TSA Bunker Fuel Charges:

A Refined Approach

Fact Sheet
In July 2008 marine fuel prices in the transpacific freight market reached a record level
of $767 per ton up nearly 260% from $296 per ton at the beginning of 2007. That
18-month increase alone raised the fuel-related cost of an average Asia-US sailing from
$704,000 to $1.83 million via the West Coast, and from $972,000 to $2.52 million via
the East Coast/Gulf.
Since that time bunker prices have fallen just as sharply, and then risen again to reach
$702 per ton in April 2011 - reflecting an overall trend of volatility. In addition, IFO 380
bunker fuel faces refining constraints as it competes with cleaner, higher-value fuels for
refinery capacity in a market recovery scenario. The key question facing transpacific
container lines: How to address this level of volatility in fixed 12-month service
contracts?
Full cost recovery with minimal delay is essential for ocean carriers. Shippers expect full
transparency in return. TSA member lines have responded by streamlining the
calculation formula on which they base their bunker charges, to make it more easily
understandable and accessible to the shipping public.
TSA will begin a transition to the new bunker charge formula with their 2009-10
contracts going forward from May 1, 2009. The new formula offers customers visibility
into weekly bunker fuel prices over the internet uses fewer loading ports in its
calculation bases the calculation on clear, simple operational assumptions fine-tunes
tiers to accurately reflect current fuel price sensitivity establishes separate charge
levels for West Coast and for all-water East Coast/Gulf sailings and adjusts on a
quarterly, rather than a monthly, basis.
This latest round of revisions is part of an ongoing effort begun in 2002 to identify and
quickly recover the full fuel cost involved in an Asia-US sailing as fuel prices rise, while
quickly returning the savings to customers as prices fall.
In a series of group and individual meetings when fuel prices were at peak levels over
2007-08, TSA lines received important feedback from customers regarding bunker
charges. Specifically, customers told carriers they wanted to see:
Greater transparency in the bunker charge formula and calculation methodology
A formula that fairly and realistically reflects actual fuel-related costs in a carrier
sailing
Less frequent adjustment for maximum all-in price stability over a 12-month
contract term
With these principles in mind, TSA lines took a fresh look at its calculation formula and
made further refinements, as it has done previously.
_______________________________
Note to Customers: Slow Steaming

Over the past year or two, many TSA carriers have engaged in the practice of
"slow steaming," also called "eco-steaming." By reducing vessel speed on
some voyages, slow steaming is intended to reduce carbon and other
emissions and thereby reduce the environmental impact of oceangoing vessel
operation. Slow steaming has already generated significant environmental
benefits. Another benefit of slow steaming is a reduction in vessel fuel
consumption as speeds are reduced.
Whether slow steaming ultimately results in cost savings for carriers will
depend on a number of factors, including bunker price levels, vessel load
factors, and vessel charter rates. A cost factor directly resulting from slow
steaming is the asset cost associated with the deployment of additional
vessels, which must be purchased or chartered, as well as accompanying
container equipment. As part of their bunker
charge analysis, the TSA carriers continue to evaluate the effects of slow
steaming and what net savings may result, given changing market conditions.

____________________________

_____________
A More Transparent Formula
TSAs new bunker charge calculation formula starts with fewer variables:
We use a publicly accessible web site,
http://www.bunkerworld.com/markets/tsaindex/, to track fuel prices.
We base the formula on CS 380 (IFO 380) marine bunker fuel only, which
accounts for 98% of marine fuel-related costs.
We establish separate charges for West Coast and East Coast/Gulf all-water
services.
We base the weekly weighted average fuel price on a straight average of:

For the U.S. West Coast:
Hong Kong + Los Angeles
For the U.S. East Coast/Gulf:
Hong Kong + New York

A Few Basic Assumptions
In order to calculate the cost impacts of fuel price fluctuations on an average
transpacific sailing, we assume the following, based on a survey of TSA members:
Average Vessel Effective Capacity:*
2,744 40 containers (FEU) to the WC
1,928 40 containers (FEU) to the EC/Gulf
Utilization:

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88.19% to the WC / 91.56% to the EC/Gulf
Average Vessel Fuel Consumption:
158.45 tons per day to the WC / 127 tons per day to the EC/Gulf
Average One-Way Steaming Time (excluding time in port):
13.94 days to the WC / 24 days to the EC/Gulf
Empty Reposition Share of Westbound Vessel Deadweight:**
7.714% from the WC / 8.84% from the EC/gulf
* Vessel capacity allowing for mix of equipment sizes, out-of-scope cargo, heavy and
oversize cargo, load-bearing limits on deck and hatches, bridge visibility, load
sequencing for priority cargo and port rotation, etc.

