Truck Topics
Fuel Surcharges - Reducing the pain of rising fuel costs
What do the truckload carriers have to say about the skyrocketing cost of diesel fuel?
"It's killing us," said Don Vogt, chairman of the Iowa Motor Truck Association and owner of Cedar Rapids-based West Side Transport Inc., which operates 425 trucks that travel nationwide.
"Fuel is 25 percent of the cost of running a truck," Vogt said.
The situation now is worse than the high interest rates that truckers had to endure more than 20 years ago, said Donna Weinrich-Lucht, owner of Weinrich Truck Lines in Hinton, a small town north of Sioux City.
"High interest rates can be controlled," she said. "You don't have to buy new equipment. But fuel you need, or you can't go."
Vogt said, "We're losing a lot of independent owner-operators who just can't afford to run any more."
"This upward spiral is really hitting our people right between the eyes," says Greg Fulton, president of the Colorado Motor Carriers Association, which represents 400 Colorado trucking companies. "It's just staggering what has happened to these prices."
Those complaints, or variations thereof, are being repeated across the country now that the dreaded barrier of $2.00 per gallon price has been reached and exceeded. Those fuel prices are eroding trucking company profits - and driving marginal haulers out of business, local and national trade associations for trucking companies say.
A key reason trucking is the pre-eminent mode of freight transportation in this country is because it is affordable. This affordability is due to very thin profit margins of two to four percent. If that moves even slightly, many are forced out of business.
List the areas of vulnerability of trucking companies, and you'll find that fuel costs are the weakest link. It is second only to labor in direct costs. Most trucking companies can't afford to absorb the diesel cost and don't have the ability in a highly competitive market to raise prices to cover the diesel costs.
Today, about 600,000 trucking companies operate in the United States, according to the American Trucking Association (ATA). Past experience shows that for every 10-cent increase in fuel pump prices, over 1,000 trucking businesses file for bankruptcy. Those are not single owner-operators, they are small carriers that have at least five trucks in their operations.
The data indicate that the fuel price increase from a year ago would wipe out about 10 percent of those businesses in the coming year. The industry is composed of small operations that can't buy fuel in bulk or secure large fleet discounts, and are at the mercy of the pump price.
In addition to those small carrier failures, officials at many trucking companies say that high fuel prices have already reduced hauling capacity in some markets. If prices remain high, it could slow an economic recovery; if one ever gets started, they say.
Background
Trucking is central to the U.S. economy.
If carriers are either forced to limit their runs or simply shut down their equipment, there won't be a way to pick up and move all the freight that must be moved. And, trucking is what brings the goods to our doors and our stores.
Other modes of transport don't travel to the 70% of American communities that trucking alone services. If logjams in the system develop, shippers who are objecting to the added cost of delivery today will be the same ones scrambling to get their freight delivered at any cost.
It's easy to see where that leads: Consumer prices rise and inflation snuffs out our country's economic expansion, or at least at this time, recovery. Even if shippers do pay higher rates or added charges, they are likely to pass the costs off to consumers, again raising the specter of inflation.
Expediting, tied as it is to the just-in-time inventory system, has developed into an essential element of the manufacturing supply chain of key industries. Just as trucking has been impacted with the higher cost of doing business, so are the single owner/operators or small fleet owners who comprise the fleets of the expedited freight industry.
History
If trucks move so much of the economy, why don't the trucking and expedited carriers just absorb the higher prices or pass them along to the customer?
Fuel surcharges are a well-established practice within trucking. Each of the regional motor carrier rate bureaus and most larger carriers now have established fuel surcharge schedules.
Carriers implement a fuel surcharge to shippers to offset fluctuations in diesel prices. Fuel surcharges allow the transportation companies to have more control over their bottom line because the up and down movement of diesel prices can have a severe impact on profit margins.
While all companies have fixed overhead costs, the surcharge allows them to address changing fuel prices as a separate entry on customer invoices.
There is no set standard surcharge, so the carrier is free to determine its own surcharge that it imposes on its customers. Small business owner–operators do not need to get government approval or file an application with DOT in order to implement a fuel surcharge.
