Fuel for Thought

The sudden rise and just as sudden drop in fuel prices witnessed over recent months is testament to the volatility of this key cost centre for carriers and ultimately the impact on the cost of freight transportation.

Some form of fuel recovery has to be expected and surcharging might be the only way to identify the volatility of fuel pricing today. In this column I will address primarily the for-hire truck transportation industry where fuel can represent 17%-20% of operating expense for TL freight and about half that for LTL freight. If you are dealing with motor carriers this is what you need to know about fuel surcharges:

They can be based upon mileage/ consumption (my preferred method) or as a percentage of the rate used (likely the most popular method). You will need to agree with your provider on a consumption yard stick (for example 6.5 mpg). You then must agree to the price of fuel being used in your tariff of rates in which a “base price” can be established. Using a combination of the mileage and consumption you can calculate the difference in the base and current fuel prices and can factor in your negotiated additional costs or contributions.

If you agree that it will be done on a percentage of revenue basis you need to factor in what triggers the adjustment. In all cases it should reflect fuel consumption and/or the fuel component of the operating expense.

Many carriers agree to peg the cost at least on a monthly basis. We would suggest you try for weekly if possible to report and control, and agree upon which reference (fuel information provider) they will use to report fuel information. It’s not a hidden agenda. Many trucking companies use an association type index and there are similarly available indices from shippers’ organizations. Both shipper and carrier organizations have assisted in the development of fuel surcharge formulas for their members over the past few years. Review these and agree on one that provides you with accurate, weekly and related fuel information.

The Internet is likely your best bet for communicating fuel information changes and keeping it up to date for all. As shippers ensure you have an audit trail for invoice payment and financial control particularly if you are able to pass along some of the fuel increase to your own customers.

While we should all agree to review and make appropriate contributions to the cost impact of fuel on our delivered goods we should go further and address what the transport provider is doing to lessen the impact on fuel price increases. Make it a part of your carrier search and qualification criteria.

Frank Beres, director of sales for White Oak Transport reports that “if a trucking company or owner-operator has not worked on this issue over the past few years then they will have a difficult time maintaining any profitability.” He goes on to say “you can look at installing new cab heaters to reduce engine idling in the winters, automatic greasers to reduce potential friction, and install automatic tire inflation systems to maintain air pressure in trailer tires.” The other common fuel reduction strategy is to “maintain the fleet and slow down.”

Charles Kemp, territory sales manager at Celadon Canada adds “Two measures we’ve had success with to reduce our fuel consumption (by 10%) include installations of SensorTracs – a real time satellite based engine monitoring device which has helped reduce the amount of time our trucks idle and lowering the speed at which our engines are governed.” Celadon’s formula for fuel takes in to account mileage driven on the lanes they quote their truckload traffic.

Carriers must also do their homework when purchasing new equipment. An engine producing 7.5 mpg versus 6.5 mpg over a million miles can create savings of more than $150,000 in fuel costs based on today’s fuel prices. Carriers also need to operate more efficiently and invest in routing software that can assist in reducing excess mileage.

I encourage dialogue amongst all members of the supply chain to drive down the impact of the fuel component on our cost of transporting goods and services. We have to work as partners to share in the abnormal nature of fuel fluctuations. The shippers and carriers who work best together will end up having significant advantages over their competitors.

Surcharge examples (data rounded)

E.g.: Toronto to Montreal 350 miles Full truckload

Base price of fuel: $2.05 per gallon

Recent spike in price of fuel: $3.64 per gallon

Difference: $1.59 per gallon

Consumption at 6.5 miles per gallon

350 miles/6.5 mpg =54 gallons

Extra cost over base rate is $1.59 per gallon X 54 gallons = $86.00

If revenue on this lane was $650 then this would represent about 13% fuel surcharge (FSC).

Note: Revenue based fuel surcharges need to be reviewed properly to address the proper level of contribution. Locally the FSC is likely to be lower due to less driving and the higher cost of the labor component of the operating expense.

If you take a local shipment going 100 miles for $350 and using 5.5 mpg consumption due to more city driving and using the above calculation we get:

100 miles/5.5 mpg = 18 gallons used

18 gallons X $1.59 = $29.00 more additional fuel cost over the base agreed to.

$29/$350 = 8%

For shippers and carriers on longer distance movements we need also be cognizant of the back haul contributions to FSC. For example, a load going from Toronto to Winnipeg rated at $2500 and FSC at 13% contributes $325 towards fuel but the same move as a backhaul would be likely rated at $1800 and at 13% FSC contributes $234. Using a percentage on the FSC here for similar mileages has some differences you should recognize.