Fuel Surcharges: True Financial Assistance Or Sheer Profit Center?
As the news media continues to report on the rise in world oil, gasoline, and diesel prices, as well as the effects of a devastating hurricane season, you might be forgiven for thinking that fuel surcharge announcements by less-than-truckload (LTL) and small package carriers are justified.
Not so forgiving are manufacturers, retailers, and industrial shippers who are growing increasingly skeptical. Many claim that some carriers are capitalizing on these news reports to impose higher-than-needed surcharges, and reap tremendous profits.
Let's do the math. Your favorite LTL service provider pulls up to your shipping dock with dozens of shipments onboard, at an average cost of $225 plus a 15-percent fuel surcharge (FSC) per shipment. That truck travels approximately 350 miles a day, and gets 7 miles to the gallon. That's almost 50 gallons at $2.75 per gallon. Or is it at the carrier's negotiated bulk rate of $2.25 per gallon?
The rate doesn't matter. Each shipment represents about $125 per day in fuel costs. Now multiple that by the number of shipments onboard and the average FSC of 15 percent. That's more than $600 in fuel surcharges on that one truck—just one of a number of trucks from the same terminal.
Furthermore, despite different LTL carriers having very different operational characteristics and economies, they invariably set nearly identical fuel surcharge levels.
In most circumstances, shippers must seriously question the rationale behind fuel surcharges.
Fuel surcharges are supposed to be the carrier's compensation for an abnormal rise in fuel prices that wasn't present at the time the shipper negotiated the contract. Surcharges should cover just that cost and nothing else, but evidence shows this may not always be the case.
Independent assessments suggest that the additional profits shipping providers generate through their fuel surcharge mechanisms can amount to more than hundreds of millions of dollars for the transportation industry as a whole.
Surcharges are not limited to motor freight. Airfreight surcharges for jet fuel can represent 50 percent or more of the total freight rate. In some cases, the surcharges are even higher than the actual airfreight rate itself.
Many shippers believe that, right or wrong, these surcharges represent some form of price agreement. Wrong!
Carriers call fuel surcharges an "opportunity for improvement." In my book, that means, "let's keep this thing going, it's great for our bottom line." Surcharges have become a profit center that LTL and small package providers are not willing to give up any time soon.
The poor independent truckload carrier who's trying to make an honest living driving his rig for hours and days on end from Point A to Point B needs fuel surcharge assistance. But the major LTL and small package carriers, steamship lines, intermodal, and airfreight providers need fuel surcharges because they are good for the bottom line.
Keep this in mind when you negotiate your next multi-year LTL or small package contract: You might feel like you did all your homework and got the best bang for your buck. But the carrier will just make up the difference with a fuel surcharge.