Fuel Prices and Your Bottom Line


One would have to live in a coma to not feel the impact that the rise in fuel costs is having on the worldwide economy.  Let’s delve into how freight rates are calculated and why they are spiraling.

v  One important fact about freight that needs to be understood is that freight is a commodity.  It is supply versus demand, pure and simple.  The rates charged to a customer have specific inputs, such as insurance, overhead, equipment (tractor and trailer expenses), maintenance, and fuel.  But, by and large, the indicator that determines the final rate charged to the customer is how much that customer will pay to have their freight moved.

v  Fuel prices – anyone filling up at the pump is keenly aware of the impact that the increase is having. 

o   What is your average fuel economy?  Do you get at least 35 mpg, better or worse?  Do you understand that semi-tractors get between 5 and 10 mpg, depending on their age, the weight they carry and other fuel efficiency capabilities?  Review this table to see how the changes in fuel prices impacts a driver’s fuel bill.

Fuel Price per Trip

Fuel Economy avg 7.5mpg

Date

2/1/2021

3/1/2021

5/31/2021

10/11/2021

2/4/2022

3/7/2022

Price/Gallon

2.738

3.072

3.255

3.586

4.019

4.849

Trip Range

100 miles

36.51

40.96

43.40

47.81

53.59

64.65

250 miles

91.27

102.40

108.50

119.53

133.97

161.63

500 miles

182.53

204.80

217.00

239.07

267.93

323.27

1500 miles

547.60

614.40

651.00

717.20

803.80

969.80

2000 miles

730.13

819.20

868.00

956.27

1,071.73

1,293.07

 

o   Freight rates include what’s called fuel surcharge.  A fuel surcharge is a fee assessed by a carrier to account for regional or seasonal variations in fuel costs. A fuel surcharge is most often seen in trucking, but an ocean or air carrier may also assess a fuel surcharge. A fuel surcharge helps protect the carrier from the volatility in fuel prices.  Fuel surcharge is dictated by the carrier and will vary carrier to carrier.  A carrier’s fuel surcharge can vary regionally when a carrier is nationwide.  Following is Landstar’s rate sheet.


o   Using the first table, following is a table showing the amount that a driver is reimbursed using Landstar’s fuel surcharge rates.

Fuel Surcharge - Fuel Recovery Cost

Date

2/1/2021

3/1/2021

5/31/2021

10/11/2021

2/14/2022

3/7/2022

Price/Gallon

2.738

3.072

3.255

3.586

4.019

4.849

Fuel surcharge

0.270

0.330

0.360

0.410

0.480

0.620

Trip Range

100 miles

27.00

33.00

36.00

41.00

48.00

62.00

250 miles

67.50

82.50

90.00

102.50

120.00

155.00

500 miles

135.00

165.00

180.00

205.00

240.00

310.00

1500 miles

405.00

495.00

540.00

615.00

720.00

930.00

2000 miles

540.00

660.00

720.00

820.00

960.00

1,240.00

 

o   How do freight rates work exactly?  A customer is charged for the linehaul, which is the price per mile to transport the freight from one location to another.  The customer will also be assessed the fuel surcharge fee for the fluctuation in fuel costs as shown in the previous bullet point.  Finally, there are accessory fees that are assessed by the carrier.  These range from tarping fees, securement fees, loading and unloading fees and more. 

o   The fuel surcharge is payable to the party that owns the tractor (the truck).  This could be the carrier or the driver when the driver is an owner-operator.  Using the two tables already provided for the estimated fuel costs and the calculated fuel surcharge, review the following table to see what the fuel liability costs might look like.

Unrecovered Fuel Costs

Trip Range

100 miles

 9.51

 7.96

 7.40

 6.81

 5.59

 2.65

250 miles

 23.77

 19.90

 18.50

 17.03

 13.97

 6.63

500 miles

 47.53

 39.80

 37.00

 34.07

 27.93

 13.27

1500 miles

 142.60

 119.40

 111.00

 102.20

 83.80

 39.80

2000 miles

 190.13

 159.20

 148.00

 136.27

 111.73

 53.07

 

o   For all intents and purposes, the tractor owner would have a smaller layout to his/her bottom line with today’s fuel surcharge compared to the fuel surcharge from a year ago.  The one area that would impact the tractor owner is the volatility of the fuel prices at the pump and whether the fuel surcharge is keeping up with the price paid at the pump. 

