High diesel fuel prices usually signal harsh times for trucking. According to the American Trucking Assns. (ATA), for every 10-cent rise in the cost of diesel, an average of 1,000 fleets go bankrupt.
That doesn't seem to be the case this year. Despite record-high fuel prices, most fleets — especially the large truckload and less-than-truckload carriers — aren't going under.
Rather, they're using a variety of fuel management strategies to offset the pain at the pump. The most prevalent is a fuel surcharge, which enables fleets to pass at least some of the higher fuel costs onto customers.
“Like any fleet, we're extremely sensitive to fuel prices. Not only are they high now, but they're staying up,” says Tom Glaser, COO of Celadon Group. “But we're coping with it. Customers today are much more understanding about the need for fuel surcharges than they've been in the past. They recognize that there's very limited capacity out there, so they're much more willing to pay it.”
Celadon is managing to recoup about 70% of the higher cost it's paying for diesel through fuel surcharges, he says. But the company is also refocusing efforts in other operational areas to bring fuel costs down, such as spec'ing new trucks to maximize fuel economy and getting drivers to use more fuel-efficient driving techniques.
“So many factors affect a vehicle's fuel economy: the truck's specs, how the driver operates it, if you're operating in mountainous areas or across flat plains, the weight of the freight, excessive engine idling, etc,” Glaser says.
“We are much more cognizant of fuel economy as a whole and what plays into it,” he adds. “That's why we're trying to be smarter at both ends: getting the shipper to help defray our fuel costs through surcharges, while doing what we can to conserve fuel.”
Almost every carrier we talked to said fuel surcharges are far and away the most effective method for handling escalating diesel prices.
Diesel fuel prices skyrocketed from a national average of just over $1.42/gal. last summer to settle at just over $1.71/gal. by mid-July this year. Along the West Coast — and especially in California-the price shot up to over $2.35/gal. in late May before falling to just over $2.11 in mid-July.
Forecasts by the Dept. of Energy (DOE) don't offer much relief. The agency expects diesel fuel prices to remain at or above a national average of $1.65/gal. through the third and fourth quarters this year.
“Obviously, high fuel prices are never welcome in this industry because fuel is typically the second-highest operating cost for most fleets, [and can be] up to 25% of their operating costs in some applications,” notes ATA chief economist Bob Costello.
Dave Berry, vp for Swift Transportation, puts it more bluntly: “Diesel fuel is the lifeblood of the trucking industry. Each year, the trucking industry consumes over 32-billion gallons of diesel fuel, [which] means that a one-cent increase in the price costs the trucking industry an additional $320 million in fuel expenses.”
ATA's Costello points out, however, that fleets are not experiencing pain at the pump equally. The kind of impact high diesel prices have on any one fleet “depends on how much they are getting recouped for that expense, whether through fuel surcharges or higher rates,” he says.
According to Celadon's Glaser, “Fuel surcharges really have become staples in contracts between carriers, shippers and receivers since about 1994-1995.” Now, however, “we've become much smarter about explaining the ‘why’ to our customers,” he adds.
Schneider National is also deflecting the higher of cost of diesel through fuel surcharges. Greg Sanders, Schneider's regional vp-sales for the West and Southwest, says that process has become much easier lately.
“The industry has done a good job over the last three years educating shippers as to how high fuel costs impact not only the fleet, but our ability to serve them,” he explains. “As a result, coupled with tight capacity, surcharges are sticking a lot better in the marketplace today.”
“Five years ago, to even try to get a small fuel surcharge across to a customer would have required some tall talking,” says Mike Deegan, a vp at APL Logistics. “But today, as most shippers need capacity, it's been a much easier process.”
“There's a much higher level of understanding among customers about the need for surcharges,” adds John Burton, vp-marketing for SCS Transportation. “And it's a much more fair and equitable way to pass on that cost. We don't gain … more revenue from customers because the surcharge doesn't cover the total cost of fuel. Also, the process is transparent, so the customer can see the surcharge rise and fall based on the swings in diesel prices.”
Joseph DeLuca, spokesman for LTL operator Con-Way Transportation Services, says: “Right now, fuel surcharges are our main strategy for dealing with higher fuel. We don't like to charge our customers for the higher cost of fuel, but they understand why we have to.”
Though shippers may view them as a nuisance, carriers by and large feel fuel surcharges are an absolutely critical business tool. “[Surcharges] are such a critical cost control component in trucking today that you must have them in place to survive,” says Schneider's Sanders. “That's why the historical correlation between high fuel prices and increased carrier bankruptcies mostly involves small to mid-sized carriers that don't have enough clout to make surcharges stick.”
“You can't do without it,” says Clifford Parker, president and gm of G&P Trucking, and former chairman of the Truckload Carriers Assn.
A TL and intermodal cartage hauler, G&P is able to recoup a large percentage of higher fuel prices via surcharges that kick in on a sliding scale when diesel goes over $1.20/gal. For its cartage operations, however, G&P is mostly unable to collect a fuel surcharge, a situation that's having a major impact on the carrier's bottom line.
“To date, higher fuel prices have cost us an extra $70,000, and we're not recovering $50,000 of that,” Parker says. “If prices stay high like this, we're looking at paying an extra $600,000 by year's end for fuel. If it weren't for the strong freight market we have right now, we'd be suffering.”
