Opinion: We Have the Same Kind of Issues in Canada

By Micheline S. Tansey

resident

reight Carriers Association of Canada

orth American Transportation Council

Fuel prices remain at the top of the list of challenges facing Canadian general freight carriers today. Because of geography, operational differences and the fact that Canadian fuel prices are higher than in the United States, fuel costs are an even larger proportion of total costs for Canadian carriers than for their U.S. counterparts. Current Canadian fuel costs are more than 65% higher than in June of 1999, and with fuel being 6% to 8% of total costs for less than truckload carriers and 17% to 25% for truckload carriers (the longer the average length of haul, the higher the fuel/total cost ratio), the impact is significant. After labor costs, fuel is the most significant cost component for general freight carriers.

After absorbing increases for a few months, the majority of Canadian carriers reluctantly implemented fuel surcharges, but the initial increases were a profit drain that is difficult to recover. Since the fuel surcharge programs were implemented during July–August 1999, our office has received many calls from shippers. The nature of their questions indicate many shippers do not fully understand why carriers must promptly recoup fuel cost increases. The majority of questions deal with surcharges that motor carriers impose when fuel prices go up. For instance, shippers want to know why carriers can’t absorb fuel-price increases just as many other industries do? And, why establish fuel surcharges in the first place and not simply take a rate increase and be done with it?

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We explain that with razor-thin net margins, averaging less than 3 cents per dollar of revenue, there is little room, if any, to absorb fuel price increases, or any other cost increases for that matter. For Canadians, the 65% fuel price hike results in a cost increase of 5%, or 5 cents per dollar of LTL revenue (with a 7.6% average fuel/revenue relationship). Without full recovery, that means a loss of 2 cents for each revenue dollar. For truckload carriers, for which the 65% increase results in a cost increase of 12% or more (with fuel/revenue relationships of 18% or more), it is even worse, since failure to recoup increased fuel costs means a loss of 9 cents for each dollar of revenue.

Fuel surcharges that fluctuate with fuel prices are the most efficient means to recover fuel cost increases. Over the years, experience has shown us it is also the fairest when all customers pay their fair share. If carriers were to attempt to recover fuel costs through rate increases, thousands of rate agreements and contracts would have to be renegotiated every time fuel prices move up or down. Surcharges are more practical.

Administering surcharges, nonetheless, adds to a carrier’s administrative burden, which gets costlier when customers resist, necessitating repeated contact with carriers’ personnel. To exacerbate this problem, carriers are now faced with increased customer resistance to general rate increases announced last September, because they have to be implemented while a fuel surcharge is in effect.

Many forward-thinking large shippers understand that motor carriers must pass fuel cost increases on to their customers if they are to provide ample transport capacity in the future. But many shippers also expect their carriers to postpone rate increases until the fuel crisis subsides. This is understandable, since their transportation costs have already increased substantially. However, while it may be possible to defer recouping increased operating costs during fuel crises of relatively short duration, to expect carriers to do so when the crisis persists for more than one year is to jeopardize the future financial health of the carriers. It could well diminish their ability to provide service in the long term.

Canadian general freight carriers, just like their U.S. counterparts, are dealing with other very important challenges, including a severe driver shortage that keeps worsening and pushing up salaries, fringes, equipment, recruitment and training costs — this is especially severe for the longer-haul carriers. Also, fleet value continues to decline due to lower residual value of used equipment, yet carriers must make sizeable investments in new technology to remain competitive and meet customer demand.

In addition to all that, hours-of-service reform also looms in Canada, which will be sure to aggravate the driver shortage and increase operating costs.

Carriers that do not aggressively deal with these important challenges may, for a very short while, gain competitive advantage as they bypass rate increases while their competitors are raising rates. However, this advantage will be short-lived. As in all businesses, carriers must obtain sufficient revenues to be able to meet the future needs of their customers, who, rightly so, are constantly demanding higher and more sophisticated levels of service.

The Freight Carriers Association of Canada and the North American Transportation Council represent less- than-truckload general freight carriers in both the Canadian and U.S.-Canada transborder markets on matters of pricing, costing and economics. Ms. Tansey is a citizen of both Canada and the United States and has been involved in trucking issues for more than 25 years.