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Calculation of Bunker Fuel, Currency, and Inland Freight Fuel Price Adjustment Factors for USTRANSCOM Commercial Shipping Contracts

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Calculation of Bunker Fuel, Currency, and Inland Freight Fuel Price Adjustment Factors for USTRANSCOM Commercial Shipping Contracts July 2009 Calculation of Bunker Fuel, Currency, and Inland Freight Fuel Price Adjustment Factors for USTRANSCOM Commercial Shipping Contracts FINAL REPORT Prepared for the U.S. DOD/Transportation Command (USTRANSCOM) Abstract: Military units that move equipment and supplies to and from points around the globe rely on USTRANSCOM to provide sea, land, and air shipping services when needed. USTRANSCOM, for 95% of all tonnage moved, contracts for intermodal ship- ping services from regularly scheduled commercial carriers. The offered rates—per mea- surement ton or per TEU—apply to a given origin-destination pair for as much as 17 months from the time the offers are made. During that interval, prices of fuel and foreign currencies may fluctuate. In order to shift some of this volatility risk to shippers, carriers apply price adjustment factors to their published ocean and inland rates to compensate the carriers (or the shipper) for price changes. The specific adjustments apply to bunker and diesel fuel for ships, selected foreign currencies, and surface transportation fuel. This study describes the theoretical and practical considerations in designing these three types of price adjustment factors, and proposes methods for calculating the technical factors and their components. U. S. Department of Transportation Volpe National Transportation Systems Center Cambridge, MA Authors: Lee Biernbaum Mario Caputo Mark Gentile David Hyde Gustaf Lawson Douglass B. Lee, Jr Joseph Mergel David Pace July 2009 U.S. DOT/Volpe Center U.S. DOD/USTRANSCOM Contents Executive Summary. 1 Bunker Allocation Factor (BAF) . 2 Currency Adjustment Factor (CAF) . 4 Inland Intermodal Fuel Adjustment Factor (FAF) . 6 Bunker Adjustment Factor (BAF) . 9 General Principles of a BAF. 9 Volatility . 9 Time Lag Between Purchase and Delivery . 10 Basic Components of a BAF. 10 BAF Computation Requirements . 11 Fuel Consumption per Cargo Unit . 12 Distance. 12 Speed . 13 Vessel Capacity . 13 Fuel Price Differential. 14 Mix of Fuel Types . 16 Other Fuel Adjustment Factor Components . 16 Trade Imbalance . 16 Substitution. 17 Risk Sharing . 17 Positive/Negative Symmetry . 17 Defects of an Asymmetrical BAF . 17 Symmetrical BAFs . 18 Price Change Buffer Thresholds . 18 Anticipated or Unexpected . 19 Hedging . 19 Options . 19 Hedging and BAFs . 19 Pricing Alternatives . 20 With/Without BAF . 20 A La Carte Pricing . 20 Example of Airline Fuel Surcharges . 21 Transparency . 21 Updating BAF Components . 22 Current Fuel Price . 22 Absolute Surcharge or Percentage . 22 Flagging and Buy America . 22 Industry BAF Practices . 23 Proposed USTRANSCOM BAF Methods and Assumptions. 24 Price Indexing Factors . 24 ii U.S. DOT/Volpe Center July 2009 U.S. DOD/USTRANSCOM Prices of Different Fuels . 25 Prices at Different Locations . 25 Fuel Consumption Factors . 26 Representation of the Typical Vessel . 26 Transit Time Estimation . 29 Fuel Consumption Factor. 30 Engineering Analysis of Fuel Consumption Rates . 31 Composite Vessels by Trade. 31 Ship Characteristics per Lane . 33 Model Calculation and Results . 38 Comparison of Fuel Consumption Factors and Transit Times with Maersk Lines 39 Circuity Factor . 42 Concepts and Theory . 42 Empirical Estimation . 44 Transhipment . 45 Input Substitution Factor . 46 Production Function . 47 Speed . 47 Marine Propulsion . 