By Mark Montague
The No. 1 operating expense for a trucker is fuel: at $4.05 a gallon—the national average as I write this—a trucker will spend 63 cents a mile on diesel based on fuel economy of 6.4 mpg, an admirable achievement.
Nationwide, fuel prices rose by more than 25 cents per gallon between January and February. All things being equal, it cost a carrier more in February to make the same trip as it did in January. Given the slim margins at trucking companies, even a small increase in the cost of diesel can mean the difference between making and losing money on a run.
To account for fluctuations in the fuel price, a trucking company working directly with a shipper on a long-term contract will often negotiate a linehaul rate—what the carrier actually gets paid to move the load—plus a fuel surcharge. Fuel surcharges are typically calculated in cents per mile (the amount will increase or decrease by a penny each time fuel goes up or down by X cents per gallon) or on a percentage of the linehaul rate (the surcharge increases by X% for each incremental one-cent increase in the price per gallon). Most carriers base their fuel surcharge on the national average retail price for on-highway diesel as provided by the Energy Information Administration (EIA) of the Dept. of Energy, which updates the national average fuel price and posts it on its web site every Monday.
When fuel prices rise fast, a fuel surcharge can put trucking companies at a disadvantage. It can take 25 to 30 or more days to get paid for the trip the carrier took today, and by that time, it may cost more to refill the tank. Of course, when fuel prices drop, as they did between the end of February and middle of March, the carrier may benefit, but somehow prices never seem to fall as fast as they rise.
Fuel and Load Brokers
A carrier or owner-operator that is working with a broker on a one-time haul on the spot market often gets a flat, all-inclusive rate. Even though the broker may collect a fuel surcharge from the shipper, the carrier probably won’t receive a fuel surcharge unless it’s specifically negotiated. That’s why it’s important for truckers to pay attention to fuel prices and to ask load brokers for a higher rate or to pass along the full amount of the fuel surcharge paid by the shipper.
How does a carrier know what to charge? When fuel prices are rising fast, my rule of thumb is this: for each 1-cent increase in the price per gallon, the carrier should ask for an additional dollar per day. So when fuel goes up 25 cents, and there’s no fuel surcharge coming from the load broker, the carrier should negotiate an additional $25 per day to cover the cost of fuel.
Other Rules of Thumb
Whether you’re a carrier negotiating long-term contracts or you’re looking to be compensated for fuel on an all-inclusive-rate spot load, here are some other rules of thumb to follow:
Don’t negotiate on fuel: You're not just undercutting a competitor when you give ground on a fuel surcharge, you’re undercutting your ability to pay your fuel bill. If you treat a fuel surcharge like a revenue generator or a charge to be negotiated, shippers will wonder if it’s a legitimate charge at all. Given the percentage of fuel in your overall cost-per-mile, there should be no doubt that it is.
Be consistent: Unless you're equipped for it, assigning a multitude of surcharge percentages and formulas to different customers is an administrative nightmare. Set your fuel surcharge criteria, make them clear, and stick to them.
Educate: As shippers have become better informed about surcharges, they're asking tougher questions. Explain why fuel surcharges are fair and reasonable and should be passed through to the carrier.
Do your part: Help customers consolidate shipments and maximize capacity. Control your own fuel costs by optimizing routes, reducing speed, minimizing idling, and so on. Show that you’re doing your part to keep your fuel-spend in check.
No one can predict the cost of diesel fuel tomorrow. But by educating shippers and brokers about the need to be protected against price fluctuations, carriers and owner-operators can take some of the uncertainty out of their future—and keep their capacity in the market.
Mark Montague is the industry freight analyst for DAT, which operates the DAT® Network of load boards and facilitates the matching of more than 68 million spot (non-contract) loads and trucks per year. He holds an MBA in Transportation from Indiana University as well as a Bachelor of Science degree in mathematics and has applied his expertise in rates and routing for carriers, 3PLs, and shippers for more than 30 years. He is based in Portland, Ore. For information visit www.dat.com.