Falling Freight Gives Shippers Leverage
By Jonathan S. Reiskin, Associate News Editor
This story appears in the April 2 print edition of Transport Topics. Click here to subscribe today.
A loosening of the tight capacity for freight hauling now makes the fuel-surcharge programs — upon which motor carriers depend to insulate them from fuel price spikes — vulnerable to demands for change by shippers.
While the surcharges are not disappearing, parties on both sides of the negotiating table said shippers are now in a much better position to insist upon altering important details than they were a year ago.
Competition among diesel fuel sellers has made it easier for medium-size and small firms to get better fuel-purchasing agreements that take advantage of price fluctuations.
Anecdotal evidence to this effect is appearing as freight volumes continue their retreat from the blockbuster levels of 2005, when carriers were in a position to make and enforce demands (3-5, p. 1).
Thomas Sanderson, chief executive officer of Transplace Inc., a third-party logistics provider, said that the “trucking capacity-and-demand balance has changed. Trucks are in plentiful capacity, and because of that shift, there are opportunities that are being taken advantage of.”
“Salesmen [for trucking companies] have to act like salesmen again, rather than order takers,” said Michael Regan, CEO of TranzAct Technologies. His Elmhurst, Ill., company offers freight payment and other logistics services for shippers.
“The notion of the fuel surcharge is pretty well-established. It’s an accepted pricing mechanism,” Regan said. “However, shippers are getting much better at understanding reasonable versus unreasonable in the formulas used in the surcharges.”
A number of people interviewed for this story cited a Jan. 26 ruling by the U.S. Surface Transportation Board as encapsulating the mindset of shippers. A part of the Department of Transportation, STB addressed in its ruling the practices of freight railroads only but did frame the issue in a way that resonates with shippers.
The STB’s ruling barred railroads from assessing fuel surcharges based on a percentage calculation of the base rate. The agency also ruled that railroads may not impose a fuel surcharge on traffic that also is paying a higher rate based on a cost index that includes the price of fuel.
“Our decision . . . brings common sense and fairness to the railroads’ implementation of fuel surcharges,” STB Chairman Charles Nottingham said as he announced the board’s ruling.
“This new rule will preclude them from selectively imposing surcharges in a manner that bears little relationship to actual fee. It will also remove the possibility that railroads will view fuel surcharges as a profit center.”
At a recent investors’ conference, the CEOs of two major less-than-truckload carriers said it was difficult to push on basic freight rates and fuel surcharges simultaneously.
“Customers were pushing back on the fuel surcharge,” said Douglas Stotlar of Con-way Inc., the parent of Con-way Freight, the third-largest LTL in North America.
Stotlar said the company’s managers noticed a deterioration in yield, or revenue per unit of freight moved, in 2005. In 2006, the company went through a yield-management review process that raised some rates, resulting in the loss of more business than usual for such a process, Stotlar said. That review led to some balking on surcharges.
Richard Gaetz of Vitran Corp., parent of Vitran Express, recounted a similar experience with freight rates and fuel surcharges, saying at the BB&T Capital Market conference in Miami that for shippers, “there’s only so much supply chain money to go around.”
L.E. “Tripp” Dunman III said, “Shippers are now asking their carriers, ‘What can you do for me?’ ” Dunman said he talks to many shippers as part of his job as managing director of the fuel surcharge group at FCStone Trading, a commodities trading firm in Kansas City, Mo.
“It’s flipping from a carriers’ market to one for shippers. The more the market for trucking softens and the more cognizant of fuel shippers are, the more likely they are to push back.
“The more knowledgeable you are, the more leverage you have,” Dunman said, offering an idea of the form the pushing back might take.
“I think caps on fuel surcharge programs are probably coming. . . . An astute shipper might want to use the fuel-surcharge program most of the time but push back with a cap, so that the price might never go higher than some level — X.”
He also has compiled a list of pet issues, or details to look for in surcharge agreements, that both sides must understand thoroughly:
How are the tables set up? Check them carefully.
- What is the baseline fuel-price threshold where the surcharge starts?
- What is the increment of change? How many cents per gallon?
- Is the basis of the surcharge the national Department of Energy diesel average, or is it a regional number?
- Does the surcharge reference diesel fuel, gasoline or crude oil? Retail or wholesale?
- Is the surcharge based on a percentage of the bill’s subtotal, or does it work on a per-mile-traveled basis?
TranzAct’s Regan saw this threshold issue come up in a negotiation last year.
“The tide really started turning during the fourth quarter,” he said. “We had a carrier come in and say we should use his level of rates.
“The shipper said we should use our level and a $2.40-a-gallon threshold for the starting point. The carrier walked away but then came back and took it,” Regan said.
Wayne Johnson, director of logistics for American Gypsum Co. in Dallas, said he raised the threshold level for his surcharge program to $1.80 a gallon from $1.20 at the start of 2006.
Johnson, who is chairman of the Highway Transportation Committee of the National Industrial Transportation League, said most of the NITL members he has talked to “have their own surcharge programs and give them to carriers.”
Regan said the market usually determines who is the first to offer a surcharge proposal. “It’s more about the state of competition rather than the size of the companies involved. Now shippers can present them,” he said.
Sanderson of Transplace agreed. “This isn’t about fair and equitable; it’s a function of supply and demand,” he said.
Sanderson traced fuel surcharges back to the early 1990s and the run-up to the first Persian Gulf War. He said he has seen times when shippers ignore them with impunity and when carriers make successful demands of no-surcharge, no-shipping.
While shippers are feeling comfortable today, he warned against hubris. “The automotive and housing sectors of the economy will come back, and when they do, carriers have pretty good memories. You need to think of the long term,” he advised.
To incorporate current market conditions but also foster long-term relationships, Sanderson said he likes annual reviews.
“Run a formal annual bidding process. Lock in capacity commitments and rates for the next 12 months, and give every carrier a chance,” Sanderson said.
“It’s good for both times, when capacity is tight and when it’s not.”