** Contribution to a ships total westbound deadweight from empty containers being
repositioned to Asia, and subsequent reduction of westbound sailing capacity, allocated
to eastbound fuel-related cost.

A Simple Calculation
Taking the variables and assumptions described above, TSA developed the following
sample calculation of the new bunker charge in late 2008, from posted Hong Kong, Los
Angeles and New York bunker fuel prices for July 18, 2008. These averaged $740.65
per ton to the U.S. West Coast, and $735 per ton to the U.S. East Coast/Gulf.
1. Calculate the fuel cost per sailing.
$740.65/ton x 158.45 tons/day x 13.94 days = $1,635,942.50 (WC)
$735/ton x 127 tons/day x 24 days = $2,240,280.00 (EC/Gulf)
2. Add the westbound allocation of total fuel cost (for empty repositions).
$1,635,942.50 + $126,196.61 (7.714%) = $1,762,139.11 (WC)
$2,240,280.00 + $198,040.75 (8.84%) = $2,438,320.75 (EC/Gulf)
3. Calculate effective capacity at average utilization.

2,744 FEU x .8819 = 2,420 FEU (WC)
1,928 FEU x .9156 = 1,765 FEU (EC/Gulf)
Knowing the total adjusted fuel cost per sailing and the effective capacity at
average utilization, it is then possible in the above example to calculate the fuel
cost per FEU:

$1,762,139.11 divided by 2,420 FEU = $728.16 per FEU (WC)
$2,438,320.75 divided by 1,765 FEU = $1,381.48 per FEU (EC/Gulf)

Price Sensitivity
In order to establish the fuel price tiers which trigger up or down movement in the
bunker charge, we must understand the price sensitivity of ocean carriers operations in
the Asia-US market how fluctuations in the CS 380 fuel price affect the fixed cost of
the sailing per FEU.

To test price sensitivity, TSA ran the calculation using a weighted average fuel price for
the first week of June 2008 ($617.75 to the WC; $588.25 to the EC/Gulf), and
compared it to the result for the third week of July, shown above:

$617.75/ton x 158.45 tons/day x 13.94 days = $1,364,481.88 + $105,256.13
(7.714%) = $1,469,738.01 divided by 2,420 FEU = $607.33/FEU (WC)

$588.25/ton x 127 tons/day x 24 days = $1,792,986 + $158,499.96 (8.84%) =
$1,951,485.96 divided by 1,765 FEU = $1,105.66/FEU (EC/Gulf)

Thus, the fuel price rose by $122.90 to the WC and by $146.75 to the EC/Gulf, while
carrier cost per FEU rose by $120.83 and $275.82 respectively. In other words, every
$20 increase in the price of fuel translates into another $19.66 in carrier cost to the
WC, and another $37.59 to the EC/Gulf.

Rounding to the nearest dollar, we see a consistent relationship between bunker fuel
price fluctuations fuel cost impacts per sailing, when the basic cost calculation is applied
to any fuel price: When the bunker fuel price rises by $20 per ton, container lines see a
$20 increase in cost per FEU ($16 per TEU) to the West Coast, and an increase of $38
per FEU ($30 per TEU) to the East Coast/Gulf.

This forms the basis of TSAs bunker charge tiers. It would be impractical to set the
tiers in increments of less than $20; calculation would be unnecessarily complex,
especially over a 13-week period as the charge level would be a constantly moving
target. Although it means that the precise cost number arrived at using the full
mathematical calculation shown earlier will typically be slightly higher or lower than the
actual bunker charge tier price, allowing the fuel price to move up or down by $20
without needing to adjust the bunker charge provides a measure of price stability for
carriers and shippers.

A final adjustment to the bunker charge tiers compensates for estimated bunker fuel
cost embedded in base rates since bunker charges were first introduced in the Asia-US
trade lane (see FAQ section below for details). After arriving at a bunker cost per FEU
under the earlier calculation methodology, TSAs guideline bunker charge table reflects
a subtraction of $80 to the West Coast and $160 to the East Coast/Gulf in order to
arrive at the final tier levels.

