This paper discusses the controversy about the Bunker Adjustment Factor (BAF) computation. The BAF is a surcharge, used to compensate fluctuating fuel costs of ship operations, on top of the base freight rate. The debate about the BAF is mainly situated in the container liner shipping industry. Until October 2008, numerous liner carriers gathered, in so-called liner conferences, to determine the general level of the freight rates and a trade lane-wide bunker surcharge recommendation. However, in October 2008, the European Commission revoked the exemption for the liner shipping industry based on the anti-trust regulation. Consequently, liner carriers have to impose their own bunker surcharges independently.

From June 2013, Mediterranean Shipping Company (MSC) stopped applying bunker surcharges separately to freight charges on the Asia-Europe and Mediterranean trades. This fuelled the debate on surcharges. The shippers criticized the move into the freight rate and alleged that the BAF is a hidden profit centre. They prefer costs that have a major impact on the overall cost of shipping to remain separate from the base rate. An analyst of Alphaliner states that “Although most of the carriers continue to publish BAF tariffs, they have effectively ceased to apply BAF on the Asia-Europe trade following the precipitous fall in spot rates on the trade”. From January 1, 2015, the introduction of a Sulphur Emission Control Area (SECA) BAF for shipments to and from the special emissions control areas adds to the complexity and difficulty of liner shipping tariff computation.

The study analyses the pricing policy in liner shipping by examining the relationship between the BAF and Bunker price on one hand, and freight rates, on the other hand. Using monthly data applying VAR regression in the Granger causality framework, it is tested whether BAF is a cost driven or acts as a revenue grab.