Photo: Emily Metcalf
Photo: Emily Metcalf

On June 12, 2011, Matson Navigation, which carries roughly two-thirds of the containerized cargo to Hawaii and whose rates impact the cost of nearly everything in the state, raised its fuel surcharge to 47.5%, the highest level since the fee was first imposed over a decade ago.

As is usual, this increase was matched by the other carriers in the trade.

This was the latest in a series of increases that have more than doubled the surcharge in just four months from its February 21.75% level.

However, as of last week, the price of oil was $99.29 per barrel on the New York Mercantile Exchange (NYMX).

The price of oil on February 27th was $101.15 and has hovered around $100 in the intervening months.

With no discernible increase in oil prices, the surcharge more than doubled.

Similarly, prior to this year, the record high for the fuel surcharge was 42.25%, set in 2008 when oil prices soared to $145.29 per barrel.

Today the surcharge is 12% higher than its peak in 2008, despite oil prices being 32% lower than their 2008 peak.

That does not take into account that Matson has raised its base rates, to which the fuel surcharge is applied, by $120 in each of the last three years.

Discussions with customers and a review of Matson’s tariffs confirm Matson now collects well over $1,000 in fuel surcharges for every Hawaii container.

But this is a topic Matson will not discuss.

When asked for the average fuel surcharge cost in dollars for a Hawaii container, Matson Navigation Company’s Director of Public Relations, Jeff Hull said: “We don’t disclose that information.”

Matson’s current fuel charges for freight to or from China on the ships that are also used for Hawaii and Guam also were not disclosed: “The terms of freight rates in the China trade are subject to confidential contracts.  For competitive reasons, we are unable to reply to this question,” Hull said.

But Hull said Matson has a “public record of monitoring fuel prices and adjusting the surcharge accordingly, upward and downward.”

Hull maintains Matson has indeed decreased the fuel surcharge when the price of oil decreases.

“As a result of dramatic increases in fuel costs this year, Matson has implemented three increases to its fuel surcharge in 2011, totaling 21.75 percentage points, as well as an additional 4 percentage point increase that will become effective June 14, 2011. The last time Matson’s fuel costs experienced a comparable spike was in 2008, when the fuel surcharge reached 42.75 percent, effective August 31, 2008.  Fortunately, fuel prices fell precipitously during the last two quarters of that year, allowing Matson to make six consecutive decreases.  By the year’s end, the fuel surcharge was at 15 percent.”

The following graph compiled by Hawaii Reporter shows the fuel surcharge and the price ( NYMX) of oil:

Click on image to enlarge chart

 

See a more detailed report here: Matson Fuel Surcharge vs oil prices

As can be seen in the chart, the fuel surcharge appeared to follow the price of oil closely through 2008, but since then, has, with few exceptions, diverged from its previous tracking of oil prices with a dramatic divergence occurring in the last few months.

Because Matson’s service from the West Coast is legally considered interstate trade, the Hawaii Public Utilities Commission and other state agencies have no authority over its rates or charges such as the fuel surcharge.

Whatever regulatory oversight there is exists at the federal level. For most of the last 100 years, Matson’s rates were heavily regulated by the Federal Maritime Commission with detailed cost studies required for any rate increase.

Since 1997, following the ICC Termination Act, that changed and Matson has filed rates at the Surface Transportation Board (STB), an federal agency that primary oversees railroads.  The new law was intended to allow competition to maintain reasonable rates.

However, due to the Jones Act, which mandates that only American built, flagged and manned ships deliver goods between American ports, experts say there is little competition in the Hawaii trade.

The Surface Transportation Board legally has some oversight over the rates to and from Hawaii.

Under the law, Matson’s rates are deemed reasonable if they do not increase by more than 7.5% in a given year.

Hawaii Reporter’s calculations indicate that Matson’s total rates including surcharges have increased more than 20% on average since last year, yet there has been no investigation by the Surface Transportation Board.

A Surface Transportation Board spokesperson has confirmed that it has some oversight of Matson. Essentially the way it works: Matson files its rate increases with the board and approvals are accepted automatically.

What about government oversight to ensure that Matson does not recover more in fuel surcharges from Hawaii customers than its fuel expense for Hawaii service? Hawaii Reporter was referred by Hull back to the Surface Transportation Board.

A Surface Transportation Board spokesman confirmed what industry executive said: There is no investigation into Matson’ rate increases unless there is a complaint filed with the agency.

Would Matson be willing to make those records (fuel costs and fuel surcharge receipts) public?

Hull said no: “We do not publicly disclose proprietary information.”

As a subsidiary of Alexander and Baldwin, Matson is a publicly traded company, yet financial analysts say the company does not report detailed cost information that could be used to verify that the fuel surcharge is only a cost recovery mechanism.

Alexander and Baldwin’s latest financial disclosures, however, indicate a possible motive for raising the fuel surcharge in Hawaii above cost levels, financial analysis told Hawaii Reporter, pointing to the company losing money on its China Service. Matson is currently operating 14 vessels, 10 of which go on to China.

Analysts say the trade from China to the West Coast is highly competitive with many international players and Matson is only a small player unable to effect market rates. At least two analysts interviewed by Hawaii Reporter say Matson should be monitored to ensure it is not using the captive Hawaii customer to cover those losses.

