Inflation & Pricing Strategies – Freight

Interview Transcript

Article | Inflation & Pricing Strategies – Freight
15th June 2021 Atheneum Team

Expert Profile


Vice President Freight


Viking Lines


Harri’s had 36 years of professional experience in the transport and freight industry, gathered at companies like Viking Lines and Searail where he managed their entire turn around process. At Viking Line as Vice President Freight he is accountable for digitalising large parts of their processes and has helped increased freight volumes carried by their vessels, increasing the turnover of the freight business by 50%.

Section 1: Input Cost Variability Strategies

1.1. What are the most price sensitive costs in your industry?

It’s the bunker. It’s the fuel for the vessels and the labor costs, I would say, off the top of my mind, I think that covers it all. Labor and fuel are the biggest components of the total price when we calculate the price. I think these are two factors that are varying a lot, not maybe the labor costs, but the fuel cost is varying and the personal costs, depending on how many people are at work, and you need to tie them up for the period of time.

I would say these two items are giving us the most of the cost base of our product. So naturally you then have the fixed cost when you’re having a deal with the vessels. So, you have a fixed cost. That’s also something to think about, but I would say I still would keep saying the fuel and the labor.

Part of our labor force is fixed, and the other part is varying depending on demand, unfortunately the variation, when you’re dealing with the vessel and the shipping, you need to have minimum number of crew members on the vessel in order to be safe on the sea. So, the fixed costs is quite large. The variable is only a small part of the labor cost.

There are loads of fuel options on the market, they are endless I would say, but you still need to build up a relationship with some suppliers. And in our case, one supplier, which we’re using currently, we changed it over the years.

Of course, we are monitoring the cost level and you can commit yourself to a quantity of fuel and then fix a price in advance, but despite the fact that there are endless opportunities to purchase fuel we will still stick with one or two suppliers for the longer. We respect the long-term cooperation with our suppliers.

A long-term cooperation gives you the trust and the ability to talk about the facts and hopefully getting us a win-win situation when the supplier wins, and we win by having a long-term and not shopping around not daily, but monthly or yearly.

1.1.1. Have these costs been rising? Why?

The labor costs are going up here where we operate, the labor costs are stipulated by an agreement between the labor union and the company’s union. And usually they make deals for two, three or four years. And these agreements are including an automatic correction of the salary levels by some certain percent per year or some adjustment to it.

So, when these agreements are done, they usually run over a few years and then you stick with the rise of the labor cost. Regardless of what the outcome of the business is. So, it’s kind of fixed, and when it comes to fuel it’s the world market price that dictates the fuel prices in larger scale, and you just have to live with it.

If the fuel prices vary because there is a conflict of interest somewhere in production around the production facilities far away from here, or there is a lack of tonnage to transport the oil, etc. We just have to live with the market price variations of the fuel.

Futures contracts are of course an option. Some use them, some don’t, some use it partly, some don’t and it’s kind of a company-wise decision what you make of it. But when we go to our end product, we sell our services and we have then a bunker surcharge, which is fluctuating from monthly basis. Nobody can do any futures on that one so it’s changing monthly.

The rising costs of fuel have a huge impact. When there are a lot of operators, a lot of ferry lines to choose from the companies using ferry lines, then calculate what’s the most economical way of getting across. If the bunker surcharge is making your services too expensive, then you will lose volumes, but that’s something that you have to live with for the year, because we have annual agreements with the clients and then annual prices, & the basic price is fixed for one year, for one calendar year.

Then you only have the bunker, which is fluctuating and not every company in our region has the bunker surcharge, but we have it. So, when our bunker surcharge is going up, it diminishes our possibilities of making a business when we losing some volumes because the neighbor’s offering lower costs.

The bunker surcharge is what we have based on the world market price in certain place in the world for the quality which we are using on our vessel. And we calculated one month and then it will be the bunker surcharge for the next month thereafter. And it’s, a per unit per meter of the unit, which you have to base an extra a certain Euros per unit.

1.2. What are some of the current strategies you employ to manage this variability?

Long-term commitment, long-term relation, long-term agreement if possible, with your partners, and then you tie yourself up to certain volumes and it’s important to see the foreseeable future cost level, so you know what costs you have to live with.

That’s only possible when you’re living in the world when you have long-term commitment. Because you know that you have your annual agreement with your clients, then when you’re buying in you try to tie your costs level in the same period of time.

With the labor unions, again, a dialogue needs to be developed, what we tried to do is a dialogue and you use up a lot of time to make them understand the problems, the challenges which we have within our business. And by that, they would then understand our needs.

So, through dialogue, through cooperation, awareness of the challenges hopefully gives us an advantage and it will be an agreement which both have a possibility of making some pros for it.

1.3. How have these strategies changed in the last few years? How do you expect they will change?

I don’t expect that there will be any changes. We have in recent years we have done a great deal of opening dialogues to these authorities, to the labor unions, to the suppliers, and to have a dialogue, to have an understanding. It has helped us, I would say, and of course the bigger buyer you are, hopefully the better rates you get, and that’s what you get to by concentrating on the long-term relationship with few suppliers, so few as possible. And then that’s a dialogue, awareness and a commitment.

We find this way of what we’re doing now very good for us, and we try and do it naturally and find a better way of doing it tomorrow. What it will be I have no idea at the moment we have some ideas, but it remains to be seen in the future.

