Messing with the fuel surcharge
Filed under: Uncategorized
I know I’m preaching to the choir here, but to understand just how painful fuel prices have become, let’s consider a 500-truck fleet that averages 2,000 miles per truck per week at 5.75 mpg. The fleet consumes 173,913 gallons per week. Using $4.33 for the average retail price of diesel on May 12, at this rate the fleet will spend $753,043 per week for fuel.
At the same time last year, fuel cost $1.56 less per gallon, and the fleet spent $271,304 less per week. Being generous, we assume a 90 percent recovery through the fuel surcharge and other means. Net fuel costs are still up by $27,130 per week. And if this spread continues the rest of the year, the fleet stands to lose about $760,000 more in fuel on top of what it already lost since January.
For years, shippers, carriers and private fleets have been using the same basic approach to fuel surcharge –one linked to the weekly national or regional retail price of diesel as recorded by the Department of Energy. In the late 1990s, carriers’ net fuel costs – costs after offsetting surcharges – were 17 to 18 cents a mile, Today, net fuel costs for longhaul carriers are 26 to 30 cents per mile. Meanwhile, carriers also are paying significantly more for new equipment — with no gains in fuel economy.
In addition, shippers and brokers get interest-free financing of surcharges. The average number of days it takes shippers and brokers to pay freight bills and fuel surcharges is 46 days, causing cash flow problems for carriers who are paying today’s fuel bills with last month’s surcharges. Furthermore, the slow freight market, increased traffic congestion, hours of service and fuel conservation efforts are driving down fleet productivity, leaving fewer miles to spread out fixed costs.
Amid these financial pressures, shippers and some brokers are exploring new formulas for the fuel surcharge — in their favor. Some are using the price of fuel on the day they tender a load to a carrier versus when the carrier actually picked up the load. Even more sophisticated are fuel recovery approaches developed by third-party fuel management services.
One such service is Breakthrough Fuel, which has convinced several major shippers that a more equitable way to help carriers recover fuel costs is to use technology to determine the “actual” cost of fuel along a route from point A to point B. The shipper believes it is paying for fuel that is closer to what carriers actually are paying in particular lanes for particular freight movements.
Compared to the conventional surcharge model, the Breakthrough Fuel approach does respond somewhat to the problem of surging prices because it’s tied to current fuel prices, not last week’s average. But the Breakthrough Fuel concept has some drawbacks. For example, many carriers have contracts with their owner-operators based on the conventional fuel surcharge model. Fleets can’t easily change how they reimburse drivers for fuel in one lane and not the other. And many carriers already have fuel-purchasing arrangements that might not integrate well with the Breakthrough Fuel scenario.
But perhaps the greatest concern with Breakthrough Fuel and other alternative concepts is that many shippers and even some brokers have long accepted and encouraged more liberal fuel surcharge mechanisms in lieu of higher freight rates. So any program that in essence lowers this cost recovery could force carriers to grind more costs into linehaul rates – or force them out of business.
June 6th, 2008 at 2:57 pm
It’s agonizing to see carriers park trucks and get out of the business, and in the short term, there are no solutions. The only bright spot is that gross freight tonnage is not really changing. That means that SOMEBODY will be moving the freight. As crazy as this may sound, fuel should not affect carriers, just pass on the cost, like everybody else. The problem is universal, the shippers HAVE to pay, period. Any carrier that weathers through the storm, will come out on the other end with a ton of new customers. This is a time when 50% of the carriers will not be able to adjust in time, and the other 50% that continually make their presence known to shippers will prosper. Bad neews for some, is just opportunity for others.
June 12th, 2008 at 10:00 pm
It is always an enlightening exercise to see how things stack up after doing some math, really sheds light on how substantial an impact the rising fuel costs are. Interesting times indeed. I’m seeing the effects of this with a variety of clients in different industries, pretty amazing how interwined everything is and how dependent we are on oil…