The June 12 oil surcharge increase comes just three days before Matson announced another increase. However, this time, oil price increases are not to blame. The company told its customers in a June 13 email that because the state legislature has removed its General Tax exemption this session, it will charge its customers for it to make up the difference. The increase will cost customers an additional $52 per container, according to a J Matson. The increase takes effect July 10, 2011.

Comments

comments

5 COMMENTS

  1. When one considers the entire “real” picture of Matson’s operation, their profits, at the expense of Hawaii residents, are worth examining. While I believe any business should be able to charge whatever the market will bear, Matson’s overwhelming majority share of transpacific shipping to Hawaii warrants government oversight. Certainly more than the STB is barely offering.

    Matson ships today carry twice the cargo load than the ships did ten years ago, within the same size hull. They employ smaller crews and are built with more efficient engines (diesel) than their old steam powered fleet.

    What this basically means is that Matson has actually doubled their profits when one considers the fleet number has stayed basically the same (or smaller even) and the ships are carrying more with less associated costs per vessel. Fuel and freight rates increase frequently and repeatedly. When measured by the number of containers carried (revenue) per ship, per voyage, they are maximizing their profits rather handsomely.

    And don’t fall for the silly story about losing money in the China service. Any Matson Captain on that run will tell you, they are raking in the money. Matson ships carry revenue generating cargo from the west coast to Hawaii. Then they continue to Guam, where they discharge their last “loaded” containers. Now each ship departing Guam is hauling a full load of empty boxes to China, where they again pick up a full load of Asian cargo bound for the USA. Matson calls only at two ports in China that are specifically suitable ONLY for ships that match the size of Matson (and Horizon’s) current fleet. The draft (available depth of water) at the piers and in the harbors and rivers that the ships must transit, are too shallow for the mega-container ships that Matson “claims” to be competing against. Thus the ships enjoy the ability to load a full amount of cargo and return to the US.

    They are carrying revenue cargo almost the entire time the ship is at sea. This is a ship owner’s wet dream. The only leg of the voyage that is done without revenue cargo, is between Guam and China, a relatively short hop.

    Who is Matson’s biggest competitor in the China trade route they have chosen??

    Matson!

    A year ago Matson management decided to charter five foreign flag ships, owned by a foreign company with foreign crews employed onboard and run direct service from China to the west coast, bypassing Hawaii and Guam. This was a risky decision. Half the voyage running in ballast (carrying empty containers) and the other half was ‘projected’ to carry full loads of loaded revenue earning boxes. As time went by, Matson realized it was taking cargo away from itself. In an effort to maximize profit on their US flag ships, most cargo goes to those American ships first and Matson’s foreign charter ships pick up what’s left. They have been running less than full each voyage and not meeting their own cargo expectations. But if it is anywhere near as bad as Matson claims it is, they can simply NOT renew their charter agreement in another year or two. Matson has no risk and little concern with this trial arrangement, if it doesn’t pan out in the long run.

    Don’t feel sorry for Matson’s perceived challenges. They always do well for their shareholders and own executives. They have made some painful and stupid mistakes (rebuilding one of their ships into a car carrier (MOKIHANA) instead of building a real car carrier from the keel up.

    Matson’s biggest problem is shoreside labor and the ILWU…not to be confused with ANY of their labor issues concerning their shipboard crews. The shipboard crews and their labor unions have taken a beating over the years. Their contracts have gone up and down with the economy. While shoreside, the ILWU has enjoyed handsome returns even in down years.

    The ILWU will always be a force to reckon with, even if the Jones Act were dumped tomorrow. Do not confuse them with labor employed onboard their ships.

    Matson is swimming in cash. But Hawaii democrat leadership and their incestuous relationship with organized labor will never allow this arrangement to be changed. Look at who supports our government. Look who funds their campaigns. Look at Inouye and Abercrombie, two of the single biggest proponents of the Jones Act and our local maritime industry.

    Matson dabbling in the China service trade is a thinly veiled effort to see first hand, what would it be like to manage foreign flag ships and get some real tangible financial numbers first hand. Any fool on the waterfront can see that they are studying up on the scenario that, someday, there might not be a Jones Act anymore…once “Dan” expires.

    Sadly, if you think Matson is making too much money now, wait until they get rid of the Jones Act. Then Matson will be making an even more obscene amount of profits than today. Imagine this; same service, same runs, same freight rates, all at half the operational costs…or even less.

    Pity you and me.

    Unless you own stock in Alexander and Baldwin.

  2. Today (August 8th) Matson announced it will cutback it’s China service to half of what it has been offering it’s customers.

    http://www.joc.com/container-lines/matson-ends-china-service

    “Unfortunately, the economics of the trans-Pacific trade have shifted dramatically in the relatively short time since we developed the model,” said Matt Cox, Matson’s president. The comapny’s operating profit plunged 75 percent to $9.4 million in the second quarter compared with the same period a year ago.”

    Played out as I suspected and noted above. A&B will start increasing their profits again…

    Let’s not forget the price of oil today as the market plunged. When this article came out West Texas Crude was $105 a barrel, today it’s $80. Brent was $120, today it’s $103.

    Where’s that downward fuel adjustment now, Mr. Cox??

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