DC Velocity - March 2016

BY MARK B. SOLOMON, EXECUTIVE EDITOR–NEWS

MOTOR FREIGHT

transportationreport

THE BUSINESS OF DIESEL FUEL SURCHARGES HAS grown increasingly complex over their 43-year history and seems to have moved further away than ever from their original purpose, which was to help motor carriers recoup soaring fuel costs triggered by the 1973–74 Arab oil embargo.

Shippers who get hit with the passed-on costs are sympathetic to the carriers’ need to manage a cost whose fluctuations are beyond their control. At the same time, they believe the surcharge mechanism has gone from being a clean pass-through of fuel costs to an arbitrage designed to enhance a carrier’s revenue and profit. “There are a lot of games that can be played with fuel,” said Terri Reid, director of transportation, international and retail logistics, for Caleres, a St. Louis-based footwear company, and a big truck user.

Because surcharges are part of shipper-carrier contracts and are not regulated, the potential for free-market double-dealing is always present. For example, the surcharge formula (more on that below) is based in part on a fleet’s fuel efficiency, and many modern-day fleets boast the most efficient trucks in the industry’s history. Yet surcharges are based on a lower miles-per-gallon (mpg) threshold that becomes detrimental to the shipper when calculating fuel costs, according to critics.

Large truckers buying fuel in bulk will negotiate huge discounts and rebates from truckstop operators, but then will pocket the difference between their wholesale costs and the surcharge revenue based on a government-published weekly index that prices fuel at the retail level, critics contend.

Some carriers bake surcharges into their base rates, a step that eliminates a shipper’s ability to see the charges for a key element of a trucker’s pass-through costs. A freight broker working in the spot, or non-contract, arena, which accounts for 25 to 30 percent of the total truckload market, incorporates a fuel surcharge into the total price it offers its shipper customers. As a result, a shipper using a broker doesn’t know the impact of fuel on its overall cost.

Larry Menaker, a Chicago-based consultant who has been around the business for decades, said that surcharges, while not perfect, have generally lived up to their original intent. However, Menaker acknowledged that in the $550 billion-a-year truckload sector, where fuel is a significant cost component because of the relatively long lengths of haul, there has been pressure to change “what shippers believe is a broken system.” While surcharges in the truckload sector are based on the length of haul, surcharges in the smaller less-than-truckload (LTL) segment are calculated as a percentage of shipment revenue because the haulage lengths are shorter.