Even though diesel fuel prices have leveled off after an unprecedented surge past the $1.76 per-gallon mark, many trucking companies and package carriers are having difficulty making ends meet, even with fuel surcharges.
“Fuel cost spikes happen periodically and last variable lengths of time, and we never know how long that’s going to be,” said Dean Cotten, president of the Mississippi Trucking Association (MTA). “Truckers have to make some kind of adjustment with their shippers in order to survive, and most of them have done that. A lot of times, a trucking company will take it on the chin at the beginning of a fuel price increase, but it soon becomes a problem. Long-time experienced motor carriers know this is something inherent in the trucking industry and they have to make provisions.”
Some economists point to the recent 4% increased demand for oil in America and increased demand in other foreign countries and suggest that destabilization is responsible for the recent increase of approximately $12 a barrel. Oil currently costs about $38 to $40 per 42-gallon barrel.
Douglas Col, an analyst for Morgan Keegan, said diesel fuel probably accounts for 12% to 15% of truckload carriers’ revenue dollar. For a less-than-truckload carrier, it’s 4% to 6%.
“It’s a very significant cost, and obviously eats away at some of the profits,” he said. “But capacity and freight demand are very much in favor of the trucking companies right now. It’s a favorable environment for rate increases. Fuel surcharges are not being fought, like they might have been in the past when shippers had other options. That helps minimize the effects of some of the diesel price run-ups.”
Tom Fowlkes, CFO of Oakland-based Vortex Truck Lines, said fuel costs, the company’s second-largest expense after payroll, are 17% higher than last year.
“The economy has picked up, so freight volumes are up, but the spike in fuel costs is making it very difficult — impossible even — to operate profitably,” he said. “We do have a fuel surcharge program in place, which we believe is the industry standard. Even so, we still can’t recover nearly all of the increased cost on fuel surcharges. Broker loads do not pay fuel surcharges. Probably 10% of our miles are deadhead miles, and there’s no fuel surcharge on those. Trucking in general is a very thin margin business anyway, with about a 5% profit margin even in the best of circumstances.”
For the last week in June, the average diesel price in the U.S. was $1.70 per gallon, compared to $1.42 last June. The typical fuel surcharge is currently about 10 cents per mile over the $1.15 baseline diesel price, increasing one penny per mile for every six miles. The rate is based on six miles per gallon, said Fowlkes.
“Another thing that’s hurt us a little bit is that most people use the national price of diesel as the standard for their fuel surcharge, and if you’re going heavily to an area like California, which is higher than the national average, then your fuel surcharge will not make up increased costs,” he said. “If given a choice, we’ll go east rather than west.”
Carriers that have a large portion of their freight traveling to the West Coast have been proactive in asking shippers for a West Coast surcharge, said Col.
“Some of the larger trucking companies have had success with that,” he said.
Because of the higher fuel price environment, intermodal transportation carriers are poised to take some of the market share from trucking firms, said Col.
“If you want to haul 110 trailer loads from California to Chicago with 110 tractors, you’ve got to pay diesel for those tractors,” he said. “If you put a trailer on a rail car, you’re paying for diesel for one trainload. Shippers that don’t have service requirements for truck transport may find it a little cheaper to use rail service. But that’s not a big factor to trucking companies.”
Even though FedEx does not add a fuel surcharge to consumers for ground transportation, the Memphis-based company adds a surcharge for jet fuel, said Lourdes Pena, spokesperson for FedEx.
“As many other companies are doing, we’re making sure the efficiency level in our trucks and jets is shipshape, which we always do anyway, and we continue to look at innovative ways to save money,” she said. “We recently launched two new hybrid trucks in Los Angeles as a pilot program to save diesel fuel costs and to be more environmentally friendly. We plan to expand that program in the next few years.”
Contact MBJ contributing writer Lynne W. Jeter at firstname.lastname@example.org.
BEFORE YOU GO…
… we’d like to ask for your support. More people are reading the Mississippi Business Journal than ever before, but advertising revenues for all conventional media are falling fast. Unlike many, we do not use a pay wall, because we want to continue providing Mississippi’s most comprehensive business news each and every day. But that takes time, money and hard work. We do it because it is important to us … and equally important to you, if you value the flow of trustworthy news and information which have always kept America strong and free for more than 200 years.
If those who read our content will help fund it, we can continue to bring you the very best in news and information. Please consider joining us as a valued member, or if you prefer, make a one-time contribution.Click for more info