Thursday, October 15, 2009

Fuel needs to be a flow-through consumption-based charge – a system that would fair for everyone.

Fuel costs are the largest ongoing financial concern for both carriers and shippers. Fluctuating fuel costs create challenges for companies to remain on budget, which ultimately impacts bottom lines.

The current recession has tempered the volatility we’ve seen creating chaos in previous years. Rack fuel prices this year have been trending between $0.692/litre and $0.792/litre, according to Freight Carriers Association (FCA) data. The truckload rate for fuel surcharges ranges from 16% to a recent high of 21.4%. Compare this to July 2008 when fuel peaked at a rack price of $1.33/litre with the truckloads surcharged at 49.9%.

The recession has reduced the demand for fuel, and that has provided relatively stable pricing. Fuel consumption will inevitably pick up again, once the economy begins to recover, and many of the issues that existed prior to the recession to create fuel shortages (and drive prices up) are still in force. This will leave Canadian consumers paying considerably more for fuel. Carriers will be forced to increase the fuel surcharge… and transportation service purchasers will have to pay.
The logistics community needs to start reviewing how it deals with the cost of fuel. The current method of surcharge using a percentage doesn’t account for how fuel is consumed. Percentage based fuel surcharges have no real bearing on how much fuel is required to haul a particular load. It creates an unequal cost for fuel for the shipper paying a higher freight rate than a shipper with a lower rate for a move for a similar lane.

Take, for example, “Shipper A,” rated at $1,200, and “Shipper B,” rated at $1,000. The extra cost of the fuel surcharge at 21.4%, once the rate differential is removed, is $42.80 more for “Shipper A,” who has not consumed any more fuel to move his load.

The original concept for fuel surcharges was cost recovery, according to the FCA’s fuel bulletin of August 13, 1999. The idea was to compensate carriers for incremental fuel costs that were occurring at any given time. But when fuel is charged on a percentage basis, a portion of the rates is compounded into the total freight costs, causing a hidden increase. How many rate increases have carriers submitted over the past 10 years since the original percentage based fuel surcharge of 1999?

The best way to change this is to use a distance formula based on average vehicle consumption of fuel. Therefore the formula would be the rack price per litre use the current $0.792, less the $0.39 litre cost that was embedded in the original freight rate when fuel surcharges were implemented, equals $0.402. Divide this by the average kilometres per litres providing a cost kilometre travelled. A good conservative benchmark for a tandem tractor is 2.3 kilometres/litre. This provides a fuel surcharge of $0.175/km. On the $1000 rate for a recent trip of 842 kilometres, the percentage fuel based on 21.4% was $214 but as cost per kilometre it is $147, a difference of $67. For the low volume shipper the fuel reduction difference was $110.
Opponents of this method will indicate trucks pulling heavier loads use more fuel versus lighter loads. Then there’s the question of what to do with LTL. When I look at the Freight Carrier Association fuel charges there are three classifications LTL, TL, and Heavy TL. This could be easily adapted into a distance based formula. With the LTL being the most complicated to develop. However nothing is insurmountable, a cost per cube kilometre could be developed similar to how the FCA developed the LTL percentage surcharge.

The other issue opponents have against using a per-mile fuel formula is empty miles, summer versus winter utilization. Trucking companies benchmark fuel consumption on an ongoing basis. The number of 2.3 kilometres/litre was for a tandem fleet of 150 tractors that operated over a number years. It has everything embedded in it: summer, winter, empty, full, city and highway travel.
Fuel needs to be a flow-through consumption-based charge – fair for everyone, based on the original intention.