Mar.9, 2012

JAL to adjust applicable terms on international cargo FSC

Japan Airlines (JAL) will amend the conditions of application on fuel surcharges (FSC) collected on ex-Japan international cargoes for the first time in four years, with the new FSC to be enforced starting April 1 this year. In the proposed FSC that the airline has submitted to Japan's Ministry of Land, Infrastructure, Transport and Tourism (MLIT) on March 7, the fuel benchmark price to be applied will be from $130 to under $135 per barrel, so the rates will significantly drop for each route compared to the current scheme. JAL's Communications Division talked about the reduction in rates, saying that, "The high yen is one of the primary factors. We have decided to push for a new scheme that comprehensively takes the fuel costs into account." The carrier has started to push for the restoration of freight rates on international airborne cargoes, but it seems that how forwarders and related entities will regard the new scheme for FSC will also become a focus of interest among the concerned sectors in the industry.

The FSC in/after April 1, when the new scheme will be rolled out, will stand at Y132 (currently Y129) for long-distance routes (to U.S./Europe, including Africa and the Middle/Near East), Y105 (Y111) for long-distance Asia routes and Y82 (Y93) for short-distance Asia routes (Hong Kong, China, Philippines, Taiwan, South Korea and Guam). If the current scheme were implemented, however, the FSC will come to Y143 for long-distance routes, Y123 for long-distance Asia routes and Y103 for short-distance Asia routes. Fuel prices have generally been hovering in the higher levels, but with the application of the new scheme, wide-margin reductions in rates can be realized in all routes compared to the current scheme.

JAL claims that the FSC adjustment has been taking place 12 times in a year (monthly) since fiscal 2009. Each month's FSC is decided with the average rate of Singapore fuel price (kerosene) two months prior used as the fuel benchmark price. In the case of the FSC in/after April, the average fuel price in February this year stood at $132.46 per barrel, so the FSC was determined based on the fuel benchmark price of " from $130 up to under $135."

Under the medium-term management plan for fiscals 2012-2016 that the company unveiled last month, JAL has set the fuel price for the period to $130 per barrel and the exchange rate to Y85 to the dollar. With this, the company expects the fuel costs to reach Y258 billion in fiscal 2012 and Y267 billion in fiscal 2013.

JAL has already been striving to come up with new business and curb fuel consumption, as well as carry out hedging through derivative deals when needed, in order to control the effects of market fluctuations in relation to fuel and exchange rates. Specifically, the company has built a risk management system combining "period dispersion-type hedging" that minimizes the fluctuations in the short-term market and "cost determination-type hedging" that fixes the costs.

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