Fuel Prices and Your Bottom Line
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.
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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
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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.
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Accessories
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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
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Other accessory charges are related to load
management.
§
Debris removal
§
Ferry/pier charges
§
Forklift usage
§
Escort or security fees
§
Storage fees
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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.
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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
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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
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Build a relationship with a carrier
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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
When using contract carriers, our margin is the
minimum allowable.
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