48 Fuel Economy . 49 Fuel Inputs . 51 The Production Function . 51 The Cost Function . 55 Other Production Function Forms . 56 Substitution Factor. 56 Risk Distribution Factor . 58 Buffer Threshold and Risk Distribution . 59 Base Price Bidding Process . 59 20-to-40 Foot Container Equivalence (TEUs vs. FEUs). 60 Weight versus Volume . 61 Industry Survey. 62 Developing a USTRANSCOM Conversion Factor. 63 A Network-Wide Conversion Factor . 63 All Factors Combined . 65 Technical Factor Comparison Between 1993 and 2009 Volpe Studies, and Maersk 65 References . 68 Currency Adjustment Factor (CAF). 73 Introduction . 73 Foreign Exchange Markets and Currency Volatility . 75 Foreign Currency Markets . 75 Managing Exchange Rate Risk . 76 Measuring Currency Volatility . 77 Industry CAFs and Developing a USTRANSCOM CAF . 81 iii July 2009 U.S. DOT/Volpe Center U.S. DOD/USTRANSCOM Key Components of a CAF . 81 Developing a CAF Methodology . 83 Choosing the Right Currencies . 83 Currency Baseline and Carrier Base Rates . 86 Measuring Volatility and Establishing a Buffer Zone . 87 Currency Analysis Results . 87 Addressing Dominant Exchange Rates . 92 Foreign Currency Expenses . 93 Risk Sharing Factor . 96 Conclusions and Recommendations . 96 References . 98 Inland Intermodal Fuel Adjustment Factor (FAF) . 101 Inland Intermodal Fuel Adjustment Factor (FAF) . 101 Feasibility of a CONUS and/or OCONUS FAF. 102 FAF Methodology Development . 103 FAF Input . 104 Base Period for Fuel Pricing. 104 Fuel Price Data . 104 Truck Fuel Consumption Factors . 104 Rail Fuel Consumption Factors . 106 Truck/Rail Competitive Break Even Point . 108 Industry Practice for Applying Inland Fuel Charges . 109 Alternative Approaches to Modeling a FAF . 109 Recommended FAF Methodology . 113 FAF Implementation Details. 115 Sample Internet Site . 116 CONUS Inland Fuel Surcharge (FAF) for USC-06 Shipments . 116 Limitations of the Proposed FAF Methodology. 122 References . 124 Appendices . 127 BAF Appendix A: Critical Lane Fuel & Distance Tables . 127 CAF Appendix A: Currency Adjustment Factor Methodologies . 145 References . 146 CAF Appendix B: Individual Currency Figures over Varying Contracting Periods 147 Japanese Yen . 147 South Korean Won . 148 Singapore Dollar . 149 iv U.S. DOT/Volpe Center July 2009 U.S. DOD/USTRANSCOM United Arab Emirates Dirham . 150 Djibouti Franc . 152 Jordanian Dinar. 153 Kuwaiti Dinar . 154 Pakistani Rupee. 155 Qatari Rial . 156 Egyptian Pound. 157 Euro . 158 Pound Sterling . 159 Israeli New Shekel . 160 Norwegian Kroner . 161 Polish Zloty . 162 Turkish New Lira . 163 CAF Appendix C: Applying the CAF . 165 Step 1: Superlane Assignment . 165 Step 2: The applicability of the CAF . 165 Step 3: Calculate CAF . 166 CAF Appendix D: Lanes and Superlanes. 167 FAF Appendix A: FAF Current Industry Practice . 173 Trucking . 173 Rail/Intermodal . 175 Ocean Carrier Inland Moves. 175 Conclusions/Observations on Current Industry Practice . 177 Trucking . 177 Rail/Intermodal . 178 Ocean Carrier Inland Moves. 179 References . 179 FAF Appendix B: Typical Rate-Based Truck Fuel Surcharge Estimator . 183 FAF Appendix C: Underlying Logic of the Rate-Based Fuel Surcharge . 185 FAF Appendix D: Typical Mileage-Based Truck Fuel Surcharge Estimator. 187 FAF Appendix E: SDDC Transportation and Travel Policy No. Tr-12 . 189 FAF Appendix F: GSA Approach to Fuel Charge Calculation for Household Goods Movements . 191 FAF Appendix G: BNSF Railroad Approach to Estimating the Fuel Surcharge for an Intermodal Shipment . 193 v July 2009 U.S. DOT/Volpe Center U.S. DOD/USTRANSCOM FAF Appendix H: TSA Inland Fuel Surcharge Calculator . 195 Inland Fuel Surcharge Calculator . ..
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