Inflationary Feedback on the DFDS Flat Rate
The JEP Reports that: “THE government’s deal with DFDS has been published – which reveals that the fee the ferry operator must pay for its exclusivity is performance related, mean average fares are capped, and prices can only go up by inflation, except under exceptional circumstances.”
Minister Kirsten Morel was very pleased about this. Examining the redacted agreement, I note that Clause 20 and Schedule 3 of the DFDS–Jersey concession agreement establish a flat-rate freight pricing model, define inflation-linked adjustments, and outline how DFDS sets and reviews its charges. These sections are central to understanding the cost implications for retailers and consumers.
Clause 20 governs how DFDS sets prices for its ferry services. Key points include:
- Flat-Rate Charges: DFDS applies a fixed price per lane metre for freight - £56 for standard freight and £45 for non-time-sensitive goods.
- No Volume Discounts: Unlike the previous Condor model, DFDS does not offer bulk shipping incentives. All customers pay the same rate per unit of space, regardless of shipment size.
- Transparency and Review: DFDS must publish its pricing structure and notify the Island Authority of any proposed changes. However, the clause does not require approval for price changes unless they breach performance or inflation caps.
Also important is Schedule 3 – Pricing and Mean Average Pricing. This schedule expands on Clause 20 with technical details:
- Mean Average Pricing: DFDS must ensure that the average fare across all bookings remains within a defined range, preventing excessive price hikes.
- Inflation Adjustment Formula: Prices may be adjusted annually based on a weighted blend of:
- 50% UK Consumer Prices Index (CPI)
- 50% Jersey Retail Price Index excluding mortgage interest (RPIX)
- If inflation is negative, the adjustment is capped at zero - no price reductions required.
What are the immediate implications for Jersey
- Loss of Economies of Scale: Retailers who previously paid less per unit for larger shipments now face uniform charges, eroding margins. Morrisons reported a 6.1% cost increase within five months of implementation.
- Price Inflation Risk: Higher freight costs may be passed on to consumers, especially for food and household essentials.
The Inflationary Feedback Loop
The Minister argues the flat rate improves transparency and fairness, and importantly is fixed to rises no higher than the RPI (as per the calculation details above). However because the flat rate is linked to RPI there is a feedback loop which he does not mention.
Recent statistics on the RPI show a local rise in inflation. It should be noted that food and non-alcoholic beverages account for approximately 11.6% of Jersey’s RPI basket as of the 2024 update. This makes it one of the most influential categories in measuring inflation and cost-of-living changes on the island.
Now freight costs directly affect food prices, especially in Jersey where most food is imported. So if DFDS’s flat-rate model raises food import costs, it can disproportionately impact the RPI due to food’s high weighting. And since DFDS freight rates are partly indexed to Jersey RPIX, this creates a self-reinforcing loop:
Higher freight flat rate → higher food prices → higher RPI → higher freight flat rate again.
This is part of the equation which has not been made public in all the hype by the Minister over the advantages of having a flat rate limited to RPI. This means that there are two key factors at play:
- Structural Inflation Risk: The model embeds a self-reinforcing mechanism that could drive cost-of-living inflation, especially in an import-reliant island economy.
- No Downward Adjustment: If inflation turns negative, the agreement caps reductions at zero—freight rates don’t fall.
So if Jersey RPI rises sharply due to local food inflation (e.g. from freight costs), but UK CPI remains lower, the overall increase in DFDS rates is dampened. But this is only a partial break. Jersey RPI is more sensitive to local food and freight costs, so it captures the inflationary impact of the flat rate more directly. Also the formula doesn’t include a cap or smoothing mechanism, so even modest UK CPI increases can still allow for significant freight rate hikes when combined with rising Jersey RPI.
An example:
Let’s say:
Jersey RPI rises 6% (due to food and freight)
UK CPI rises 3%
Then the freight rate increase would be:
(0.5 x 6%)+(0.5 x 3%) = 4.5%
So the UK CPI tempers the increase—but not enough to break the feedback loop if Jersey’s inflation is being driven by the freight system itself.
In conclusion
A flat rate mechanism can lead to less rises than, for instance, the large price rise created by Condor in one year, but to say that it is capped by RPI is disingenuous as this ignores the effect of an inflationary feedback loop.
The JEP Reports that: “THE government’s deal with DFDS has been published – which reveals that the fee the ferry operator must pay for its exclusivity is performance related, mean average fares are capped, and prices can only go up by inflation, except under exceptional circumstances.”