Fuel surcharge rates are typically based on the US National Average Diesel Fuel Index, which is published weekly by the Energy Information Administration of the U.S. Department of Energy. Depending on the national average of cost per gallon, truckers set a fuel surcharge that can go as high as 8%.
When fuel prices are low, the surcharge is dropped altogether. The fuel surcharge is always shown as a separate entry on freight bills so the customer knows exactly what he is being charged.
Not all customers are ready to accept their increased shipping costs, however. Some customers like to negotiate their own surcharges and really big customers sometimes say they won’t pay it. And, when shippers object or refuse to pay fuel surcharges, often the choice is haul it at a loss or cease servicing that account.
Expediting and surcharges
Over the last few years, most of the major expediting carriers have implemented fuel surcharges on their customers, as in conventional trucking. Panther II Transportation of Medina, OH says that its customers have been understanding in the need for the fuel surcharges. The company now pays its contractors 100% of the fuel surcharge at the same time as the settlement for the run is paid.
Ken Rideout of Tri-State Expedited Service, Inc. in Perrysburg, OH says that his company uses the Energy Information Administration's weekly update of average retail fuel prices by region in determining fuel surcharges.
"It's necessary to help our contractors with the surcharges, and they receive 100% of those extra charges. In most cases, our customers accept the surcharges willingly; they understand that its necessary to offset the rising cost of doing business."
Government interest
Fuel surcharges have also been the federal government’s response in each of the past fuel crises, even when the industry was still economically regulated. During the fuel crisis in 1973 and 1974, the Interstate Commerce Commission granted motor carriers the ability to bypass the Commission’s tariff filing/approval process and impose an emergency fuel surcharge with only one day’s notice.
Recognizing the serious impact that fuel price increases have on independent owner-operators, Congress passed a law in 1974 that required compensation paid to owner-operators by motor carriers be increased to compensate for fuel price increases over the previous nine months.
At the time, the ICC had written an order to mandate this compensation to owner-operators, but the ICC did not have the authority to promulgate the order in less than 30 days. Both the House and Senate recognized the serious impact of the fuel crisis on the transportation industry, specifically owner-operators, and the need for fast action.
Within a three-day period, a law was passed requiring the ICC to fast track the bureaucratic process and to issue its order within the following week.
Trucking did that in 1999 as prices began to rise. But when prices ran out of control, the industry realized it had reached a crossroads.
"Every nickel the pump price goes up, we add another penny a mile on our surcharge," says Don Vogt of West Side Transport. "We ought to be collecting 13 cents a mile now, but we're only getting an average of eight cents overall, because not all shippers will pay it. That means we have to absorb five cents a mile in extra costs. That's taking away all the profit."
"If you try to raise your prices to cover fuel increases, your customers will tell you they've got 40 other carriers they can go to that aren't raising their prices," said Dino Guadagni, vice president of Denver-based trucking firm Western Distributing Transportation Corp.
Guadagni said Colorado is particularly susceptible to high diesel costs. With more technology and communications firms than heavy manufacturers, Colorado has relatively few goods to ship out of state by truck. As a result, trucks often must leave Colorado empty to pick up cargo in other states.
"It's tough to cover fuel costs when you're running empty trucks," he said.
One solution from the Owner Operator Independent Driver Association (OOIDA)
During the various fuel crisis, there have been many proposals in Congress to cut the fuel tax, draw down the strategic oil reserve, and investigate OPEC for its market fixing practices. This is because the fuel crisis has primarily been viewed as a problem with the world oil market.
OOIDA says that it looks at the fuel crisis not exclusively as a problem with the oil market, but also as a symptom of problems within the trucking industry. Those problems include the inability to set rates high enough to compensate for basic costs, including sharp increases in diesel fuel prices.
OOIDA devised a proposal to require all motor carriers, brokers and freight forwarders to impose a mandatory minimum fuel surcharge and, where applicable, pass 100 percent of that surcharge on to the person who paid for the fuel, the owner-operator. Furthermore, the proposal would make it unlawful to reduce rates for the sole purpose of compensating for the fuel surcharge.
Details of how the fuel surcharge formula would function:
• The amount of the surcharge would rise and fall with the price of fuel.
