Shipping costs have yet to hurt economy

Matson's fuel surcharge jumps to more than 21 percent

When Matson Navigation Co. Inc. announced yesterday that it would increase the amount it charges customers to cover rising fuel prices, it marked the latest in a series of increases that have more than doubled Matson's fuel surcharge in the past two years.

While the surcharge increases are hardly surprising in a time of rising crude oil prices, there does seem to be something remarkable about the charges, which other shippers also have imposed: They appear to have had little effect on Hawaii's economy, so far.

"It's just amazing that these energy cost increases haven't had more of an impact," said Paul Brewbaker, chief economist with Bank of Hawaii.

Matson's latest change will increase its fuel surcharge for its Hawaii and Guam services from 18.5 percent to 21.25 percent. The change will go into effect June 4. It compares to an 8.8 percent surcharge in June 2004.

Matson is hardly alone in raising surcharges. Horizon Lines Inc., the second-largest shipper in the islands, followed Matson's last fuel surcharge increase to 18.5 percent with a similar increase that took effect April 3. The company said yesterday it was reviewing whether it would follow suit again.

Likewise, Pasha Hawaii Transport Lines said earlier this week it would double its fuel surcharge to 18.5 percent from 9.2 percent beginning May 29 because of the effect that fuel prices have had on its operations. But the company said yesterday it would not likely immediately respond to Matson's increase.

Despite surcharge hikes, which affect virtually every product shipped into the islands, Hawaii's economy has managed to chug along briskly, with unemployment remaining low and inflation seemingly in check.

As Matson describes them, the increases add up to just pennies on a grocery cart full of goods. The latest increase would tack just one tenth of a penny onto the cost of transporting a can of beer, for instance, or just more than a penny for a twelve pack. The increase adds half a penny to the price of carrying a head of lettuce, or just over 2 cents for a 20-pound bag of rice, Matson said.

Still, over time, the surcharges add up.

The previous 18.5 percent surcharge already had added nearly a penny to can of beer and 14 cents to the cost of delivering a 20-pound bag of rice. In fact, the increase in fuel surcharges account for more than half of the increased revenue that Matson's parent, Alexander & Baldwin Inc., reported from its ocean transportation business during the first quarter of this year. Altogether, the company reported that approximately $7.7 million of its $219.3 million in ocean transportation revenue came from increases in the fuel surcharge. Ocean transportation revenue for the quarter increased just $13.1 million.

While the surcharges are meant merely to cover Matson's increased costs for bunker fuel, which have more than doubled since early 2002 from about $170 per metric ton to more than $350 as of May, they have nonetheless added up to millions of dollars in increased shipping costs for customers.

What has allowed the economy to absorb much of this, Brewbaker said, are two main factors.

First is an apparent fundamental faith that central bankers, in the United States and abroad, know how to keep inflation in check. This, Brewbaker said, has led firms to refrain from raising prices while workers and labor unions have opted not to ask for a whole lot more money.

"What's remarkable is while that shock (from fuel surcharges) is passing through, it's not causing everybody to change their pricing or their wage-setting behavior," Brewbaker said.

The other factor is globalization, which has led not only to goods and services that are less expensive to produce, but also to distribution chains managed by sophisticated information technology that keeps things running smoothly and efficiently.

"When you get to the end of the distribution chain, it's really, really competitive, and you don't just have the ability to push up prices," Brewbaker said.

To be sure, Brewbaker said, people will at some point start changing the way they spend. And Hawaii's tourist economy could be hurt if fuel prices drive airplane tickets so high that people decide to save money by staying closer to home for vacation rather than flying to the islands. Crude oil prices, he said, could go higher still.

"The fat lady might not have sung yet on oil prices," he said.

All of this leaves some state officials concerned.

Maurice Kaya, chief technology officer for the Hawaii Department of Business, Economic Development & Tourism, said that the rising prices combined with Hawaii's isolation show just how important it is for the state to develop and implement alternative energy sources whenever possible.

And although Kaya said he has not found an economist who can tell him when the other shoe will drop, Kaya said it is bound to happen in the long term.

"At some point in time the increase in fuel prices is going to start affecting us," Kaya said. "You can't help but have that happen."