Using the earlier example, the calculation methodology translated average fuel prices of
$740.65 per ton (WC) and $735 per ton (EC/Gulf) into bunker fuel costs of $728 per
FEU and 1,381 per FEU respectively. Substracting embedded costs results in the
following:

$728/FEU (WC bunker fuel cost) $80/FEU (WC embedded cost) = $648/FEU WC
bunker charge

$1,381/FEU (EC/Gulf bunker fuel cost) $160/FEU (EC/Gulf embedded cost) =
$1,221/FEU EC/Gulf bunker charge

Thus, as shown in the table below, a $740.65 per ton fuel price = a $648/FEU West
Coast bunker charge, and a $735 per ton fuel price = a $1,221 per FEU East Coast/Gulf
bunker charge.

Revised TSA Guideline Bunker Charge
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TSAs simplified calculation methodology, and the creation of distinct charges via the
U.S. West Coast and East Coast/Gulf, affects the overall bunker charge in two ways:

2. There is inevitably a disparity in USWC and USEC/Gulf charge levels due to the
actual cost of fuel consumed, as demonstrated previously. East Coast/Gulf all-water
services are, by definition, less fuel efficient each ship is at sea many more days and,
because of Panama Canal capacity constraints, ECAW service requires 8-9 ships of no
more than 4,500-TEU capacity, versus a typical West Coast service involving five ships
of more than 6,000-TEU. However, since many U.S. importers from Asia route
shipments to multiple destinations via all coasts, fuel-related transportation costs tend
to average out over time.

1. Individual tiers are narrower than under the old formula. As a result, a $20
fluctuation in the fuel price to either coast does not trigger as dramatic a change in the
charge.
Quarterly Adjustment

As it implements the new bunker charge formula TSA will return to quarterly
adjustment of the bunker charge, a practice that had been in place up until May 2006,
when bunker prices had begun to demonstrate significant ongoing volatility. The
reasoning behind this change is discussed in greater detail in the FAQ section of this
fact sheet below.

For purposes of calculating upcoming charge levels, it is first necessary to know that
the effective dates for adjustments going forward will be based on calendar quarters:
January 1, April 1, July 1 and October 1.

Adjustments will be based on a calculation of average weekly West Coast and East
Coast bunker prices over a 13-week period ending 30 days prior to the effective date,
as follows:


Weekly average West Coast and East Coast fuel prices will be posted on the TSA
website each Tuesday. Our source for bunker fuel price data is Bunkerworld, and the
same weekly prices will also be available at
http://www.bunkerworld.com/markets/tsaindex/.

The simplest way to calculate the charge is to:

West Coast East/Gulf Coasts
BUNKER
FUEL PRICE
20 40 40 HC 45
BUNKER
FUEL PRICE

20

40 40 HC

45
(Per MT)

(Per MT)
800.01 - 820 566 708 797 896 800.01 - 820 1098 1373 1545 1738
780.01 - 800 550 688 774 871 780.01 - 800 1068 1335 1502 1690
760.01 - 780 534 668 752 845 760.01 - 780 1038 1297 1459 1642
740.01 - 760 518 648 729 820 740.01 - 760 1007 1259 1416 1593
720.01 - 740 502 628 707 795 720.01 - 740 977 1221 1374 1545
700.01 - 720 486 608 684 770 700.01 - 720 946 1183 1331 1497
680-01 - 700 470 588 662 744 680-01 - 700 916 1145 1288 1449
660.01 - 680 454 568 639 719 660.01 - 680 886 1107 1245 1401
640.01 - 660 438 548 617 694 640.01 - 660 855 1069 1203 1353
620.01 - 640 422 528 594 668 620.01 - 640 825 1031 1160 1305
600.01 - 620 406 508 572 643 600.01 - 620 794 993 1117 1257
580.01 - 600 390 488 549 618 580.01 - 600 764 955 1074 1209
560.01 - 580 374 468 527 592 560.01 - 580 734 917 1032 1161
540.01 - 560 358 448 504 567 540.01 - 560 703 879 989 1112
520.01 - 540 342 428 482 542 520.01 - 540 673 841 946 1064
500.01 - 520 326 408 459 516 500.01 - 520 642 803 903 1016
480-01 - 500 310 388 437 491 480-01 - 500 612 765 861 968
460.01 - 480 294 368 414 466 460.01 - 480 582 727 818 920
440.01 - 460 278 348 392 440 440.01 - 460 551 689 775 872
420.01 - 440 262 328 369 415 420.01 - 440 521 651 732 824
400.01 - 420 246 308 347 390 400.01 - 420 490 613 690 776
380.01 - 400 230 288 324 365 380.01 - 400 460 575 647 728
360.01 - 380 214 268 302 339 360.01 - 380 430 537 604 680
340.01 - 360 198 248 279 314 340.01 - 360 399 499 561 632
320.01 - 340 182 228 257 289 320.01 - 340 369 461 519 584
300.01 - 320 166 208 234 263 300.01 - 320 338 423 476 536
280.01 - 300 150 188 212 238 280.01 - 300 308 385 433 487
260.01 - 280 134 168 189 213 260.01 - 280 278 347 390 439
240.01 - 260 118 148 167 187 240.01 - 260 247 309 348 391
220.01 - 240 102 128 144 162 220.01 - 240 217 271 305 343
200.01 - 220 86 108 122 137 200.01 - 220 186 233 262 295
180.01 - 200 70 88 99 111 180.01 - 200 156 195 219 247
160.01 - 180 54 68 77 86 160.01 - 180 126 157 177 199
140.01 - 160 38 48 54 61 140.01 - 160 95 119 134 151
120.01 - 140 22 28 32 35 120.01 - 140 65 81 91 103
100.01 - 120 6 8 9 10 100.01 - 120 34 43 48 54
80.01 - 100 0 0 0 0 80.01 - 100 0 0 0 0
Bunker Charge Calculation Period
January 1 September November
April 1 December February
July 1 March May
October 1 June August
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1. Track the average West Coast and East Coast/Gulf prices each week during the 13-
week periods shown above;