• Fuel surcharges could be calculated as a percentage of the freight bill or on a mileage formula.
• Mandatory fuel surcharges shall be at least the amount necessary to compensate the payer of the fuel for the increased price of fuel.
• A formula would be devised that would track the Energy Department’s weekly survey of diesel fuel prices at the pump. When prices deviate sharply, the surcharge would kick in.
OOIDA says the benefits of this plan include:
• Permanent solution to address unpredictable fuel price increases in the future.
• Cost of fuel increases no longer borne solely by small business truckers with the least capacity to afford such costs and the least ability to pass on those costs.
• Motor carriers, brokers and freight forwarders who impose fuel surcharges are no longer at a competitive disadvantage for doing so because all must impose it.
• The economy would avoid a disruption in transportation. Historically, fuel surcharges have been the only successful solution for the trucking industry
Close, but not close enough
The Motor Carrier Fuel Cost Equity Act of 2001 (HR 2161) was introduced by 12 co–sponsors during the first session of the 107th Congress, but received little attention after its introduction. Its companion bill (S 1914) was presented shortly thereafter in the Senate.
So, what exactly would HR 2161 and S 1914 do? The most important thing they do is to require motor carriers, freight forwarders and brokers to impose a fuel surcharge on customers when the national diesel fuel price rises above 115 cents per gallon. Under the proposed legislation, the amount is required to be the amount necessary to compensate the payer of fuel for the amount of the increase in the price of fuel.
These bills were left in limbo at the close of last year's sessions, and according to knowledgeable sources, it will require a concerted effort to revive the proposed legislation.
Implementing a fuel surcharge
Information is available for independent owner/operators not leased to a company with an existing fuel surcharge program:
OOIDA
The Owner-Operator Independent Driver Association offers information for its members to negotiate a fuel surcharge and a sample letter to send customers. It suggests basing fuel surcharges on the average retail diesel price for the region where a load originates.
Fuel surcharge implementation info is available from OOIDA
http://www.ooida.com/Swimming_sharks/MAR%20fuel%20surcharge%20kit.htm
Daily updates of average fuel prices by state
http://ooida.truckmiles.com/fuelprices.asp
MTMC
Some carriers have used the fuel surcharge plan of the federal government’s Military Traffic Management Command, which has its surcharges posted on its web site. (See URL below)
MTMC manages loads hauled for the military by private carriers, including owner-operators. It acts as a transportation broker between government shippers and commercial carriers.
The Military Traffic Management Command’s fuel surcharge adjustment rate reached a record high recently as the national average diesel price climbed to $1.753 per gallon.
The adjustment rate, which motor carriers receive to offset rising fuel prices, jumped to 5 percent. For every 10 cents the price of fuel rises above $1.301 per gallon, MTMC pays its carriers 5 percent of the difference between the $1.301 baseline price and the actual price of fuel per gallon.
MTMC first implemented a fuel surcharge in April 2001. Rates are posted monthly and affect shipments picked up on and after the 15th of the month through the 14th of the following month, said Robyn Hamill, industry economist with the command's Distribution Analysis Center. The rate in February, when the average cost for diesel was $1.542, was 3 percent.
Under a policy known as TR-12, the command bases the adjustment rate on the national average price for diesel on the first Monday of each month. MTMC uses prices posted to the official Department of Energy Web site.
Military Traffic Management Command
www.mtmc.army.mil/frontDoor.
The U.S. Energy Information Administration updates average retail price weekly by region at its website. That information is also available by calling (202) 586-6966.
US Energy Information Administration
http://www.eia.doe.gov/.
Here is an example of one truckload carrier's fuel surcharge table. The company states that 100% is passed on to the owner/operator.
FUEL PRICE % INCREASE
$0 - $1.25 0%
$125.1 - $1.32 1%
$132.1 - $1.39 2%
$1.39.1 - $1.46 3%
$1.46.1 - $1.53 4%
$1.53.1 - $1.60 5%
$1.60.1 - $1.67 6%
$1.67.1 - $1.74 7%
$1.74.1 - $1.81 8%
$1.81.1 - $1.88 9%