• Fuel surcharges cut both ways

    Whether charging customers fuel surcharges in a volatile pricing environment is a wise strategy may depend on what kind of hauling is being done, according to a report issued by equity research firm Bear Stearns. According to Bear Stearns, the conventional wisdom holds that the financial performance of transport companies suffers when fuel prices rise and improves when they fall. Analyzing the effect
    Aug. 9, 2001
    2 min read
    Whether charging customers fuel surcharges in a volatile pricing environment is a wise strategy may depend on what kind of hauling is being done, according to a report issued by equity research firm Bear Stearns.

    According to Bear Stearns, the conventional wisdom holds that the financial performance of transport companies suffers when fuel prices rise and improves when they fall.

    Analyzing the effect on earnings in the wake of a 30% decline in fuel prices, the firm found that “some companies that were unable to fully recover the increase in fuel expense when fuel was rising are now poised to benefit from a decline in fuel prices.”

    The research firm said the railroads and truckload carriers “were probably hurt the most when prices rose and… are now the best positioned to benefit as prices fall.” LTL carriers effectively neutralized the effect of both rising and falling prices by setting up “floating” fuel surcharges.

    But the package carriers FedEx and Airborne collected fuel surcharge revenue that exceeded the rise in their fuel expenses, stated Bear Stearns. As a result, a sharp decline in fuel prices “could now actually work against earnings for these two parcel carriers if they lose the revenue from their fuel surcharges.”

    On the other hand, noted the research firm, UPS implemented a much smaller surcharge (1.25% vs. 4.0% for both FedEx and Airborne) so a fall in prices may have a “small net positive impact on its 2002 earnings.”

    As for non-asset-based providers and lessors, Bear Stearns said they will be “relatively unaffected” by fuel price changes because they either directly or indirectly pass that expense along to customers.

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