Low Price Of Diesel Fuel Not Necessarily Good For LTL Carriers

Written by Neal Willis

iStock_000003460089_Medium_Fueling_a_TruckThe U.S. Energy Information Administration (EIA) publishes weekly data regarding the retail price of diesel fuel in the U.S.  The EIA doesn’t dictate nor does it regulate the fuel surcharge rate imposed by a carrier, but most LTL carriers use the weekly retail price information published by the EIA in their fuel surcharge pricing formulas and base their surcharges on a sliding scale that moves up or down corresponding with the average weekly price of diesel fuel.

LTL carriers have been known to rely on fuel surcharges as somewhat of a profit center in the past and counted on them to positively contribute to operating margins; however, with the currently low price of diesel fuel, carriers have really felt a strain on their profit center and already thin margins have been squeezed even tighter.

Unlike truckload carriers, LTL carrier fuel surcharges are applied as a percentage of the total freight bill. A lower price at the pump translates into a lower percentage surcharge being applied to the overall freight bill, which means a lower amount of revenue is collected for shipments.  Truckload carriers and shipments are a somewhat different story.  Their margins can be affected more positively by lower diesel fuel prices, as their fuel surcharges are usually factored on a cost per mile basis.

From October 2010 to January 2015, diesel fuel prices remained at or above $3 per gallon and, according to Michael Scheid of SJ Consulting Group, when diesel fuel prices are above $3/gallon, the average LTL carrier revenue collected from fuel surcharges exceeds fuel expense, leaving additional money that can positively contribute to a carrier’s bottom line.  Conversely, when diesel fuel prices are below $3/gallon, LTL carriers typically spend more on fuel expense than they collect in fuel surcharge revenues, and carrier profits are negatively affected.

Add together a severe driver shortage, mounting government regulations and increasing equipment expense, an average LTL carrier’s capital costs have been consistently higher than operating margins over recent years.  Most LTL carriers have recognized the need for improving operating margins and have already adopted a more disciplined pricing strategy by purging costly and unprofitable business from their networks in favor of better freight and more cooperative shippers willing to pay for space and quality of service. 

In the face of lower fuel prices at the pump, some carriers have iStock_000043036520_Medium_Fuel_Price_Decreaseadjusted their fuel surcharge scales upward midstream, while others have adopted new tariffs with higher base rates and no fuel surcharges whatsoever.  Either way, carriers must continue to find ways to improve operating margins as capital costs continue to rise at an alarming rate.

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