2. Total the prices for the entire period and divide by 13 to arrive at a quarterly
average; and

3. Look up the charge for that average West Coast or East Coast/Gulf price in the TSA
calculation table.

PLEASE NOTE: Because the average weekly West Coast and East Coast/Gulf prices are
different, it is necessary to look them up separately under the West Coast and East
Coast/Gulf columns in the table as shown in the earlier example. Reading straight
across from one column to the other will not, in most cases, provide the correct charge
levels (see example at the bottom of page 5, as it relates to the Bunker Charge Table
on page 6).

Frequently Asked Questions

Q: Why are you modifying the bunker charge and the calculation formula now?


A: This latest set of revisions to TSAs guideline bunker charge formula reflect an
ongoing refinement process, reflecting changes in TSA membership and service
characteristics, as well as incorporating shipper feedback in recent months. Our
objective is to achieve as fair and transparent a formula as possible, recovering bunker
fuel costs fully as prices rise, and assuring customers that savings will be passed on
just as fully when fuel prices turn downward. TSAs bunker charge formula has been in
place for more than a decade. Of necessity it has reflected a weighted average of the
vessels, fuel purchasing and consumption patterns, and service characteristic of the
varius TSA member carriers. This average of averages approach was bound to produce
an often complex, unwieldy formula. Until recently, however, fuel prices were low
enough that carriers were less focused on full recovery and customers were less
focused on transparency. TSA lines pressed hard in their 2008-09 service contracts for
full, floating bunker charges, and made significant progress toward that end. TSA
understands that achieving full fuel cost recovery in 2009-10 and beyond will in turn
require maximum transparency, fairness and price predictability for customers in the
charge formula. A committee of TSA lines went to work, stripping out unnecessary
variables and steps in the calculation process clarifying how per-ton bunker fuel price
fluctuations translate into per-container cost impacts and charge levels developing
distinct charge levels to the West and East/Gulf Coasts and returning to quarterly
adjustment of the charge to reduce volatility.

Q: Doesnt the discrepancy between West Coast and East Coast/Gulf bunker
charge levels mean that West Coast shippers have been routinely overcharged
for years?

A: No. The existing formula was initially developed by TSAs predecessor conference,
ANERA, at a time when fuel costs were still folded into, and recovered through, base
freight rates. Shippers wanted the fuel component of rates broken out in a separate,
transparent charge so they could assess whether the increase in freight charges
attributed to fuel were justifiable. A single charge for everyone was simpler in terms of
tariff and contract preparation. The weighted average calculation formula took into
account West Coast and East Coast/Gulf prices at the time, a single charge simplified
public filing of tariffs and contracts. But it is important to stress that bunker charges
have routinely been undercollected in recent years. When fuel prices were relatively
low, it became a customary practice among many carriers to mitigate their bunker
charges in the course of contract negotiations. Reversing the practice proved difficult in
recent years as fuel prices have risen dramatically to the point that container lines
have sustained major financial losses that forced a change in behavior. In TSAs best
estimates, undercollection of the bunker charge, along with shippers use of multiple
routings via all U.S. coasts, has resulted less in an overcharge to West Coast customers
than in a steep discount to all customers but especially East Coast customers over
time.

Q: Hasnt some portion of bunker cost historically been folded into base rates?
If so, how much? If not, why not?

