Transparent economics. Are yours?

Last Friday, we talked about the surging rate of fuel surcharges for ocean-going containerized freight and how it will soon affect the price of imported goods.

As you might expect, fuel surcharges aren’t just going up for seagoing freight customers.

It’s hitting air travel customers as well.

This Times UK article talks about the recent, substantial increase in per-ticket airline fuel surcharges. On the flight they checked, the fuel surcharge was about 218 Pounds Sterling for a London to San Francisco flight. That’s $424 using the exchange rate on June 5, 2008.

$424 per seat? Man, I must have packed on a few pounds lately. Let’s look at a little rough math and see what impact this fuel surcharge has on the airlines.

Assuming that a Boeing 767ER (Extended Range, often used for long international flights) flies this route and uses every drop of fuel that a 767ER can carry, the price for that flight’s fuel is $91603.60. That’s 23980 gallons at $3.82 per gallon for Jet A as of May 30 2008, per IATA.

A 767ER’s range is 12,200 kilometers or 7580 miles, according to Boeing. Assuming that means a full tank, then we get 3.16 gallons per mile (rather efficient, aren’t they?) or a current fuel-only cost of $12.08 per mile to fly 7580 miles. Given that we have a couple of hundred people on the plane, that’s not bad.

The trip from London to San Francisco is 5357 air miles, according to InfoPlease.com.

According to Boeing, a typically configured 767ER holds 224 people in a 2 class configuration, IE: coach and first class. 224 people paying a fuel surcharge of $424 add $94976 to the gross receipts for that flight if it is full (as most planes are these days).

Unfortunately, even that $95k of fuel surcharge isn’t covering the 90% increase in Jet A fuel prices in the last year. Not even close. If that flight is full, you aren’t paying for the difference in fuel prices since 2000 (what the IATA calls their baseline or “100 points” price).

You’re paying the entire fuel bill for the flight.

Presumably there has always been a fuel cost component of the airline ticket. Apparently that is no longer the case.

Only thing is, you only flew about 5400 miles. Remember, a full tank flies the 767ER about 7600 miles. A little more rough math means that we left 883 gallons of $3.82 Jet A in the plane upon arrival at the gate in San Francisco (about $3000).

But I’m a generous guy. We’ll call it even for the $3000, assuming that extra 883 gallons over the average gallons per mile fuel efficiency is burned during taxi and takeoff. And we need to keep in mind the safety margin to have the fuel to steer around storms and/or circle incessantly because of delays caused by weather and Presidential candidates using the same airport.

Finally, you might want to lay off the donuts and pack lighter clothes. The airlines are also allegedly considering a weight-based fee.

If there are any airline pilots reading this that have better numbers on fuel, I’m all ears. I’m sure YOU aren’t seeing any of that extra money.

Are the economics of your business this transparent? What would your clients say if they could do this kind of math on your fees? Are you delivering so much value that they don’t even think about it?

The airlines aren’t. You had better be.

Related articles:

NY Times article about steps airlines are taking to make planes more efficient. Smart stuff. Kudos to them for looking at everything, but not just cutting for the sake of cutting.

Quoting from the article:

â??Our fleet is over 500 airplanes,â? said Beth Harbin, a Southwest spokeswoman. â??If you can make a difference on one airplane on one flight, and multiply that by 500, in this day and age that is significant.â?

Fuel Surcharges: Another reason to buy local

My CFO friend does that sort of financial wizardry for a large international importer.

Last weekend, she told me she had been informed by her shipping vendors that the fuel surcharge on seagoing containers was going up at least 30%, to about $1200 for a large container.

That got me to thinking about a number of issues, so I started digging around.

The Westbound Transpacific Stabilization Agreement (WTSA) covers oceangoing freight in the Pacific in and out of the Oakland area. They recently announced a $600 per container increase, which is a brief resting place before Oct 1’s full “floating” charges take effect.

Up in Canada, the news is the same. The Canada Transpacific Stabilization Agreement (doesn’t that sound benign?) recently set their fuel surcharge at $1,260 for a 45 foot container.

There is similar news elsewhere in the industry.

A 45 foot container holds 3000 cubic feet of “stuff” (that’s 86 cubic meters for my overseas readers).

Let’s look at the impact of these fees on imported goods that your store might be selling or consuming.

Let’s say you have a 40″ big screen HDTV. Figure the box to be 2 feet thick, 4 feet tall and 5 feet long (all wild guesses). That’s 40 cubic feet, or about 75 TVs per container.

It might be more or less, but my box size guesstimate will probably be made up for by the space used by pallets and the like. The math isn’t the point.

If 75 televisions have to split that $1,260 fee, then each TV will go up about $20. Or should.

What will the increase be when it gets to you, the retailer? Do the math before you sign that contract.

If you sell imported cars, figure 4 cars per 40 foot container. That adds $315 per car to your cost, if you’re lucky.

It isn’t just ocean-going freight.

You need to be looking at this elsewhere. A simple example: Does a $1 Fedex or UPS fuel surcharge make sense on a 10 ounce overnight envelope? Call your Fedex/UPS sales rep and see what kind of flexibility they offer, if you do the kind of volume that would make this substantial to you.

My CFO friend tells me to expect some things to rise 30%, even though the fee increases don’t appear to reflect that size of increase in the cost of your goods. October’s increase will push you again.

It’s easy to watch this sort of news on CNN or MSNBC and think it doesn’t impact you – but it does. I suggest paying closer attention to it, particularly if you do a lot of international shipping. Maybe that’s another reason why Ian doesn’t buy Chinese.

On Monday, we’ll hit a lot closer to home on these fuel surcharges. And I might even make you mad.

In the meantime, take a long hard look at the kind of value you’re delivering now. Consider whether those increasing international shipping charges might just be better spent elsewhere – like on locally produced goods.