There are some new ecological and environmental solutions we are considering for our future strategy. Fuel is one big thing with being green. Today we are using fossil fuels in gas format and then the liquid format, at least because we use an LNG, we use marine gas oil.

And what we tried to explore is the LNG is step one because it’s more energy effective. It’s a more environmental friendly source of energy, but it’s only a half step on the right direction. What we then need to do is go all the way to bio side of the gas and the fuel sources. The problem today is that you don’t have enough the bio fuels on the market to be able to use them in that larger scale and the amount which is on market today, it would make our fuel costs at least double, maybe triple or quarterly bigger. So it’s not economically feasible directly to hop on to the bio fuel, but that’s where we’re going. Eventually we will be there and we have started to work. It’s a long process, but we are on the way, moving in that direction.

Section 2: Inflation Management Strategies

2.1. Do you anticipate inflation impacting your business? If so, how?

Some of our supply agreement has a clause stipulating an automatic cost rise based on the inflation or customer index, well that’s also on inflation and that’s kind of an automatic thing, which you then have to live with it. I don’t like the automatic things to adjust the prices because I know that I cannot have towards my clients, I cannot have an automatic thing.

I always need to negotiate a rate change only when of course, if it’s a higher, which is usually is, but yes, we’re always trying to move the inflation rate change to the end users, that’s what we’re trying to do.

Naturally, part of our business is to do it a little bit more effectively, so you don’t need to just put everything on the end price. So, you have to be more effective in the way of doing it. Our main goal is always to get to move the inflation to the end price, naturally.

2.1.1. Could inflation impact shareholder value?

Yeah, of course naturally, because the shareholder value is based on the company’s financial outcome and what expectations you have on a company’s financial outcome for the years to come and naturally it has directly and indirectly.

2.2. What will be your pricing strategy in response to cost push inflation?

We always try to put it into the end price, what we’re selling out. So at the end user, the end customer pays the bill. That’s our strategy on that one. Naturally, we then also all the time find a more effective way of dealing the business, what we’re doing and hopefully get a more margin in between and then earn more money in the process. But that’s the strategy. What we trying to do.

There would come a point that we start to absorb some of the costs, but you know that we’ve been there many times that you cannot absorb the cost rise, and then you don’t get it from the end user either. You have to somehow to be more effective and that’s a never ending work, what are we doing to find a way of doing it a little better, earning a little more margin in between. On paper, it sounds very, very lucrative that all the cost rises needs to be on the end price. But that’s not a reality.

You need to absorb something in between by being more effective in what you do, using less fuel finding optimal usage for your tonnage or your labor or whatever, getting more out of the business, but still we try to put it in the end customer, but it’s easier said than done.
To improve efficiency like this, of course you have the possibilities of artificial intelligence, which is giving you an endless possibilities in the future, and that’s becoming an everyday tool in your toolbox at the moment. And of course you use all the data-based tools to help, to be more effective.

If we just take a look to deep sea shipping, there are a lot of possibilities of making a navigation system to finding the most optimal way between two points, two ports, which is where less wind, less waves, no time to wait until you get to the port.
So, these are also helping us over here to find the most optimal way between two ports. But it’s database led so the knowledge and expertise which we have in our staff, they know a lot of things, many of guys have been with us for several years, so that combined with the data, computer science and artificial intelligence are the other tools.

As an international business, with international customers, there is a benefit in using the Euro. But for customers outside the Euro, we don’t have to go further than to Sweden, they have the Krona, they don’t have the Euros. So, what we have done in our line of business, as we have stipulated that all our business on the freight side are based on Euros in order to not to have this fluctuating exchange rates policy.

But then again, we then buy bunker based on USD, and then there is a small fluctuation, and we have some vessels sailing mainly from the mainland Sweden and the costs, the labor costs on those vessels are based on Swedish Krona and the prices on board are stated with Swedish Krona, but then you take a risk and you try to find a middle way what do you think the exchange rate, thank God up here it’s not changing that much monthly, so you can almost live with it. But if there are bigger changes, naturally you have to adapt to it.

2.3. How will changing prices impact your post Covid-19 recovery?

I don’t think it will hurt the recovery. Of course, no, I don’t think it will hurt. On the freight side we have not been hit that badly, but we’re not talking about major changes, radical changing on the pricing, but few percent here, few there, it’s not the end of the world. I don’t think I have heart to see that it will affect the outcome.

2.4. What public policies/government support could help your businesses with rising prices?

I think what we need here, at least in Finland, where I’m monitoring the market, the are we are most lacking in is the long-term planning we’re lacking the long-term possibilities of investing into the future.

When the vessel life cycle is 30-40 years, the trucks on the road, their life cycle is about 10 years. If the politicians only dictate rules for two to three or four years, there’s a huge risk to be taken for the rest of the year. So, I would say the long-term is the key word on planning side.

The taxation by far is the biggest, taxation in everything in vehicles, in fuel, in road taxes, the taxes is one thing. And the possibilities for companies to earn money and then invest it in your own company, that’s what I’m hoping to get.

I just read an article here the other day in Finland that the government of Finland has not come out and told the market what is the future fuel.

Which fuel will be the one which the government supports for the future and will not put extra taxes on it. So that’s a big thing when you going to buy a truck, you don’t know whether you’re buying a diesel or gas or bio gas or whatever kind of motor in it. That’s a risk for all business at the moment.