C. F. Lynch & Associates

Who's Fueling Who?

By Clifford F. Lynch

DC Velocity, February 2008

When returning from a quick out-of-town trip the other day, I handed the attendant at the offsite airport parking facility my $7.95-per-day coupon. To my surprise, he responded with a request not for $7.95, but for $10.67. Curious as to how my bill could have increased by 34.2 percent, I checked the receipt. The fine print turned out to be very revealing: There was a 9.25-percent sales tax, a 10-percent airport tax, and you guessed it – a $1 fuel surcharge. To add insult to injury, the taxes also applied to the fuel surcharge. Everyone won but me.

This started me thinking about the whole fuel surcharge subject. We’ve all heard the stories of carriers profiting from surcharges (as well as a few about shippers that refused to pay them in full or even pay them at all). But how can this be? I asked myself. These charges are supposed to be tied to an index published every Monday by the Department of Energy. If fuel prices go up, the shipper pays more. If they go down, the shipper pays less. Though prices could change every week, at least the system is fair.

I decided to check some annual reports and press releases to see what the motor carriers themselves had to say about their surcharge programs. Here’s what I found:

  • Motor Carrier A was very straightforward in its reporting for 2006, providing figures for both its fuel surcharge revenues and its fuel expenses. However, the fuel surcharge revenue equaled 96 percent of its total fuel expense. Since general increases supposedly do not factor in fuel costs (the idea being that carriers will rely solely on fuel surcharges to recover those cost increases), this carrier obviously has found a way to cover virtually all of its fuel costs.
  • Motor Carrier B has its surcharges pegged at a base fuel price of $1.00 to $1.12 per gallon, and now has a fuel surcharge in excess of 50 percent. In its 2006 annual report, it states, "While the fuel surcharge impacts [our] overall rate structure, the total price received from customers is governed by market forces. Although fuel costs increased significantly during 2005 and the first eight months of 2006, increased revenues from fuel surcharges more than offset these higher direct diesel fuel costs."
  • Motor Carrier C States, "We believe the distinction between base rates and fuel surcharges has been blurring over time, and it is impractical to clearly separate all the different factors that influence the price that our customers are willing to pay. In general, under our present fuel surcharge program, we believe rising fuel costs are beneficial to us in the short term."

In all three cases, it’s clear that rising fuel costs have not affected the carriers’ bottom lines. But it’s also clear that there’s absolutely no consensus among carriers about what constitutes a fair and reasonable fuel surcharge. In fact, on July 23, 2006, one major LTL carrier reduced its fuel surcharge by 25 percent. No wonder we are confused and more than a little concerned.

Back when it functioned more as a rate bureau than a technology company, SMC3 described the function of fuel surcharges this way: "These surcharges track both increases and decreases in fuel costs, so both carriers and shippers benefit from swings of the fuel price pendulum." Well, the pendulum appears to be sticking a little. It seems to me that shippers would be well advised to be aggressive in their rate negotiations. There’s no question that carriers should have a mechanism for recovering their fuel cost increases, but using fuel surcharges as a profit center goes beyond the bounds of fairness.


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