As anyone who drives a vehicle can attest to, the price of gasoline has fallen dramatically since the end of 2014. In the transportation industry, diesel fuel prices have also fallen, though not as dramatically as gasoline. Yet earlier this year, as the Dept of Energy (DOE) national average price was falling week by week, LTL and small parcel carrier fuel surcharges suddenly jumped. How could this be?
Back in the 1990’s when fuel prices suddenly escalated, carriers instituted the fuel surcharges with the idea that the sudden increases in costs due to fuel would be 'passed through' to the shipper, based on the weekly DOE average price. Therefore the surcharge would rise or fall with the price of diesel. Over the years however, the surcharge has morphed into a revenue source for the carriers more than a simple cost pass through. So when diesel prices took a sharp downturn, many carriers were faced with declining revenues because of the smaller surcharges. In fact, several carriers and Wall Street analysts cited declining fuel surcharges in a potential reduction of quarterly carrier earnings.
To make up for this loss, many of the LTL carriers quietly adjusted their fuel surcharge tables in February with the result that their fuel surcharges went up between 1-3 percent during a period when the diesel prices were declining or holding steady. As a defense, many carriers noted that they were also adjusting the higher end of their surcharge tables, so that if diesel does again go up to $4.00 per gallon, the surcharge will be less than it was in 2013. In effect the carriers are flattening out the surcharge schedule, so that the fuel surcharge does not increase, nor decrease as dramatically with wild fluctuations in fuel price.
Further evidence that fuel surcharges do not truly reflect a “pass through” mentality is the fact that the surcharge itself is based on freight charges paid, not necessarily the amount of fuel the carrier uses. For example, take two shippers located in the same city, shipping the same product. Shipper #1 has a 75% discount based on their volume. Shipper #2 is four times the size and therefore has an 85% discount. If both shippers send out a 1,000 lb. shipment from their plant in Chicago to a customer in Atlanta, Shipper #1 will pay a larger fuel surcharge, as his net freight charge will be greater than shipper #2. Yet, the amount of fuel for the carrier to haul the identical sized shipments from the same point to the same point is the same. Rail shippers grappled with the same issue, until the Surface Transportation Board ordered the railroads to base their fuel surcharges off of mileage, not how much in freight the shipper paid. Perhaps someday, LTL carriers will do the same.