o   Who then pays for the increase in fuel costs?  The customer does.  The tractor owner should be protected by the impact as fuel costs always impact the person paying the bill and not the carrier in the long run.  The main problem is that the customer pays for the increases two to three times the actual cost of the fuel.  Carriers use the increase in fuel costs as a reason to raise the linehaul rates as an arbitrary increase even when the fuel costs are covered by the fuel surcharge. 

v  Linehaul Rates

o   Linehaul rates is the cost per mile that a customer is charged for the direct transportation of their freight from one point to the another.  There are a variety of reasons that impact linehaul rates.

o   Capacity constraints have been the largest area to impact the overall cost of freight in the last two years.  In 2019, prior to Covid, the US was experiencing a shortage of drivers across the nation.  One estimate indicated a shortage of one million drivers.  In today’s market, that estimate would be massively low.  The impact on the customer is simple.  Let’s assume that a customer has freight in Lubbock that delivers to Houston.  Let’s also assume that there are fifty similar loads shipping from Lubbock.  Finally, let’s assume that there is only one driver in the Lubbock area.  Those fifty customers will go into a bidding war to snag that one driver and that one driver can dictate his own rate.  The average rate of $1,500 for that area can easily zoom to $15,000. 

o   Load type will impact the linehaul rate, whether it’s the product type or the trailer type.  Refrigerated freight will cost more than van freight.  Hazmat material will cost more than plastics.  The weight of the freight will impact the cost of the freight, such as machinery will cost more than plastics.  Specialty equipment, such as heavy haul, will cost more than everything else.

o   Freight lanes can impact the linehaul rates and that relates to the number of available loads and/or the number of available trucks.  California can be difficult to find available trucks because of the emission rates that California has implemented.  Tractors and refrigerated trailers that meet the California emission requirements can cost 50% more than their non-California compliant counterparts. 

o   Extra stops are a sticky subject for drivers.  For the most part, drivers want simple loads.  They don’t want to physically touch the freight, which means they don’t want to help load or unload the freight.  Drivers also don’t want to stop more than picking up the load from the shipper and dropping off the load to the consignee.

o   Location will always be an indicator that impacts the rate.  Metropolitan areas have better rates than rural areas.  It’s almost a simple matter of math.  There will be more drivers in a metropolitan area than a rural one.  The miles a driver must drive empty to and from a load is a consideration on the rate per mile.  This is referred to as deadhead.

o   Route length is another factor.  Basically, the rate per mile can be thought of as a daily rate.  A driver will want to earn a certain amount of money each day.  Assume that $1000 a day is an average rate that will provide the average driver their desired income and all other parties their equitable share.  The average linehaul rate per mile would be the $1000 divided by the number of miles driven that day.  The maximum average miles per day might be 600 miles, which makes the rate per mile $1.67.  However, a route that is only 250 miles means $4.00 per mile.  A driver will want the same amount of money on any given day no matter how many miles is driven.

v  Accessories

o   Accessory charges are charges payable to the driver, usually, for performing an action that extends beyond driving the freight from one point to the next.  Some fees are not paid in full to the driver but are revenue streams for the carrier.

o   These accessories are related to load handling. 

§  Load tarping

§  Hazardous cargo

§  Pickup or delivery at non-standard times

§  Layover fees

§  Loading or unloading fees

o   Other accessory charges are related to load management.

§  Debris removal

§  Ferry/pier charges

§  Forklift usage

§  Escort or security fees

§  Storage fees

o   One important accessory fee is when a truck is ordered and cancelled after the driver has been dispatched.  This is known as a TONU – Truck Ordered Not Used.

v  Margin is the final part of the rate picture.  Margin is basically profit.  It’s that part above the inputs that goes to the billing carrier.  In the Landstar world the margin is split between Landstar and the agent. 

In determining the rate to charge a customer, I have an evaluation tool that I use.  It provides historical data for a given lane and the rates charged for the last 15 days, 30 days, 90 days, and 365 days.  It gives the average rate for a low-range, mid-range, and high-range for each of the four periods. 

Following is a snapshot of this data for three routes.

