Flying on Surcharges

Flying on Surcharges

Copyright 2004, Traffic World, Inc.

If airlines'' fuel costs and surcharges keep rising, more air cargo may be pushed back onto the ground as shippers shift freight from overnight to second-day delivery.

"If your shipper is shipping high-value commodities, it''s not going to make a big difference," Campbell-Hill Aviation Group President Brian Campbell said. "If they''re shipping low-value commodities, a 10 percent increase is a big difference."

For the present, industry observers say they have not seen any such cargo shift. Although it is more fuel-cost-dependent than surface modes, air still is only one of several means of transportation facing rising fuel costs. Every time shippers fill up their personal cars at the gas pump, they are reminded of this.

The price of a barrel of oil topped $41 in mid-May, bringing with it a growing spate of fuel surcharges airlines are tacking on to their cargo rate structures.

Shippers understand that rapidly rising fuel costs are to blame for the surcharges. But just because they understand the rationale doesn''t mean they like paying them.

"Added costs are never incurred pleasantly," Pilot Air Freight Executive Vice President Frank Perri, Jr. said.

Perri said Lima, Pa.-based Pilot is able to pass many of the fuel surcharges it incurs as a forwarder on to the shippers.

"We''re working closely with all of our customers," he said. "It''s not like this is a big surprise because as consumers, we see it every day at the fuel pumps ourselves."

Carriers link their fuel surcharges to the price of jet fuel, as compiled by the U.S. Department of Energy. Most carriers adjust their surcharges monthly. Jet fuel costs have steadily risen during the past year.

Today''s shippers and carriers can take heart that the fuel price situation today is nothing like it was 25 years ago during the energy crisis of the 1970s when in inflation-adjusted dollars oil cost $90 to $100 per barrel. But that does not make people today feel like they''ve got it good.

"I don''t see [fuel prices] going down any time soon, although I''d like to," American Airlines Vice President for Cargo Sales and Marketing Mark Najarian said. "There''s a lot of unsettled things that until it gets a bit more settled, I don''t see the trend changing."

Dallas-based American adjusts its fuel surcharge weekly according to a formula it posted on its website two years ago. As of last week the airline was charging shippers 20 cents per kilogram on international shipments and 8 cents per pound for domestic shipments.

American, like other airlines, is in the process of adjusting its fuel surcharge scale upwards to include $.25 and $.30 surcharge triggers.

"If the price of fuel keeps going up the way it is, I don''t know what the top end is," Najarian said.

Integrators charge surcharges too.

"We''ve had one in place for quite a while," FedEx spokeswoman Kristin Krause said. FedEx Express adds a 6 percent fuel surcharge. "Customers always know what the fuel surcharge is in advance. Because of the fuel surcharge, we''re able to monitor and track how fuel goes up and down. Obviously it''s an extremely high cost center, but we manage it very well."

Even in times when oil prices are more moderate, fuel typically represents the second highest cost to airlines after labor. Fuel costs normally account for 12 to 15 percent of airlines'' operating costs. With today''s fuel prices, they now represent 25 to 30 percent of operating costs. Even with rising fuel surcharges, carriers cannot recoup that kind of expense, said Campbell-Hill Aviation Group''s Campbell.

"[Fuel costs have] been going up so fast," he said. "You can''t usually stay ahead of the curve with surcharges. There''s a lag problem with fuel surcharges. They''re going to continue and they''re probably going to rise through the summer and into the fall."

Shippers trying to shoulder the burden of paying more to move their goods have varying degrees of success in trying to pass along those costs to consumers, Campbell said.

"If they''re in a pure commodity-based industry, it''s hard," he said. "If they''re in an industry where they can differentiate themselves from their competitors, they can pass them on. Sometimes the same shipper in different markets will have different power."

Although no one has a pat answer for how to ease the fuel price burden, the Air Transport Association is lobbying the Bush administration to step in to help. The ATA is asking the president to cease diversion of domestic oil into the nation''s strategic petroleum reserve.

"It preserves the reserve, but it also provides some much-needed short-term relief," ATA spokesman Jack Evans said. "We''re facing the summer travel season in just a few short weeks, and some short-term relief during that busy summer travel relief could make the difference for a number of our members."