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Should Falling Diesel Fuel Costs Result In Lower Motor Carrier Profits?

Posted on October 6, 2015

Written by broussard_press

By Steve Broussard, CTL, CTB – Broussard Logistics

Many motor carriers and Wall Street analysts have recently stated that “falling” diesel fuel prices have resulted in “lower earnings” for carriers, which confirms what many in the industry have alleged for years…the fuel surcharge is a profit center for many carriers.

The purpose of the fuel surcharge, which was honorable and necessary, was to allow carriers, motor and rail, to recover rapidly increasing fuel costs, during the era of tight government regulations of transportation pricing.

Prior to the passage of the Motor Carrier Act of 1980 and the Staggers Rail Act of 1980, carriers had to seek approval from federal and state regulatory agencies prior to adjusting their rates. Most rate increases could not become effective without 30 days’ notice. Emergency orders could be approved on short notice, but required filing of an application with the Interstate Commerce Commission (“ICC”). During periods of rapidly increasing diesel fuel costs, carriers could not recover the higher fuel costs with higher rates fast enough to maintain financial status quo.

The Arab oil embargo in the mid-70’s created a shortage of gasoline and diesel products resulting in rationing and drove up prices. Since then, we have had periods of time when carriers applied a fuel surcharge, when diesel prices rose of above a base cost. Most carrier base-line diesel cost is around $1.20 or so. Some railroads have “rolled” their fuel surcharge costs into their rates, which is never good for shippers, to establish a higher base cost. As an example, the BNSF Railroad uses $2.50 per gallon as their base cost.

The main reason that the fuel surcharge has become a “profit center” for carriers is that the formula, or methodology, used to formulate the surcharge is based on outdated information. Most motor carriers use 5 miles per gallon for their formula, which is significantly lower than the fuel efficiency of most trucks on the road today, which is about 6.5 miles per gallon, a 30% improvement in fuel efficiency.

Armed with this information, shippers should avoid agreeing with carriers to “roll” the fuel surcharge into their base rates, because, when diesel fuel prices drop, the shipper will continue paying the fuel surcharge and, if the carrier takes a percentage increase in their rates, the fuel component increases exponentially and will do so in perpetuity.

Actually, applied properly, the fuel surcharge is good for carriers and shippers. Carriers are able to recover their fuel costs during rapidly rising fuel costs, yet, when prices come down, which will occur, shipper costs come down accordingly. Fuel costs are not static and rolling the fuel surcharge into base or line haul rates rarely benefits shippers, because when diesel fuel costs do rise, carriers will initiate another round of fuel surcharges, and these will be applied to a base or line haul rate that already includes a fuel cost adjustment. Essentially a tax on a tax.

Falling diesel prices should not have a negative impact on carrier profits, if the fuel surcharge methodology used is correct.