April 19, 2010 2:00 AM, EDT

Carriers Can Achieve Significant Savings by Altering Practices, Consultants Say

By Susan L. Hodges, Special to Transport Topics

This story appears in the April 19 print edition of Transport Topics.

Trucking companies should consider altering the ways they levy and maintain fuel surcharges or risk additional red ink from diesel and gasoline costs this year, industry consultants and analysts advise.

Suggested changes include reducing the number of surcharges that carriers bill to customers, adjusting the surcharges more frequently and potentially altering the carrier’s entire surcharge system.

“Surcharges I’m familiar with start around $1.10 to $1.20 per gallon, and I doubt we’ll ever get back to that price as the base level for fuel,” said Bruce Jones, a consultant with KSM Transport Advisors, Indianapolis.

The last time the national retail diesel fuel average was below $1.20 a gallon — on March 4, 2002 — it was at $1.174; it has not been below $1.50 since December 2003.

Jones said most carriers have not just one fuel surcharge, but several. The number of different rates can grow if carriers charge new customers at new levels but don’t revise rates for existing customers.

As a result, different customers may pay different surcharge rates. To even things out, Jones said, carriers would do better to raise the price level where their fuel surcharges begin.

Similarly, Duff Swain, president of Trincon Group, a trucking consultancy based in Columbus, Ohio, said he thinks carriers should negotiate with shippers to adjust fuel surcharges more often.

“Because the wholesale price of fuel can change daily, fuel surcharges should be adjusted as often as possible — we’d even suggest daily — to be equitable to carriers,” he said.

Carriers that are “marginally profitable and don’t have good working lines of credit” are particularly vulnerable to fuel-price fluctuations, Swain said. Many of these carriers are small fleets or owner-operators with little bargaining power. When fuel prices rise quickly, these businesses may not have the cash or credit available to pay the difference, he said.

To simplify the billing and payment situation, some carriers and shippers have moved to a single flat rate that includes freight and fuel.

American Gypsum Co., Dallas, pays that way. Wayne Johnson, director of logistics at the company, said a flat rate could help carriers achieve “a fair price on fuel.”

Johnson said flat rates “are not necessarily less money — they could be more money” for carriers. The real issue, he said, is not so much the actual price of fuel, but how that price is paid.

Some shippers are now paying carriers a flat rate of about $2.40 a gallon, said Johnson, who is also chairman of highway transportation for the National Industrial Transportation League.

“We want to make sure our carriers survive. because if they go bankrupt, it causes us a lot of grief, too,” he said.

Robert Ragan, senior vice president of finance for flatbed carrier Melton Truck Lines, Tulsa, Okla., said the past year has been extremely difficult for his company.

“We don’t like the peaks and valleys [of fuel prices], either,” said Ragan. “We agree with shippers that a consistent monthly cost per mile would be best.”

But with excess shipping capacity in many areas, he said, “it’s more difficult to get surcharges per our standard scale.”

KSM’s Jones said some large national shippers require carriers to use the shipper’s surcharge table. Midsize and small carriers are usually most affected by this move because they seldom have enough clout to refuse.

“Rather than lose the business, carriers will use the shippers’ tables,” said Jones. “[But] shippers’ tables may contain calculation factors and base rates that differ” from those of their carriers, he said. They also may differ in how often the surcharges can be changed.

Even so, fuel surcharges vary greatly between carriers and between load types.

“Truckload companies don’t recover 100% of their fuel costs with surcharges because they only charge for billed miles, not empty miles, out-of-route miles or idle time,” said David Ross, an analyst with Stifel Nicolaus Transportation & Logistics Group.

In contrast, LTL carriers with shipments from many customers sometimes can make a couple of cents per gallon on surcharges. That’s because the same amount of fuel could be burned carrying 500 packages or 700.

“It’s impossible to figure out how much fuel is used to move one package,” said Ross. As a result, fuel costs cannot be connected to individual customers. “So the carrier estimates how much it should be getting,” Ross said. “And when business is good, they make more money.”

But every rule of thumb has exceptions. A CEO at one Midwestern truckload carrier who asked not to be identified said his company has made a net profit of about 3 cents per gallon on fuel surcharges for the past 12 months because of purchase agreements with fuel suppliers.

“The best deal when fuel prices are declining is usually cost plus [a penny or two] per gallon,” said the executive, “because cash prices are usually much higher.”

But cash listings form the basis for weekly average fuel postings, and fuel surcharges are based on those prices. “So if $2.80 is on [the official] DOE [price average], but my cost is actually $2.60, I benefit 20 cents,” he said. “But when all of my costs are considered, that waters down to about 3 cents per gallon.”

When fuel prices rise for an extended period, said the CEO, cash minus discount is often the better fuel-buying arrangement. “Often, truck stops will lag on increasing their cash prices for competitive reasons, to pull business in,” he said. “You have to understand your vendor’s business as well as your own.”

Trincon’s Swain urged truckers to use the surcharges they receive to offset their fuel expenses directly.

“Then they’ll be able to see whether the surcharge is working for them,” he said.

Swain also said many fleets he has talked with “still treat fuel surcharges as revenue instead of a credit against an expense.”

By reorganizing their accounting systems to apply the surcharges against actual trips taken, he said, “carriers can find out specifically what each trip costs.”

In this way, Swain said, truckers can determine if they are “meeting costs, making a margin or making a profit.” The findings can be used further to determine if adjustments are needed in the application of equipment, routes or fuel agreements.