Rocketing fuel prices lead to higher surcharges
Staff -- Logistics Management, 4/1/2003
As fuel prices continue their unprecedented upward surge toward the $2 per-gallon mark, many package carriers have announced increased fuel surcharges to cover those costs. Ranging from a 0.25- percent rise to almost a full point, those increases could, if the trend continues, lead shippers to consider alternative means of transportation.
A number of factors are conspiring to push up diesel prices. First and foremost, perhaps, is uncertainty in the market about the impact of war in Iraq on that country's oil industry. Other influential factors include production cutbacks in Venezuela resulting from political unrest and sharp increases in refiners' costs over the past 12 months.
FedEx Ground last month pushed its fuel surcharge up by a quarter-point to 1.5 percent. UPS followed suit with a jump to 2.0 percent in April, and Airborne went up a half-point to 1.8 percent for ground service and increased its airfreight surcharge to 5.13 percent—a leap of 0.7 percent.
Parcel carriers aren't the only ones raising fuel surcharges, of course; many less-than-truckload and truckload carriers have been forced to do the same. The problem is that those surcharges often don't completely cover the carriers' fuel expenses. That's because such increases can be negotiated contract items, points out Diego Saltes, an economist with the American Trucking Associations (ATA).
"It's difficult for a company to get the surcharge they expect," he says. "They may get half of it or a percentage of what they initially put on the table because it can be negotiated. But even if a company can get the surcharge, they're not getting their whole cost recovered." That situation is exacerbated when a truck returns empty from delivering a load, since the carrier absorbs the full cost of fuel for the return trip, he notes. Unrecovered fuel expenses could even force some smaller carriers out of business, Saltes adds.
At least one transportation industry analyst, though, thinks motor carriers will get the increased surcharges they need. That's mostly because capacity has been more aligned with demand due to the demise of Consolidated Freightways and some other smaller carriers, says Satish Jindel of SJ Consulting Group in Pittsburgh, Pa.
"Right now the carriers are sitting in a very strong position to ensure that their prices and their margins are maintained," he contends. "They will not have to absorb increases in fuel pricing. It's part of the system. It's the intent of the fuel surcharge—the ability to pass [the cost] through because they can't control it."
If motor carriers are indeed able to continue raising fuel surcharges, shippers may have to rethink their transportation choices. "I think that shippers may look into how they might consolidate LTL shipments into truckloads," says Jindel. "And definitely, the railroads will be an alternative because they don't use fuel as much."
Saltes also sees rail becoming a potential alternative to trucking—but at a cost. "It is possible that companies that were using rail before will contemplate going back to it, even if it doesn't provide them with the same level of reliability and on-time delivery that trucking does," he says. "But there's a limit to that because shippers have structured their operations on just-in-time inventory. In the majority of operations, it's probably impossible to replace trucking with rail and continue with the same business model."
Will the prices and surcharges hit a ceiling anytime soon? It's hard to say given the uncertainty in the Middle East, but if some members of Congress have their way, higher prices could be coming this fall.
Both Republican and Democratic leaders of the House Transportation and Infrastructure Committee are considering raising the federal tax on diesel fuel by 7.2 cents on October 1. Committee Chairman Don Young (R-Alaska) says that he does not consider the proposed increase to be a tax, but rather a "user fee."
That could be the breaking point for carriers and shippers alike. "This is a national issue that the government needs to look at to find what it can do to keep these prices from going above a certain level," Jindel says. "Something will need to be done because our economy can't absorb pricing above $2.00 a gallon."
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