“There is a time to laugh, and a time not to laugh, and this is not one of them.” Inspector Jacques Clouseau (Pink Panther)
2011 was a much needed and deserved recovery year for well-managed trucking companies. 2012 looks like growth will continue moderately and capacity will continue to tighten. This bodes well for those trucking companies, which survived the Great Recession.
There is one dark cloud on the horizon, i.e., rising fuel prices. As of the writing of this article, prices are pushing $110 per barrel. It was not long ago that a barrel was in the $80 range. Managing through periods of rapidly rising fuel costs is critical to a trucking company’s success or failure. Rising fuel prices tests a carrier’s pricing, cost management and cash management skills.
From a shipper’s perspective, rising fuel prices are budget busters. Their traffic managers are charged with beating their budgets for transportation costs, but the only thing one can predict about diesel prices is that they will change. Oil markets have been volatile for quite a while. With the economy slowly growing and uncertainty in the Middle East, the price pressure is upwards. A shipper in setting budgets should anticipate this in setting budgets. A good strategy for a traffic manager is to strip as much fuel out of the base rate and place it in a fuel surcharge as possible. This creates delineation between costs you can manage and costs that you can’t while securing your core carrier base.
From a broker’s perspective increased fuel prices offer an opportunity to increase their margins. Many brokers keep the fuel surcharge instead of passing it on to carriers. They negotiate rates “all in.” Shippers who pass the problem onto broker’s will exacerbate the capacity shortage many shippers are now concerned about. These practices are creating concentration in the industry as smaller carriers and owner operators are often the first to fail.
From a carrier’s perspective, managing through a fuel crisis is imperative to survival. There is a strong statistical correlation between rising fuel prices and carrier bankruptcy. Failure results from losses, running out of cash, or both.
In 2008, when prices increased dramatically some shippers complained that carriers were profiting from fuel surcharges. Aside from the obvious proposition that businesses should seek to make a profit on all they do, fuel surcharges do not cover a carrier’s fuel costs. Motor carriers burn fuel on the actual miles as opposed to the computer-generated miles upon which fuel surcharge schedules are based. Carriers’ consume fuel for unpaid empty miles, out of route miles and idling. These are a part of the business. Shippers don’t directly reimburse for these costs. Carriers pay for fuel weekly. It then takes a few days to bill the shipper and 30 to 60 days to get paid. There is a cost in the time value of money and the carrier must invest substantially more working capital to cover this float. Shippers with excessive detention increase a carrier’s fuel consumed in idling. Temperature control carriers consume additional fuel to run their trailers. Heavy loads decrease fuel economy.
Fuel is the largest expense a carrier incurs. Let’s take, for example a truck that runs 120,000 miles per year. At 6 miles per gallon, that truck requires 20,000 gallons per year. At $3 per gallon the cost is $60,000, at $4, $80,000 and at $5, $100,000. No other costs of operating a trucking company comes close, not the truck, the trailer or the driver.
The first thing a carrier should do before pricing business is analyze the shipper’s fuel surcharge. These are typically “take it or leave it” schedules which are not negotiable. There are several aspects to the fuel recovery quality of the fuel surcharge schedule. Some are based on short miles and others on practical miles. They all peg the increase to a certain price per gallon. This is typically the DOE price for the preceding week, but watch for some who get creative in their definition of the fuel prices. All fuel surcharge schedules are different. They start at different fuel prices and increase in different increments. Is the fuel surcharge scheduled capped? We saw a couple in 2008, which were clearly inadequate when fuel shot up to $5 per gallon. It takes time and money to get a customer to fix this when needed.
Fuel surcharge schedules reset at different time intervals. Some reset the fuel surcharge weekly, some monthly or some quarterly. If the fuel surcharge was based on last week’s Department of Energy prices, in a rising fuel market, the carrier, paying for the fuel this week is always a week behind in recouping the increase. A monthly or quarterly adjustment can create a situation where the carrier is paying substantially more for fuel, than the fuel surcharge reimburses it for.
What are the customer’s payment terms and practices? These greatly affect the time cost of the money a carrier will invest in working capital.
Some schedules allow a carrier to capture the increase in fuel costs better than others. We refer to weak schedules as “fuel surcharge lite.” Any fuel costs the carrier will incur which are not recaptured by the fuel surcharge schedule must be included in the base rate. By analyzing the fuel surcharge schedule first, you can then determine what other fuel related costs must be included in the base rate. Keep a list of those contracts with fuel surcharge lite schedules. When fuel rises quickly, you will either need to approach these customers to increase the base rate, or find other customers to replace them quickly. A profitable piece of business with a lite fuel surcharge can quickly turn into a loser.
“It’s true. My surprises are rarely unexpected.”
Inspector Jacques Clouseau