Freight rates continue to lag operating costs’ limited cost recovery in 2007-08 adds to current rate pressures… record fuel prices make floating bunker charges a top priority’ uncertainty over the outcome of labor negotiations on the US West Coast will put pressure on US East Coast services’ transportation infrastructure remains a concern going forward.

Container shipping lines in the Transpacific Stabilization Agreement (TSA) have established a voluntary guideline revenue/cost recovery program for the 2008-09 contract season. The program, which is subject to all applicable filing and consultation requirements, addresses rising operating costs in the coming year, including record marine fuel prices in 2007-08. In combination with further steps to be taken in 2009-10 contracts, it also will establish over time a level of profitability required to meet anticipated asset and service expansion in the Asia-US freight market.

‘We’ve already seen significant carrier redeployments that reflect the deteriorating economics in the high-cost transpacific market, relative to other trades,’ said TSA chairman and American President Lines Ltd. chief executive officer Ronald D. Widdows. ‘Given cost increases expected through the end of 2007 and into 2008, and the potential for service disruptions, there’s an obvious and compelling need for a viable rate structure that encourages adequate carrier reinvestment.’

Elements of the plan proposed by TSA include:

  • Freight rate increases of US$400 per 40-foot container (feu) for US West Coast port-to-port and door cargo, and US$600 per feu for all other traffic, including intermodal and US East Coast all-water shipments.
  • Restoration of a floating bunker fuel surcharge ’ broken out from base rates and adjusted on a regular basis to reflect bunker fuel price fluctuations ’ in all contracts that have had bunker surcharges mitigated, capped or folded into base rates.
  • A US$400 per feu peak season surcharge will be applied to all shipments on TSA member line vessels during the period of June 1 through October 1, 2008, subject to adjustments relating to the timing, duration and strength of the 2008 peak.

TSA lines also intend to modify the timing of service contracts, extending 2008-09 contracts by an additional two months, to expire on June 30, 2009. This will give shippers the benefits of two additional months at 2008 contract rates, and will also mean that future 12-month contracts will have July 1 start dates.

Finally, carriers plan to include provisions in upcoming contracts that will enable them to recover increased West Coast trucking costs which may arise from legislative and/or regulatory changes, such as implementation of the transport worker identification card (TWIC) and the proposed Los Angeles-Long Beach harbor truck plan.

According to J.S. Lee, senior executive vice president of Hanjin Shipping Co. Ltd. and a member of TSA’s executive committee, said transpacific container lines still anticipate a 7-8% increase in basic operating costs apart from fuel ’ inland rail and truck charges, container handling at destination US ports, and repositioning of empty containers back to Asia after cargo has been delivered at US interior points. He added that carriers also must address increased costs that were not recovered in current contracts. Beyond that, he said, restoring carrier revenues to sustainable levels of profitability cannot be done in a single year, and the market should be prepared for a continuation of this initiative in 2009-10 contracts. A TSA survey of member line operating costs relative to freight rates shows current rate levels well below break-even costs for nearly all carriers on most route segments.

At the same time, bunker fuel prices rose by 34% during the first nine months of 2007 alone, from an average $295 per ton in January to an average $395 per ton during September. An internal TSA survey reveals that this $100 per ton difference in price ’ taking into account typical vessel capacity, actu