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DO YOUR FREIGHT RATES REFLECT IT? By: Steve Broussard |
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Is the world upside down? I’m excited about gasoline prices nearing $2.00 a gallon! Diesel prices were $2.595 per gallon 9/25/06, down from a recent high of $3.065 on 8/14/06, a decrease of 15.3%. Now is a good time to review any contracts or agreements with your motor carriers to make sure that adjustments for these lower fuel costs are being passed along. In reviewing some truckload tariffs and freight bills, it appears that some carriers are taking the opportunity of higher diesel fuel costs to increase their profit margins with excessive fuel surcharges. Currently, most motor carrier fuel surcharges are triggered when fuel costs rise above a base cost per gallon, i.e. anywhere from $1.10 to $1.20 per gallon. Shippers need to be aware of motor carriers offering or adjusting their freight rates by ‘rolling in or folding in’ the cost of fuel and lowering their fuel surcharge index to reflect a HIGHER base fuel cost. In 1982, the Interstate Commerce Commission allowed motor carriers and railroads to ‘roll-in’ a minimum diesel fuel cost to their freight rates of approximately $1.32 per gallon in ExParte 311. This action was the result of a spike in fuel costs in 1979 and an attempt, albeit faulty logic, to eliminate the itemized fuel surcharge from freight bills, similar to what is done today. In March, 1986, after fuel costs had remained below $1.32 per gallon for a substantial period of time, NITL and several other shipper groups filed a petition with the ICC asking that motor carrier and railroads initiate ‘discount’ fuel surcharges to prevent the carriers from reaping windfalls on the fuel induced rate increases. The ICC denied their petitions. Shippers paid these excessive fuel costs for over EIGHT(8) years, that I have record of and maybe more! Diesel fuel costs exceeded $1.32 per gallon only two months between 1994 and January 24, 2000. Diesel fuel costs were as low as $0.953 per gallon from Dec. 1998 until March, 1999. Yes, less than $1.00 per gallon as recently as 2000. In July, 2006, the Norfolk Southern Railroad adjusted (increased) their freight rates to reflect a base crude oil price of $64.00 per barrel. Just last week, crude oil traded below $60.00 per barrel. While the NS lowered their fuel surcharge from approximately 18% down to 3% in July, there is NO provision in their fuel surcharge scale for discounts, IF crude oil drops below $64.00 per barrel. Lower crude prices translate into increased profits for the NS, just like 1982, all over again. You may not be a rail shipper, but you need to be vigilant that your motor carriers, truckload and LTL, don’t try to do the same thing, ‘roll-in’ diesel fuel costs without discounts to compensate you if fuel costs fall below their benchmark price. They say that “if we don’t study history that we are destined to repeat it”! Don’t let it happen to you. |