A: Practically speaking, it is hard to argue that base rates at their current levels include
any meaningful fuel cost component. Carriers may individually have suggested as much
in past contract negotiations, but a more precise characterization is that the bunker
charge was being absorbed in whole or in part. Rates did not rise correspondingly to
cover any where near actual fuel costs, and if actual fuel costs were stripped out of
current base rates, very little would be left to reflect inland transport, cargo handling,
security, environmental compliance, information systems and other costs, let alone any
degree of profitability. However, when TSA lines went back and reviewed the historical
bunker charge, it was found that the original charge was zero up to a fuel price of $80
per ton, meaning that $80 of bunker fuel cost was, in fact, embedded in the charge
from the outset. As a result, lines have modified the bunker charge tier levels in their
new formula to strip out the cost impacts of that embedded amount. Returning to the
price sensitivity model shown earlier, it was determined that there is a 1:1 cost impact
to the West Coast as fuel prices rise or fall, so TSA removed $80 per FEU (and $64 per
TEU) from the charge at each West Coast tier level in the table. To the East Coast/Gulf,
the actual price sensitivity is 1.9:1 but in the interest of simplicity, TSA has opted to
strip out $160 per FEU (and $128 per TEU), a 2:1 ratio.

Q: Judging by the calculation methodology you provide, arent TSA carriers
attempting to pass through their entire fuel costs to customers, as opposed to
cost-sharing?

A: To the extent that bunker fuel remains a major fixed-cost component of
transportation and supply chain logistics services provided, carriers ultimate goal is full
cost recovery. It is no different, for example, than the need for automobile
manufacturers to recover the full cost of steel or glass. In the past, when fuel prices
were lower and did not represent as large a share of the total operating cost per
sailing, carriers had some flexibility to absorb a portion of the fuel bill depending on
profitability of their other operations and/or other elements of the total freight charge.
Times have changed. Fuel costs are fully decoupled from freight rates, and freight rates
are under continuing pressure. The global liner shipping environment has also changed;
container carriers today must perform as stand-alone profit centers even within larger
organizations, or when receiving government support. No industry can indefinitely
absorb a portion of the cost of the largest input in its product and continue to sell that
product at a profit. In two respects, however, there already is a degree of cost sharing
on bunker fuel in the $80 embedded in freight rates, and in the float between the
time fuel prices rise and the time when those costs are collected through the charge
30-60 days later.

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Q: Why does the bunker charge appear to fluctuate independent of crude oil,
highway diesel and other similar fuels?

A: IFO 380 bunker fuel is among the lowest-level diesel fuel distillates. From a refiners
viewpoint it is required in large volumes but generates relatively low margins, and is a
relatively thick, dirty fuel that builds deposits in refinery pipes and equipment. When
crude oil prices are high, refiners prefer to produce cleaner, higher-value distillates;
when prices are low, so are IFO 380 margins. At the same time, shipping operations
worldwide consume, in aggregate, a comparable amount of fuel each year to Germany.
Most of it is IFO 380. Bunker fuel prices generally track those of crude oil, but isolated
factors speculation in the crude market, refining priorities and capacity constraints,
inherent difficulties for vessel operators in either storing or hedging fuel create pricing
distortions. Finally, there is a lag time between the reporting period for calculating the
bunker and implementation of the charge itself. This is necessary to give the market 30
days advance notice of upcoming increases to rates or charges, as is required by U.S.
law. Thus, the bunker charge level for a given quarter collects the average fuel price
recorded 30-120 days prior, which may have been higher or lower.

Q: If fast, fair recovery of fuel costs is so critical to TSA lines, why have they
returned to quarterly adjustment of the bunker charge guideline?

A: TSA had been adjusting its bunker charge quarterly prior to May 2006. By that time,
bunker fuel prices were rising so sharply and so rapidly that the lag time between the
reporting period and the next effective date, plus maintaining a fixed charge over three
months, represented a significant loss of revenue. While we expect bunker prices to
remain high, they appear to be stabilizing somewhat as global economic growth
moderates and as high prices encourage conservation. At the same time, fuel prices of
all kinds on the world market are likely to remain volatile in the foreseeable future.
Customers have said they are willing to accept a floating bunker charge which
addresses that volatility, but would like to maintain a greater degree of stability in their
total freight charges over what is otherwise a largely fixed 12-month contract. TSAs
overarching mission is to foster service and price stabilization in the Asia-US freight
market, and toward that end we have agreed to return to a quarterly adjustment
approach. It must be emphasized, however, that the quarterly lag time works in both
directions: In an environment of rising fuel prices, a quarterly charge tends to hold the
shippers freight cost lower over a calendar quarter.


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