As Oil Prices Fluctuate, Matson Hasn’t Reduced Oil Surcharge, Investigation Shows

Hawaii-based Alexander & Baldwin (NASDAQ:ALEX) Inc. is reporting an $18.7 million profit this quarter. The company operates Matson and brings an estimated two-thirds of Hawaii’s container ship freight.

The company said this week that it is closing down one of its Asia routes. Matson announced it lost $17.7 million on its China to California “CLX2” route this past quarter, lost another $49.7 million since start-up, and expects to lose another $20 to 25 million more through shutdown.

In a letter to its clients on August 8, Matson said it is discontinuing its CLX2 service in late August, “due to a number of financial and economic reasons.”

The letter said: “Many of you are probably aware that our original China – Long Beach Express, launched in 2006, includes calls in Hawaii and Guam before proceeding to China. We want to assure you that the CLX2 service operated independent of our Hawaii and Guam services and that this news has absolutely no impact on Matson’s Hawaii and Guam vessel schedule.”

“In addition, it’s important to understand that the two services have considerably different cost models, with the CLX1 service benefiting from round trip economics, generating revenue for both westbound and eastbound voyages. Because of this advantage, Matson’s CLX1 service has weathered comparable negative operating environments in the Trans-Pacific trade over the past five years, and we remain confident of the long term outlook for that service.”

Shipping analyst Tim Colton commented on his website (www.ColtonCompany.com):

“MATSON CAN’T COMPETE, SURPRISE, SURPRISE – “It never made any sense for Matson to start a China Direct service, i.e., a trans-Pacific service that was not artificially supported by the Jones Act and the Cargo Preference regulations, and, no surprise, they’ve given up on it already, after less than a year…  Now they can concentrate on sticking it to the people of Hawaii.”

Indeed, in Hawaii’s Matson continues to be very profitable, and shipping analyst say this is largely because of the company’s ability impose fuel surcharges on Hawaii customers.

This past quarter the company reported $18.5 million increase in revenues from fuel surcharges alone. 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.

A Hawaii Reporter investigation this past June showed that fuel increases have not tracked with the price of oil.

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.”

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

However, the evidence does not appear to support this statement. A Hawaii Reporter analysis shows that on Dec 31, the price of oil stood at $91.38 per barrel. Oil prices have averaged less than $100 for the year. Last week, on August 5, oil was at $86.88, a 5% decrease from the first of the year.  Yet the fuel surcharge at the beginning of this year was 21.75% and it is currently 47.5%, a 118% increase.

By way of contrast, in 2008, the year Hull cites, at one point oil prices exceeded $145 per barrel, a level 67% higher than they are currently.  Furthermore, the fuel surcharge he cites, 42.75%, is less than the 47.5% Matson and Horizon are currently charging.

The following updated graph compiled by Hawaii Reporter shows the fuel surcharge and the price ( NYMX) of oil with an apparent divergence this year:

For a full detailed list, see Matson and Horizon Fuel Surcharge Report as of August 2011

Matson has acknowledged the company incurred losses on CLX2 because competitive forces did not allow the company to recover increases in fuel cost.

For that reason, some shipping analysts question whether fuels surcharges paid by Hawaii businesses and consumers are either subsidizing the fuel for Matson’s Asian imports to the U.S. or are paying for the Asia route losses. The company could recover those costs in Hawaii with fuel surcharges.

However, Hull said in an interview with Hawaii Reporter today that Matson keeps this financing separate.  He maintains there is no financial tie to the Asia route that is closing down. They are two independent services, he said.

He called the fuel surcharge an “unavoidable expense” that Matson’s own internal models show the company must impose. Matson files rate changes with 30 days notice, and sometimes that leads to Matson losing money while the company is catching up, Hull said.

He maintains that Matson wants to cut fuel charges and that Matson realizes “high fuel charges are not good for anyone.”

The State of Hawaii has no authority over Matson’s (and Horizon’s) rates.  Since imports from the Mainland are classified as interstate trade, any authority to govern the carriers rates lies at the Federal level.

Since 1997, Matson has filed rates at the Surface Transportation Board (STB), a federal agency that primary oversees railroads.  The Surface Transportation Board legally has some oversight over the rates to and from Hawaii. Under STB regulations, Matson’s rates are deemed reasonable if they do not increase by more than 7.5% in a given year.

The intent of the law was to allow competition to regulate rates and presumably keep rate increases below the 7.5% threshold. However, U.S. Jones Act limits competition in the islands. It says that only American flagged, manned and built ships may operate between American ports. The result is that only two companies, Matson and Horizon, control all the Jones Act containerships in the Hawaii trade.

However, even the 7.5% limit appears to be ineffective. As Hawaii Reporter’s calculations indicate, 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 told Hawaii Reporter essentially the way it works: Matson files its rate increases with the board and approvals are accepted automatically. He confirmed that there is no investigation into Matson rate increases unless there is a complaint filed with the agency.

Horizon Lines has faced its own financial challenges this year, including its own losses on a new China service.

As stated in the Horizon Lines 2^nd Quarter earnings release:

“The start-up of a new trans-Pacific service has coincided with one of the most challenging periods in the history of the tradelane,” Mr. Fraser said.  “The revenue shortfalls and costs associated with this service negatively impacted adjusted EBITDA by approximately $16.0 million in the second quarter, or by $10.6 million  when compared against the previous year’s performance under the Maersk agreements, which ended in December.”

However, Horizon Lines has other problems. The U.S. Department of Justice Antitrust Division in April 2011 agreed Horizon Lines should pay $15 million over 5 years for the violations, down from the original $45 million fine, for federal antitrust violations in the Puerto Rico trade lane.

Horizons Lines, which appears to closely mirror Matson’s price increase schedule, is one of at least five major American shipping companies under federal probe over the last few years, allegedly for antitrust and price fixing violations.  (Also convicted was Sea Star, then a joint venture between Matson and Saltchuk, parent company of both Young Brothers and Aloha Air Cargo).

Alexander & Baldwin acknowledged in an April 28, 2008 statement that its documents related to its subsidiary Matson Navigation were subpoenaed by the U.S. Justice Department’s antitrust division — the agency investigating pricing practices of ocean carriers – even though Matson Navigation does not operate vessels in the Puerto Rico trade. This case has not been settled and neither the company nor the Justice Department will comment. Hawaii Reporter has not been able to determine whether the investigation includes the Hawaii trade lane.

However, there are two recent developments that may eventually offer some relief to Hawaii businesses and consumers:

1)   This week Pasha Hawaii announced that construction had begun in Mississippi on its new $144 million combination roll-on/roll-off/container vessel, the Marjorie C, which will be able to carry 1,500 twenty-foot containers. The ship is expected to enter Hawaii service in the Fall of 2013.

2)  Last month the Surface Transportation Board reduced the fee a customer must pay to file a complaint over a rate or an unreasonable practice from $20,000 to $350.

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