Last Year’s Lion, This Year’s Lamb?

In 2008 one of the key cost drivers was fuel surcharges, which reached unprecedented levels and threw off many a transportation budget. Exhibit 1 shows the monthly fuel surcharges for Ground and Air services for 2008 and 2009 year-to-date.

Exhibit 1: Fuel Surcharges by Month

2008 Jan Feb Mar Apr May June

Ground 6.25% 6.25% 6.00% 6.25% 7.75% 8.50%

Air 19.50% 18.50% 18.50% 20.00% 25.00% 28.00%

2008 July Aug Sept Oct Nov Dec

Ground 9.50% 10.25% 10.50% 9.25% 8.25% 6.75%

Air 32.50% 34.50% 34.50% 27.00% 28.50% 15.00%

2009         Jan         Feb         Mar        Apr
Ground    4.75%     3.25%      2.75%    2.50%
Air           7.50%    1.00%       2.50%     0.00%

The reaction from the shipping community to last year's cost is still being felt today. It is one of the reasons companies are re-bidding their transportation business and developing new contract terms in an attempt to control this variable cost component. But is it possible to take a proactive approach instead of a reactive one in addressing this topic?

The surcharges for Ground and Air are based on the On Highway Diesel Fuel and Gulf Coast Jet Fuel indexes. Here is the 2008 and 2009 year-to-date numbers that are used to set the carrier surcharge level.

Exhibit 2: The Cost Drivers on Highway Diesel Fuel and Gulf Coast Jet Fuel Indexes

2008           Jan       Feb       Mar          Apr         May      Jun
Diesel         330.8    337.7    388.1       408.4       442.5    467.7
Jet Fuel      260.47   272.82 312.45     336.46      373.76 387.82

2008 Jul Aug Sept Oct Nov Dec

Diesel 470.3 430.2 402.4 357.6 287.6 244.9

Jet Fuel 388.63 327.06 339.33 231.47 187.96 137.51

2009 Jan Feb

Diesel 229.2 219.5

Jet Fuel 146.92 125.94

What may be new information and of interest to you is the Energy Information Administration's Short-term Energy Outlook. Published monthly, it could provide you with some insight into future cost levels for diesel and jet fuel. See Exhibit 3.

Exhibit 3: 2009 Monthly Department of Energy, Short-term Energy Outlook

Janaury FirstQ SecondQ ThirdQ FourthQ

Diesel 228 229 225 224
Jet Fuel 153 159 155 155

February FirstQ SecondQ ThirdQ FourthQ

Diesel 228 231 226 227
Jet Fuel 156 160 156 158

March FirstQ SecondQ ThirdQ FourthQ

Diesel 219 213 218 224
Jet Fuel 146 140 148 155

Applying March's forecast numbers to the carriers' 2009 Fuel Surcharge charts (available on their website) we can use the following chart to estimate fuel surcharges for the remainder of this year:

                         Diesel index / Ground FSC Jet Fuel index / Air FSC

Q2                                  213 = 2.25%                          140 = 1.50%

Q3                                  218 = 2.50%                          148 = 2.50%

Q4                                  224 = 2.75%                          155 = 3.50%

The energy price trend at this time is stable with a forecast of modest increases through 2009. But be wary. We are always just one geopolitical event, one OPEC production level decision, or one hurricane away from a return to upward price volatility.

Last Year’s Lion, This Year’s Lamb?

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