Industry Issues: Fuel surchargesIssuesFuel surcharges
February 1, 2006
Recently, some shippers have been questioning fuel surcharges, arguing that the current percentage-based formulas generally in use favour the carrier and need to be changed. Before getting into the de...
Recently, some shippers have been questioning fuel surcharges, arguing that the current percentage-based formulas generally in use favour the carrier and need to be changed. Before getting into the debate on the merits or lack thereof of their arguments, we should remind ourselves that the reason fuel surcharges evolved the way they did was because that was how shippers said they wanted it. It was easy to understand and to calculate. The reality of the market over the past decade or more is that shippers on the whole have been unwilling or resistant to paying higher freight rates. In order to remain viable, to stay safe and to attract drivers, carriers have been forced to use a combination of fuel surcharges, border crossing charges, detention fees, etc., in order to earn a modest return on investment and improve driver pay packages.
Some shippers allege that fuel surcharges only go one way – up. They might feel that way, but that’s a bit disingenuous. Fuel surcharges track fuel prices. It’s not the trucking industry’s fault that fuel prices have been sky-rocketing on an upward trajectory and show little sign of abating. The reality is that carriers do tweak their fuel surcharges to reflect the reality of the cost of fuel. Many carriers already adjust their fuel surcharges weekly and others would prefer to do so. We all know the price of fuel rises faster than it falls. There is little prospect of much correction off recent peaks.
These shippers also take issue with the fact that when fuel surcharges are calculated as a percentage of the freight rate, shippers with higher rates pay more than shippers with lower rates; a percentage-based fuel surcharge also compounds any rate increase. That may be true to a point, but one needs to consider the reasons why some shippers pay higher rates in the first place.
Shippers in a head haul market pay more than those in a backhaul or in a depressed market. The fuel surcharge in a back haul market usually falls well short of compensating the carrier for fuel cost increases. Rates in those markets often do not cover basic costs, let alone fuel or a profit. The shortfall is made up in the head haul lane – it has always been this way, and it will likely always be. Market demand, capacity and type of load, all drive the prevailing rates in each lane.
Another complaint from shippers is that there is a mismatch between the underlying index used to calculate the fuel surcharge and the actual fuel consumed in the movement of the freight. This is a red herring. They should work with their carriers to come up with whatever index they want. But, they should then stick with it. If the formula is fair, things should all work out to about the same in the end.
Where this leads us is some shippers calling for a change in the way surcharges are calculated – from a percentage-based formula to one based on distance. This, it is argued, would equalize the amount of fuel surcharge any shippers whose goods travel the same distance would pay. Proponents claim a distance-based formula would be based on a carrier’s actual cost of fuel and could be further refined by equipment type.
But would things change all that much if the industry moved to a distance-based formula? Regardless of the formula you favour, they are both simply benchmarks after all. To a degree, everything is distance-based already. However, moving to a wholly distance-based approach would be complex – as freight rates vary by weight and distance. And more fuel is consumed with increased weight and distance. Furthermore, carriers pay for every drop of fuel they consume on (a) every mile they run; and (b) every hour they sit at a border waiting to cross, or are delayed loading/unloading, or are stuck in traffic congestion. What about empty miles? What about summer versus winter fuel?
Invariably, carriers see what is happening and start pushing up base rates or increasing fuel surcharges to compensate. The carrier has got to be paid one way or another, at least until we find a way to run our trucks without the need for fuel. In the end, the debate over a percentage-based versus a distance-based formula is a bit like splitting hairs.
Something upon which more carriers might be likely to agree is a recalculation of the underlying base rate used to calculate the fuel surcharge. Does it really make sense to have surcharges in the 20 to 30 per cent range? At what point does the base rate become rather meaningless and we are really just working for fuel? Resolving this however, would require true partnerships between shippers and carriers, and I am not sure the level of trust is there in all cases yet.
In the end, it is concerning that some shippers are still resistant to fuel surcharges. They are a fact of life in trucking and in virtually all other transportation sectors. Formulas can be tweaked. The base can be changed to whatever you want. In the end, the shipper’s problem is the same as the carrier’s. Both need to deal with their customers in order to be appropriately compensated.
– David Bradley is president of the Ontario Trucking Association and chief executive officer of the Canadian Trucking Alliance.