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The fuel surcharge conundrum

Posted: January 10, 2019 by Mike McCarron

Recently I was working with a carrier on its fuel surcharge policy and was painfully reminded what a complicated and antiquated system we have for handing fluctuations in the price of diesel.

When I owned MSM Transportation I’d occasionally wonder why a surcharge should be such a high percentage of a shipment’s total price, to the point where the base rate had so little bearing on our profit.

But like everyone else I went with the flow.

Now, six years later, the more I step back and see a broader view of the business, the more I realize there has to be better way.

All over the map

A lot of carriers use modified formulas based on the weekly fuel index published by either the Freight Carriers Association of Canada (FCA) or the U.S. Department of Energy.

Many larger shippers have their own programs, which they ram down the throats of carriers who want to haul their freight. The CEO of one large carrier told me, “Retailers in particular are infamous for using a formula to make sure the carriers get screwed.”

Whether you’re a carrier with your own program or you’re being force-fed a surcharge by a customer (or multiple customers), there’s zero standardization in the industry about how surcharges are calculated or applied. Their complexity requires a PhD to understand.

That’s a No-No

One question I always had about fuel surcharges is why the base rate can’t be changed to better reflect today’s diesel prices versus one that’s decades old. It would be great to get a permanent jump in base rates and eliminate today’s unsightly 35% extra charge.

The problem is the Competition Bureau in Canada and the U.S. Federal Trade Commission.

When the Freight Carriers Association of Canada was founded it was copacetic for a bunch of carriers to sit around and talk about price. Today that’s called collusion, and it could land you in the slammer.

Moral of the story: If you rely on a third-party body as a base for your fuel surcharge program, you’re stuck with a system that’s not changing because it’s against the law.

Double negotiating

The first lesson in Business 101 is never to negotiate two deals with one customer at the same time. A fuel surcharge is even more precarious because you’re hammering out two separate prices to come up with one net price.

Unfortunately, one plus one does not always equal two. One CEO told me bluntly: “Customers don’t understand that, no matter what formula they use, the base rate will be adjusted to get the number we want.”

Fuel surcharge negotiations between carriers and shippers is where the game-playing starts. It’s bad for building the trusted partnerships you need to grow your bottom line.

Despised by the industry

When asked about fuel surcharges, a senior executive from a large publicly traded carrier didn’t hold back: “I hate [I’ll let you imagine his preferred adjective] fuel surcharges. They’re just another way to screw the carrier.” Not every carrier I spoke with was that foul, but most weren’t far off.

Many complained about the administrative burden and costs of negotiating and managing surcharge programs for each individual customer. Running multiple programs makes pricing and billing almost impossible to automate.

Then there are shippers who want to have their cake and eat it, too. When fuel prices go up, customers want all-in rates. When the opposite occurs, they get amnesia and want to switch to a base rate plus fuel.

Every person I spoke with agreed that a standardized surcharge system would make life a lot easier for shippers and carriers alike. We know that’s not happening because not many trucking executives want to spend time in the crowbar hotel.

Abolishing the fuel surcharge isn’t the answer, either, since it’s the only way carriers can hedge against fluctuations in the price at the pumps.

Is there a better way? That’s for next month.

  • 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 mike@leftlaneassociates.ca, 416-551-6651, or @AceMcC on Twitter.
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