Origin

Destination

Date

RPM Low

RPM Mid

RPM High

Fairfield, CA

Dripping Springs, TX

6/14/2020

 1.42

 1.69

 1.95

Fairfield, CA

Dripping Springs, TX

8/31/2020

 1.45

 1.97

 2.49

Fairfield, CA

Dripping Springs, TX

5/7/2021

 2.60

 3.06

 3.32

Fairfield, CA

Dripping Springs, TX

7/26/2021

 3.25

 3.46

 4.28

Stockton, CA

Dripping Springs, TX

1/25/2021

 1.62

 2.16

 2.85

Stockton, CA

Dripping Springs, TX

5/10/2021

 2.61

 3.06

 3.81

Stockton, CA

Dripping Springs, TX

7/16/2021

 2.64

 3.17

 3.83

Stockton, CA

Dripping Springs, TX

8/13/2021

 3.96

 3.96

 3.96

Stockton, CA

Dripping Springs, TX

3/8/2022

 3.11

 3.40

 4.15

Windsor, CA

Dripping Springs, TX

11/16/2020

 2.07

 2.07

 2.07

Windsor, CA

Dripping Springs, TX

12/4/2020

 2.08

 2.08

 2.08

Windsor, CA

Dripping Springs, TX

4/7/2021

 2.19

 2.44

 2.69

Windsor, CA

Dripping Springs, TX

1/26/2022

 3.86

 3.86

 4.77

 

As a freight agent dealing with drivers across the nation, I have noticed several trends in the last six months.

Ø  Lazy is a word that comes to mind, and it’s not used lightly.  Drivers have never been liberal with their willingness to do more than just drive.  It seems that they are less willing to do just that even with an increase in linehaul rates.  Let’s face it, a driver that works the trailer is a rare commodity.  Following is an example of the types of things that I deal with.

o   “There’s no loading dock?”  It is likely the driver will refuse the load, as he/she will have to touch the freight with a pallet jack. 

o   “You want me to make extra stops (either pickup and/or delivery)?”  Most drivers won’t accept loads that include extra stops unless they are compensated to do so.

§  I don’t use loading or unloading fees aren’t to compensate a driver for touching the freight but use loading and unloading fees to pay the driver for the extra stops.  Loading and unloading fees go straight to the driver.

§  In the Landstar world, stop fees are a revenue fee and a driver will only receive a portion of the fee.  I don’t use stop fees to compensate a driver for extra stops for that reason.

Ø  Greed is another word that comes to mind.  There is valid justification for an increase in freight rates, but that doesn’t mean that all increases are valid.  In the previous example regarding capacity constraints, the carrier’s and driver’s costs are the same no matter what rate is negotiated. 

o   Capacity constraints has been a major issue and has driven an increase in linehaul rates, however that doesn’t mean that all increases are based on hard inputs. 

o   Fuel costs are also driving an increase in linehaul rates, even though fuel costs are covered by the fuel surcharge and not linehaul rates.

o   An abundance of loads compared to a lack of drivers means that a driver can charge a premium for their time, whether the justification is valid or not.

o   Contract carriers seek the full cost of the linehaul, fuel, accessories, and margin for themselves which means an additional markup to the customer to cover the billing carrier’s margin.  The margin should go to the billing carrier for identifying and managing the customer.  However, contract carriers often expect the margin for themselves, which means a higher rate to the customer to cover the billing carrier’s margin, too.

What can you do to reserve your bottom line while rates spiral out of control?  These are some areas to consider.

v  Planning

o   Inventory management

§  Keep track of your stock

§  Increase your inventory whenever possible

§  Be flexible and investigate alternatives

o   Delivery

§  Avoid the need for deliveries with short lead times

§  Ship full truck loads

§  When shipping less than truck load (LTL), coordinate shipping with other loads from the same shipper or region

o   Other things to consider

§  Create partnerships with neighbors

§  Maximize industry relationships

§  Stay informed

§  Be ready to deal with supply chain issues

§  Think outside the box and look to other industries and experience for ideas

v  Build a relationship with a carrier

o   Find a carrier that aligns your interests with theirs

§  Reasonable rates

§  Flexibility

§  Diverse equipment

Our goal with this post is to raise awareness on an issue that impacts your business today, tomorrow, and in the future.  Additionally, I’d like to share how we at Sommelier Logistics can help mitigate the impact that these areas have on your bottom line. 

Ø  Sommelier Logistics maintains a lower cost structure to benefit our customers.  We do so by purchasing used equipment and by driving at reduced speeds.


Ø  Our rates are based on the freight lane’s recommended rate per mile or lower if the recommended rate is exorbitant.

Ø  When using contract carriers, our margin is the minimum allowable.






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