re getting on very dangerous ground.”
Rosman subscribes to the prevailing wisdom that carriers decide to levy surcharges to make extra costs associated with volatile fuel prices and extra security measures more transparent to the customer.
But he is just as in the dark as van Doesburg or Imbriani when asked where the money goes. While surcharges were imposed to make up for the added price of fuel and screening, he thinks these fees have turned into revenue generators.
“If you actually peel the onion on either a fuel surcharge or a security surcharge and look behind it, I think you would find that there are not dollar-for-dollar cost recovery mechanisms, and in fact, there’s probably a very loose correlation between the actual costs that are associated with the fuel and security and the actual surcharge,” Rossman says. “Whether they’re actually tied to, in a very specific way, those initial cost increases — not so much.”
Back in the Netherlands, van Doesburg is weighing his options about how to continue his fight against surcharges. The security surcharge is relatively easy — just wrap it into the base rate. For fuel, IATA could step in and mandate a surcharge system that measures the market rate and comes up with an appropriate fee to charge.
With his blessing, two shippers in the high-tech and pharmaceutical industry have started to slowly take things into their own hands, telling their freight forwarders that instead of paying surcharges, they will simply pay a flat fee that encompasses everything. Their fuel fee is based on the current marketplace and their own calculations. The security fee is a flat €0.15 per kilogram.
So far, the shippers and their freight forwarders are working well together, and the experiment seems to be working. “The system has another advantage; illegal price fixing is not anymore possible because nobody determines the price of the fuel surcharge,” van Doesburg says. “Just the market price determines the surcharge.”
No price fixing and a market-based fuel surcharge sounds good to forwarders and shippers, but how carriers will react to this new way of doing business is anyone’s guess.