I was overwhelmed by the feedback I received about last month’s column on fuel surcharges. Some of you really liked what I had to say. Others, not so much.
In the column I challenged the system the industry uses to deal with fluctuations in the price of fuel, which often produces absurdly high surcharges. My thinking was that there must be a better way.
Even though truckers I talked to expressed frustration with the current fuel surcharge model, most seem content with the status quo and are confident they’re getting their fair share of the pie.
What’s fair? Research from FreightWaves indicates that 2/3 of a carrier’s fuel costs are passed on to shippers in the form of surcharges.
That number was much higher than I expected. So I revisited how carriers are coping with fuel surcharges. Here’s what I learned.
The system is no system
There’s no single formula for managing fuel surcharges. Variables like the size of fleet, sector, length of haul, and geography make industry standardization almost impossible. Throw in market lags and market nuisances (e.g., how fuel prices increase faster than they decrease) and it takes real expertise to make sure customers are paying their share for spikes at the pump.
Every carrier does things a little differently, and some better than others.
Know your math
Fuel can be easily explained even to a shipper who’s chirping about a 40% surcharge on the bill. Your contact’s boss will understand that fuel is a pure cost, and what goes up will one day go down.
The best carriers are prepared to explain not only how their fuel surcharge works but what they’re doing to keep fuel costs low, like operating modern rigs, leveraging fuel purchases, and reducing consumption by holding speed in check.
Percent-based surcharges are considered a benefit to the carrier. But many are switching to an “all-in” model — and getting rave reviews from their customers for doing it.
When I owned MSM Transportation I despised all-in rates. Those all-in rates often became “lifetime” rates that were never adjusted for swings in fuel prices.
All-in rates work best when they’re revisited regularly, like every 90 days, and the carrier routinely reminds customers that their rate will fluctuate. Some of the carriers I talked to also stress the need to tread lightly because, once you flip a customer away from a percentage-based system, there is no turning back.
One thing that always puzzled me is how freight brokers get a pass on fuel surcharges. Even the most disciplined carriers told me they let brokers off the hook. I think the third of a carrier’s fuel costs not passed on to shippers has a lot to do with hauling broker freight.
Last month I harped on the risk associated with double dipping: negotiating two prices at once — the linehaul rate and surcharge.
Well, forget about double dipping. I talked to carriers that are triple dipping by combining the base rate, fuel surcharge, and accessorial charges to get their net price. I was surprised how many of them quietly confirmed that they’re making money. Tinkering with surcharges gives them the last kick at the pricing can.
In the cloud
One of the big complaints from carriers around fuel surcharges is the cost of managing customer-mandated programs that turn into administrative gong shows. Many carriers are turning to cloud-based applications like FreightWaves to outsource their problem. The technology card is the one I’d be playing if I still owned trucks and was struggling to figure out the fuel conundrum.
Speaking of the fuel conundrum, the best tongue-lashing I took over last month’s column came from an industry leader who told me, in so many words, to shut my yap and stop messing with a system that works just fine.
An editor once told me you’re only a good columnist when you piss people off. Something about challenging the status quo!
-Mike McCarron is the president of Left Lane Associates, a firm that creates total enterprise value for transportation companies and their owners. He can be reached at firstname.lastname@example.org, 416-551-6651, or @AceMcC on Twitter.