Fuel pricing, no matter which way you look at it, has become a major factor in the economic viability of North American motor carriers and the freight rates they must charge their customers.
Although it varies by application, on average fuel accounts for 12% of motor carrier operating expenses. With fuel prices having risen from a low of about $10 per barrel of crude in the late 90s to $55-$60 a barrel of late, there really is no way carriers could absorb such an increase and survive. In fact, there is good evidence to suggest that the previous diesel price shocks back in 1999 to 2001 were one of the major contributors to the decimation of Canada’s small carrier base, which was slow to implement fuel surcharges.
Fuel surcharges have become almost universal for shippers using truck transport today; a fact confirmed by our own research conducted in partnership with the Canadian Industrial Transportation Association and CITT earlier this year. Other studies show fuel costs representing almost 25% of truckload costs for some shippers in certain lanes. But while motor carriers have become much more vigilant about recouping their fuel costs through surcharges, the recent unrest over the impact of rising fuel costs among owner/operators on the West Coast and East Coast suggests that the surcharges some carriers have in place may not be adequate to cover the true costs of fuel.
Some carriers are concerned about pushing fuel surcharges to a level where shippers will balk at paying. In some cases carriers are not able to react fast enough in raising their surcharge rates to keep up with the rising fuel prices. In other cases it’s a problem with getting shippers to pay the difference fast enough.
“There is a lot of stress on cash flow for a lot of carriers. In essence fuel pricing is making some shipping contracts potentially unprofitable. It is forcing a lot of rethinking,” acknowledges Mark Ram, president and CEO of Markel Insurance. “Top economists predicted fuel pricing would come down, yet look where it’s going. World events dictate where fuel prices go and no economist can predict what a terrorist is going to do. The key words are volatility and uncertainty.”
Which is exactly what Markel is trying to remove from the fuel price equation with its new product, Markel FUELogic. The first product of its kind in the Canadian trucking market, Markel FUELogic provides carriers with the opportunity to lock in the maximum price they choose to pay for fuel. Should market prices for fuel exceed the level chosen by the carrier, the program reimburses the difference back to the carrier. If fuel market prices fall below the pre-determined level, the carrier automatically benefits from those lower prices.
The program, available exclusively to Markel policy holders, offers three pre-determined price points, thus providing options that best fit a carrier’s unique budget, consumption patterns and financial needs, Ram explains. Reimbursements are calculated within the program and refunds are issued automatically on a monthly basis.
“When we asked motor carriers what were the toughest things in running their companies, the fuel issue hit you right in the face…We decided there had to be a way to bring our leverage to help out, especially the smaller carriers, ” Ram says. “We looked to see if there was anything out there like this anywhere in North America. We slowly put together a structure with a reputable commodities house in the U.S. to manage this product on our behalf. We don’t make any money on this. This is not a profit maker for Markel. It is a service we are giving back to our clients.”
While many of the larger U.S. motor carriers employ fuel hedging strategies, and the air carrier industry practically survives on them, such strategies were perceived as too complicated or financially risky by many smaller carriers, which do not have the know-how or resources to implement them, says Richard Thomas, national director of marketing and communications.
“Our goal was to take what seems like a complicated concept and make it a simple concept. With Markel FUELogic you pay a set dollar amount and that’s it. You’re not gambling anything; you don’t have to watch the market exchange. It doesn’t require a financial guru to conquer it,” Ram explains.
Aside from providing peace of mind that their businesses are protected from the effects of unpredictable fuel price increases, Markel FUELogic can give participating motor carriers a competitive advantage, says Thomas.
“The fuel surcharge is something that now the carrier can decide to keep on applying or use competitively. If the carrier wants to take a strategic position on pricing, the carrier can share the savings or pass on all of them to the shipper. If fuel pricing goes up and the other guys have to raise their surcharges and the carrier enrolled in Markel FUELogic doesn’t because he has locked in his fuel pricing, he has a competitive advantage,” Thomas says.
Participating carriers must be willing to hedge fuel in 42,000 U.S. gallon monthly increments, Thomas explains, adding that carriers using that much fuel a month probably have about 20 or more trucks in their fleet.
“If we see demand for fleets with fewer than 20 trucks, there are other concepts we have looked at and may consider bringing to market,” Ram says.