FAF (Fuel adjustment factor)or BAF (Bunker adjustment factor). Shipping is an energy-intensive industry just as liner shipping is a capital-intensive industry with the development of containerisation and expensive container ships.
In such an energy-intensive industry various political and economic crises cause the price of oil to fluctuate rapidly. In 1973, the price of oil rose as it did in 1979. These were the two so-called “oil price shocks” to the shipping industry. In 1990, oil again rose because of the Iraqi invasion of Kuwait. These fluctuations cause a severe effect on the price of the fuel used in liner vessels, especially when liner vessels are supposed to provide a fast service and high speed causes the fuel consumption of the vessels to rise approximately as the cubic power of the increase in speed.
Although liner conferences and non-conference liner operators provide a stable tariff or freight rate for their shipper-customers, suddenly escalating fuel costs give them no option but to reflect the increases in the form of a “bunker adjustment factor” commonly known as “BAF”. BAF is meant to operate on the principle that the amount recovered from the market should offset the additional cost of bunker fuel over the base level of the liner conference’s tariffs or rate structure.
BAF is expressed differently by different liner conferences and “rate agreements”. It can be expressed as a percentage of the base rate or as a specified number of dollars per revenue ton, that is per 1,000 kilogrammes or per 1 cubic metre of cargo shipped or even per container, either for a full container (FCL) or less than container load (LCL). Lines do decrease the BAF when this is merited, for example, if bunker prices in intermediate ports reduce. As an example of a reduction, the Hong Kong-Europe Freight Conference, operating between the Far East and Europe and the Mediterranean, cut its various surcharges in mid-February 1991, following reduction of bunker oil prices. The 30-member conference reduced the BAF from 9.74 per cent to 4.94 per cent. This would mean a reduction of about US$144 per container shipped at US$3,000 from the Far East to Europe.
Liner conferences can use reductions in BAF and other surcharges as a marketing tactic to encourage shippers to use their members’ services. Usually, independent accountants take into consideration actual prices of bunker fuel at intermediate ports on a trade route on the basis of data furnished by member lines. The accountants then advise the conference to increase or reduce the BAF. This may be reviewed weekly or monthly or even more often in times of high volatility. The results of the reviews and any changes in the BAF are published and advised to the shippers’ associations.
Shippers and their associations do object to BAFs (and other surcharges) but in many cases they pay the surcharges (depending on how badly they want the service. It must be stated that in most cases conference members have no control over bunker prices prevailing at different bunkering ports. However, it can also be stated that some conferences may not reflect a swift enough reduction in bunker prices in their published BAFs.
This surcharge can also be called “Fuel adjustment factor” or FAF.