Minister Kirsten Morel was very pleased about this. Examining the redacted agreement, I note that Clause 20 and Schedule 3 of the DFDS–Jersey concession agreement establish a flat-rate freight pricing model, define inflation-linked adjustments, and outline how DFDS sets and reviews its charges. These sections are central to understanding the cost implications for retailers and consumers.
Clause 20 governs how DFDS sets prices for its ferry services. Key points include:
- Flat-Rate Charges: DFDS applies a fixed price per lane metre for freight - £56 for standard freight and £45 for non-time-sensitive goods.
- No Volume Discounts: Unlike the previous Condor model, DFDS does not offer bulk shipping incentives. All customers pay the same rate per unit of space, regardless of shipment size.
- Transparency and Review: DFDS must publish its pricing structure and notify the Island Authority of any proposed changes. However, the clause does not require approval for price changes unless they breach performance or inflation caps.
Also important is Schedule 3 – Pricing and Mean Average Pricing. This schedule expands on Clause 20 with technical details:
- Mean Average Pricing: DFDS must ensure that the average fare across all bookings remains within a defined range, preventing excessive price hikes.
- Inflation Adjustment Formula: Prices may be adjusted annually based on a weighted blend of:
- 50% UK Consumer Prices Index (CPI)
- 50% Jersey Retail Price Index excluding mortgage interest (RPIX)
- If inflation is negative, the adjustment is capped at zero - no price reductions required.
What are the immediate implications for Jersey
- Loss of Economies of Scale: Retailers who previously paid less per unit for larger shipments now face uniform charges, eroding margins. Morrisons reported a 6.1% cost increase within five months of implementation.
- Price Inflation Risk: Higher freight costs may be passed on to consumers, especially for food and household essentials.
The Inflationary Feedback Loop
The Minister argues the flat rate improves transparency and fairness, and importantly is fixed to rises no higher than the RPI (as per the calculation details above). However because the flat rate is linked to RPI there is a feedback loop which he does not mention.
Recent statistics on the RPI show a local rise in inflation. It should be noted that food and non-alcoholic beverages account for approximately 11.6% of Jersey’s RPI basket as of the 2024 update. This makes it one of the most influential categories in measuring inflation and cost-of-living changes on the island.
Now freight costs directly affect food prices, especially in Jersey where most food is imported. So if DFDS’s flat-rate model raises food import costs, it can disproportionately impact the RPI due to food’s high weighting. And since DFDS freight rates are partly indexed to Jersey RPIX, this creates a self-reinforcing loop:
Higher freight flat rate → higher food prices → higher RPI → higher freight flat rate again.
This is part of the equation which has not been made public in all the hype by the Minister over the advantages of having a flat rate limited to RPI. This means that there are two key factors at play:
- Structural Inflation Risk: The model embeds a self-reinforcing mechanism that could drive cost-of-living inflation, especially in an import-reliant island economy.
- No Downward Adjustment: If inflation turns negative, the agreement caps reductions at zero—freight rates don’t fall.
So if Jersey RPI rises sharply due to local food inflation (e.g. from freight costs), but UK CPI remains lower, the overall increase in DFDS rates is dampened. But this is only a partial break. Jersey RPI is more sensitive to local food and freight costs, so it captures the inflationary impact of the flat rate more directly. Also the formula doesn’t include a cap or smoothing mechanism, so even modest UK CPI increases can still allow for significant freight rate hikes when combined with rising Jersey RPI.
An example:
Let’s say:
Jersey RPI rises 6% (due to food and freight)
UK CPI rises 3%
Then the freight rate increase would be:
(0.5 x 6%)+(0.5 x 3%) = 4.5%
So the UK CPI tempers the increase—but not enough to break the feedback loop if Jersey’s inflation is being driven by the freight system itself.
In conclusion
A flat rate mechanism can lead to less rises than, for instance, the large price rise created by Condor in one year, but to say that it is capped by RPI is disingenuous as this ignores the effect of an inflationary feedback loop.
Also to consider...
What about exceptional circumstances - DFDS can formally propose a pricing variation if operating conditions change materially. In a future blog, I will consider what would count as this kind of change, and the mechanisms in the agreement which come into play.
And finally... the agreement was published as a scanned and unsearchable PDF. Publishing a redacted agreement may be transparent, but it is not really as helpful as it could be.
Posts
No comments:
Post a Comment