Kenneth Farer, a Standard and Poor's analyst who recently issued a report on surcharges, says they're the best method for handling fuel price swings. “Profitability of TL and, to a lesser extent, LTL carriers can be… affected by fuel prices,” he says, noting the fuel costs represent 10% to 15% of revenue for TL carriers and 3% to 8% of revenue for LTL operators. “Surcharges allow them to offset fuel costs more than other variable expenses.”
According to S&P's calculations, as of mid-June, fuel charges added approximately 7% to the cost of LTL freight shipments and 14% to the price of TL transportation.
Fleets point out, however, that fuel surcharges aren't a complete antidote for high diesel prices. “[Surcharges] only cover the increased cost of fuel while the truck is under load. TL carriers average approximately 10% deadhead miles and usually absorb the increased fuel cost associated with deadheading,” notes Dan England, president C.R. England.
“Another cost associated with escalating fuel prices is the carrying cost of money,” he says. “Fuel vendors demand payment within 14 days, while most customers don't pay freight charges for at least 30 days from the date of delivery.”
C.L. Werner, chairman, president, and CEO of Werner Enterprises, notes that fuel charges also don't apply to out-of-route miles or fuel burned during engine idling. Even with a surcharge in place, he adds, the higher cost of fuel still hurts his company's bottom line.
“We anticipated that fuel would have a negative impact of approximately five cents per share in second-quarter 2004 compared to second-quarter 2003,” Werner says.
“But as burdensome and damaging as the increased fuel costs are to us, our independent operators are suffering even more,” England notes. “They have much less staying power. If the surcharge is not adequate, their chances of succeeding are diminished. An alarming trend is developing wherein contractors are now accepting or rejecting loads based on the level of surcharge paid by the customer.”
He says another issue revolves around the contracts between carriers and shippers that assume various cost factors. “As a general rule, moderate deviations in cost are part of the risk of doing business, and when they occur we have no choice but to absorb them and try to anticipate them better in the future,” England points out.
“But the current fuel crisis is a much different situation; its magnitude makes it extraordinary,” he adds. “Speaking from a carrier perspective, the costs must be passed on so that we can remain financially viable.”
Surcharges may be the most common vehicle for combating diesel fuel price hikes, but they're not a fleet's only option.
Under this scenario, you agree to purchase fuel from one source over a longer period of time, typically a year, at a pre-determined price. According to Richard Bell, president of consulting firm Bell & Co., hedging enables fleets to stabilize fuel costs, preventing the week-to-week fluctuations that can disrupt cashflow.
“I think you need a fuel hedge strategy, not a fuel surcharge, to control fuel costs,” Bell adds. “If you burn 42,000 gallons of fuel a month, you may want to buy fuel using future contracts and [thus] average your cost of fuel.”
Betty Simkins, a finance professor at Oklahoma State University, points out that there are fees involved in setting up hedging contracts. In addition, a company's financial situation can play a role in what price they have to pay. “It's more difficult if you're not investment grade; you'll have to post more collateral to get the hedge contract,” says Simkins.
BUYING IN BULK
You can get a better price, but if you don't have your own pumping station you have to pay for delivery to a chain of truckstops and pay them a fee to pump the fuel.
These can be set up with truckstop or refueling chains. You buy the fuel at the base-rack price, with a small fee added to cover pumping costs.
“One of the troubles you can run into with a discount fuel program, though, is that you may have to drive a lot of out-of-route miles to get to a fueling location,” says Lance Craig, president of Craig Transport. “Are you sure you want to drive 25 miles each way just to get discount fuel? In the end it could make it far more expensive than paying a higher price right next to the highway.”
Fuel economy: The secret weapon
With the price of diesel fuel going nowhere but up, fleet efforts to maximize fuel economy are more critical than ever.
“Spec'ing a truck to maximize its fuel economy potential is almost the easy part,” says John Flynn, president of First Fleet, a truck leasing firm. “The real trick is how to get drivers to use those specs to get the best fuel economy possible.”
Ed Saxman, director of powertrains for Volvo Truck North America, agrees. “The driver still has a lot more impact on fuel economy than a truck's specs. You can spec a truck for fuel economy all you want, but the way that truck is driven can cancel those specs out.”
According to Saxman, road speed still matters most when it comes to improving fuel economy. “For every mile faster you drive, you burn 1/10th of a gallon more fuel, so driving 75 mph instead of 65 mph is going to cost you an extra gallon of fuel.”
Driving less aggressively, especially in areas of high traffic congestion, can also improve fuel economy. “Leave off the throttle before you reach an exit ramp; decrease speed gradually without being hard on the brakes and you'll save on fuel,” he suggests. “If you drive with a light foot, you'll get better fuel economy.”
Flynn says it's important to remember that maximizing fuel economy shouldn't be a matter of truck vs. driver. “Both have to work together to get the best fuel mileage, in combination with other factors: proper tire inflation, the aerodynamics of the vehicle, its gearing ratios, even the swing clearance between tractor and trailer,” he points out.
Still, Saxman notes that certain aspects of the truck itself remain critical to creating a good base for fuel economy improvements. “The drag coefficient of a classic front end can be quite significant,” he says. “Moving to an aerodynamic shape…vastly improves the fuel economy characteristics of the truck. For example, at 75 mph, it takes an extra 50 horsepower to move a classic tractor style versus an aerodynamic one; all you're doing is pushing air.”