Messing with the surcharge

Consider a 500-truck fleet that averages 2,000 miles per truck per week at 5.75 mpg. The fleet consumes 173,913 gallons per week. Using $4.33 for the average retail price of diesel on May 12, at this rate the fleet will spend $753,043 per week for fuel.

At the same time last year, fuel cost $1.56 less per gallon, and the fleet spent $271,304 less per week. Being generous, we assume a 90 percent recovery through the fuel surcharge. Net fuel costs are still up by $27,130 per week. And if this spread continues the rest of the year, the fleet stands to lose about $760,000 more in fuel on top of what it already lost since January.

For years, shippers and carriers have been using the same basic approach to fuel surcharge – one linked to the weekly national or regional retail price of diesel as recorded by the Department of Energy. In the late 1990s, carriers’ net fuel costs – costs after offsetting surcharges – were 17 to 18 cents a mile, says John White, executive vice president of operations for U.S. Xpress. Today, net fuel costs are 26 to 30 cents per mile, he says. Meanwhile, carriers also are paying significantly more for new equipment – with no gains in fuel economy.

In addition, shippers get interest-free financing of surcharges. The average number of days it takes shippers to pay freight bills and fuel surcharges is 46 days, causing cash flow problems for carriers and forcing a record number to factor their receivables at 2 to 3 percent of revenue, White says.

Furthermore, the slow freight market, increased traffic congestion, hours of service and fuel conservation efforts are driving down fleet productivity, leaving fewer miles to spread out fixed costs.

Amid these financial pressures, shippers are exploring new formulas for the fuel surcharge – in their favor. Some are using the price of fuel on the day they tender a load to a carrier versus when the carrier actually picked up the load. Even more sophisticated are fuel recovery approaches developed by third-party fuel management services.

One such service is Breakthrough Fuel, which has convinced several major shippers that a more equitable way to help carriers recover fuel costs is to use technology to determine the “actual” cost of fuel along a route from point A to point B. The shipper believes it is paying for fuel that is closer to what carriers actually are paying in particular lanes for particular freight movements.

Compared to the conventional surcharge model, the Breakthrough Fuel approach does respond somewhat to the problem of surging prices because it’s tied to current fuel prices, not last week’s average. But the Breakthrough Fuel concept has some drawbacks. For example, many carriers have contracts with their owner-operators based on the conventional fuel surcharge model. Fleets can’t easily change how they reimburse drivers for fuel in one lane and not the other. And many carriers already have fuel-purchasing arrangements that might not integrate well with the Breakthrough Fuel scenario.

But perhaps the greatest concern with Breakthrough Fuel and other alternative concepts is that many shippers have long accepted and encouraged more liberal fuel surcharge mechanisms in lieu of higher freight rates. So any program that in essence lowers this cost recovery could force carriers to grind more costs into linehaul rates – or force them out of business.

“We are already doing everything imaginable to cut fuel costs,” White says. For example, U.S. Xpress uses advanced optimization software for fuel purchasing and power-to-load matching. It also uses in-cab turn-by-turn navigation and anti-idling technologies. If a service such as Breakthrough Fuel could instead help carriers recover more of their actual fuel costs, perhaps he and others would be more receptive.

“I’m willing to consider it,” White says. “But for now we have decided not to participate.”