Making Surcharges Stick

It’s going to be an expensive summer for truckers if, as analysts predict, the price of fuel stays volatile. A recent survey by the Freight Carriers Association, the Fort Erie, Ont., industry analysts, showed a 12% bump in the price of diesel between late January and early April.

If you’re a carrier with a 0.95 operating ratio in late January, that price increase just sucked away 40% of your profit. That’s enough to douse any happy thoughts about all those other “lows” in the economy: unemployment, inflation, interest rates, and so on and so on.

“The trouble with fuel prices is that you can’t do anything about them,” a buddy of mine said when I asked how his fleet was managing. “I look at our insurance rates and say, Well, at the end of the day we control our accidents and our safety performance. But with fuel, as soon as some guy in Venezuela decides he wants to overthrow the government, or Iraq says it’s going to cut back on oil production, or there’s a refinery fire in California, the little man at my local truck stop scurries out from the fuel desk and runs a new set of numbers up the sign. It’s maddening.”

Even if wholesale prices start to weaken, as they did in mid-April, retail prices won’t come down for weeks, if they come down at all through the peak summer driving season.

There are ways to defend yourself against rising fuel costs. One strategy is conservation: keep idling to a minimum, plan your routes to avoid starts and stops, and train drivers to get the most efficiency out of your equipment.

Another is to buy smart. If your cash position is strong, arrange to buy at cash discount prices. Investigate “fleet cards” or third-party fuel purchasing programs. Discounts or other incentives can offset the transaction costs and help you control where drivers buy fuel. If you have a maintenance contract or trucks under a full-service maintenance plan, ask your lessor about fuel purchasing. It probably buys in large volumes — its price plus whatever markup the company charges could still be lower than yours.

But the fact is, a well-reasoned, flexible, and permanent fuel surcharge is the most effective way to offset sudden and unexpected price increases without affecting your freight rate.

One of the best sources of information about surcharges is the Freight Carriers Association (905/994-0560), which each week publishes a recommended surcharge for its members, mostly regional less-than-truckload carriers. The amount is the percentage of a carrier’s total cost that fuel represents multiplied by the percent increase over a base price of fuel. The association uses a base of 39 cents per litre (no GST included), the average price in July 1999.

Carriers that make their surcharges stick are successful because they clearly illustrate their costs and show customers how fuel surcharges are assessed when prices change. That means having a contract to haul the freight, and a clause in the contract that addresses fuel. They are separate, and are negotiated separately.

They also make the surcharge permanent. One problem with fuel surcharges is that customers see them as a temporary measure. There is an expectation that when diesel prices begin to fall, the application of the surcharge will end. Don’t give in. Keep it on the invoice, even if the surcharge is zero. Remove it and you’ll lose time starting it up again when the prices jump.

They show that the surcharge is being passed along to their owner-operators based on the rate the shipper is paying, and not on the rate the carrier is paying the owner-operator.

And finally, they remember those basic conservation measures. A trucking company that goes begging for a fuel surcharge will get no quarter from a shipper who sees trucks idling at docks, or hurtling down the highway at 120 km/h.