Air France-KLM takes surcharge lead

Air France KLM Cargo have unveiled a new fuel surcharge mechanism that represents a major paradigm shift in what has become an industry bone of contention for both the shippers/forwarding community, as well as the carriers themselves. Donald Urquhart reports from Paris.

Dramatically rising fuel prices have forced carriers to continually hike fuel surcharges to try and cover spiraling costs, but the traditional mechanism – typically based on vastly out dated base rates – was notoriously opaque and widely perceived as unfair in its application.

Among the common complaints from forwarders and shippers is the fact the surcharges appear arbitrary and are applied across the spectrum regardless of the length of the route or the particular market. In some cases surcharges can make up some 90 per cent of the total net freight rate being charged on some trade lanes, like Asia to Europe.

Under the old system, forwarders complained that the carriers would adjust the fuel surcharges upwards, but let the rates stagnate or slide.

Air France-KLM have taken a brave, if perhaps risky step forward into previously uncharted territory to try and remedy one of the most flawed aspects of the airfreight industry, say forwarding and carrier executives.

Conceding the new system – which AF-KLM has devoted nearly six months of intensive work to develop – “looks complicated in the first instance,” AFKLM’s senior vice president, sales and distribution, Jean-Charles Foucault also acknowledged that the group was taking a risk in trying this new approach. “But we think it will bring benefits to customers and we hope it will also bring a small change to the industry”.

In presenting the new mechanism in a recent briefing to press in Paris, senior AF-KLM executives denied the impetus behind developing the new mechanism had anything to do with price-fixing charges over air cargo rates being level ledat a broad swath of the air cargo industry including AF-KLM.

The impetus behind the change

The impetus is multifaceted, partly driven by customers who want transparency and predictability which had become as acerbated by fundamental changes injet fuel prices and the Euro/USD exchangerates.

“The triggers were oil prices, thefinancial crisis and the behaviour of customers,”said Michael Wisbrun, chairman joint cargo management committee AirFrance-KLM Cargo. “While we thoughtthe financial crisis would not hurt the economy, now we know it is impacting the way people are thinking and ultimately this impacts our business. To survive we need to find synergies.”

“As a carrier we also need to have a better cost relationship,” added Marc Boudier, executive vice president AirFrance Cargo. “Rates are market driven and surcharges are cost related and what we are doing is trying to bring additional logic and rationale into the system.”

“With the current system based on a US$17 barrel of crude oil – now hovering around US$140, the system was unsustainable and jeopardises the industry and the trust of the market in the industry where trust was already lacking,” he added.

“This is not only something good for AF-KLM, but something good for the whole industry and we hope it makes sense for the market, for shippers and forwarders,” Boudier added.

A new paradigm

A key facet of the new system is the fact it relies on three different, time-based, distance zones with different levels of surcharges for each zone. This means the new surcharge takes into account the different fuel-burn patterns. The three zones include longer inter-continental flights over 9 hours (Long ICA); other inter-continental flights between 4 and 9 hours (ICA); and short haul flights less than 4 hours in length (Short haul).

Once implemented, future fuel surcharges will be determined by taking the Long ICA as the base with the other two zones being determined by taking 80 and 50 per cent of the base figure, respectively.

The US dollar is set as the base currency for the system with surcharges being converted into Euro or other local invoicing currencies.

In creating the new mechanism Foucault said it was decided that in order to maintain some degree of continuity the starting point for the new mechanism once it comes into effect on 1 September will be based on the current fuel surcharge level of US$ 1.30 per kilogram.

This will form the initial first zone,or Long ICA fuel surcharge level, while the second, or ICA zone will be set at 80 per cent of the Long ICA (equivalent to US$ 1.04) while the third Short haul zone is calculated as 50 per cent of the base figure, or US$ 0.65.

The difference between the old fuel surcharge level and the new level will be added to the freight rate, which in the case of the ICA zone, the amount added to the freight rate will be US$0.26 (see examples).

Future fuel surcharge changes willbe applied fully as surcharges and not incorporated in the basic freight rate. “In order to increase stability and prevent changes to short-term peaks, a monthly moving average will be used for the jet fuel price,” said Foucault, adding that all surcharge increases/decreases will be implemented in steps of US$ 0.10 instead of US$ 0.05.