We have all seen the headlines in the past month that FedEx, UPS, and other carriers are increasing fuel surcharges, despite the cost of fuel plummeting. Like most shippers, it raises the question ‘Why?’ After all, basic economics state that when a major cost driver of a product or service falls dramatically, prices of that product or service follow. So why then are carriers pushing this through? How are they able to get away with it?
First, the origins of fuel surcharges need to be discussed for context. You will quickly see how a simple statute that made sense over 30 years ago was quickly hijacked and became something very different.
Second, you will see the 3 main reasons you and shippers like you are getting ripped off. (Hint: part of it may be the shipper’s own fault.)
Brief History of Fuel Surcharges
The origins of fuel surcharges date back to the early 1970s. During the Fuel Crisis in 1973 and 1974, Congress granted authority to the Interstate Commerce Commission (ICC) to allow motor carriers the ability to bypass the burdensome rate approval process and impose an emergency fuel surcharge by filing a surcharge tariff with one day’s notice. Before the ICC was abolished in 1995, one of their primary responsibilities was to regulate trucking (and railroads) to ensure fair rates.
While fuel surcharges were never enacted with legislation and are not regulated, the actions taken by Congress and the ICC in the 1970s laid the groundwork and allowed for carriers to enact fuel surcharges and develop their own formulas for how they would be applied. LTL and parcel carriers use a percentage-based fuel surcharge formula, while TL carriers use either a mileage or percentage-based formula.
3 Reasons Shippers are Getting Ripped Off
#1 – Fuel surcharges were never meant to be profit centers.
The ICC granted carriers the ability to operate and survive in a rapidly increasing fuel price environment. The modification in the law was meant to compensate carriers who were operating efficiently but were being negatively impacted by something completely out of their control. Since shipping via truck has an effect on so many other aspects of our nation’s economy, it made sense to come to the relief of carriers with legislation that allowed them to operate while allowing them to be fairly compensated for the rapid increase in fuel, one of their most significant costs. Theoretically, the ICC never intended to create an additional profit center for carriers. When fuel prices inevitably came down, the intent of the law was that the fuel surcharge would mirror that decrease. That, however, has not happened since the law has come into existence.
#2 – Loss of transparency of fuel surcharges due to one rate.
For far too many shippers, transportation expenses are not a strategic part of their business. Freight is an afterthought. Trying to keep up with all the nuances of freight expenses, rates, surcharges, fees, and changes in freight classifications takes too much time and energy. So somewhere along the way, shippers began asking carriers for one single rate…the bottom line. This is where shippers deserve part of the blame. As soon as carriers began doing that, fuel surcharges – the result of a special exception driven by an external factor outside of shipping – in some cases got rolled up into the base rate and became invisible. When this happened, every percentage increase from that moment forward compounded both the shipping rate AND any fuel surcharge. Less visibility over the fuel surcharge also stripped shippers of the ammunition to hold carriers accountable as fuel prices came down. Compound this practice over 30+ years, and base rates get so skewed that carriers can discount them 70-80% and still make money. That is where we are today.
#3 – Outdated and inconsistent practices when calculating fuel surcharges.
Due to lack of visibility, and henceforth accountability, the calculation of fuel surcharges has become confusing and inconsistent. One example of this is the widespread use of an average of 5 mpg as a factor when calculating the fuel surcharge that will be applied. Many trucks today, however, get 6.5-7.5 mpg. That slight change in formula can result in a 30-50% change in the actual fuel surcharge.
Where to go from here
As with most business challenges, information is power. Once you become aware and better understand what factors make up transportation expenses in your business, the first step has been taken to getting them under control. Going to your carriers and asking for transparency, or better yet a reduction in your fuel surcharges may or may not yield results. Most carriers have a pretty complex mixture of factors that make up their rate structure. If they agree to reduce one, chances are they will offset that decrease by making it up in the line haul rate, so be aware of that tactic.
The fact still may remain that freight is not a strategic part of your business model. If you begin asking questions of your carrier regarding fuel surcharges, and you don’t like the answers you are getting, maybe it’s time to enlist the help of an expert. Broussard Logistics helps 1000+ client companies get control of their transportation expenses by providing industry leading technology and unparalleled market intelligence in a customized and transparent way.
Maybe it’s time to stop getting ripped off.