Fuel prices breed rate increases and skepticism
By Brian Milligan -- Purchasing, 3/9/2000 7:00:00 AM
As the price of fuel goes up, less-than-truckload rates go up with it. But does it have to be that way?
Some industry watchers aren't so sure. And while some argue that LTL companies must raise rates and add on surcharges to stay afloat, others warn that shippers may be overcharged. And they may be overcharged and not even know it.
It's difficult to say if high rates are justified, with LTL rates zooming up an average of 5% a year, even as fuel surcharges are being added to the mix. Some sources, even carriers, say the increases are naturally irking manufacturers who have to pay the price. They are causing a growing ripple in the trucking industry.
"The government's got to take some action--open up the reserves, do something to counteract this at these levels," says Frank Conner, CFO for the Arkansas-based American Freightways Inc. "It's having a detrimental impact on not just trucking companies, but the economy in general."
"Are the fuel increases justified? Who knows," says Jim McCallie, senior vice president of sales and marketing for the South Carolina-based Southeastern Freight Lines. "The oil companies say they are justified, and that this is the result of supply and demand. That's fine, but the other side of business is that any operation's purpose is to maximize profit. So I'm not sure."
Most LTL carriers have fallen into the groove of raising rates once a year. Increasingly, this happens in the fall. Carriers like American Freightways raised rates 5.5% on Oct. 1, 1999. South Carolina-based Southeastern Freight Lines Inc. raised its rates 4% on Oct. 1, 1999.
Misdirected anger
Conner argues that the unregulated rate increases are justified. "For the past couple of years, the rate increases in that range have been pretty well needed," he says.
Conner says any anger about these increases, if aimed at the carriers, is misdirected. He says carriers are careful to budget and forecast costs. Inflation alone can cause a company like American Freightways to predict a rate increase of 2% to 3%. But unpredictable factors such as fuel increases bring the range up to 5%, Conner says. "You have to have them [rate increases] or run the risk of going bankrupt very quickly," he says.
Things were very different in 1999, a year that saw historic lows when it comes to fuel pricing. This year, LTL carriers are seeing just the opposite--historic highs in fuel pricing. All of this was influenced by a combination of cold weather and production cuts by OPEC.
The average cost of a gallon of diesel fuel one year ago was under $1. Today, the average is over $1.30. According to the Department of Energy's National Fuel Index, the national average price of a gallon of diesel fuel on Jan. 4, 1999, was 95¢. On Jan. 3, 2000, the average price was $1.31.
"I agree that in general, everything is going up in trucking because of fuel," says Thomas Wedemire, bureau analyst for the Bureau of Labor Statistics. "And no one can predict fuel. It's pretty contingent on whenever OPEC decides to lower prices."
Customarily, LTL carriers adapt to fuel increases by giving customers a fuel surcharge. And while many carriers argue that this is the right approach to take, some industry watchers say it still leads to the possibility that manufacturers can be overcharged. So-called double charging can occur in this unregulated industry, they warn, if carriers give customers a fuel surcharge but still raise their rates to cover the increased cost of fuel.
"For shippers, the only concern I have expressed is about double charging," says John Cutler, general counsel of the National Small Shipments traffic Conference in Washington D.C. "To me, you can do one or the other. But if you do both, there is the danger that the shipper is being overcharged."
"I don't know if that is happening here, but certainly carriers are taking fuel surcharges and carriers are announcing rate increases," he continues. "Maybe they are carefully analyzing the extra costs they need. But there is just no way for us to know."
All over the map
Carriers say they have the system down to a science and base it on the national index. But their increases are all over the map.
American Freightways, for example, raises its fuel surcharge seventeen-tenths of a percent when the average fuel price on the Department of Energy's National Fuel Index reaches $1.15 per gallon. The surcharge goes up incrementally from there.
In November, when the index indicated that the average cost of a gallon of fuel reached $1.20, Southeastern Freight Lines placed a surcharge of one-half of 1% on its customers' charges. This means that a customer with a freight bill at $200, who receives a 50% discount, would pay a fuel surcharge of 50¢.
"We are just a little $400-million company, and we didn't feel comfortable implementing a fuel charge until the cost of fuel reached $1.20," says McCallie.
The Ohio-based Roadway Express Inc., institutes a 0.5% fuel surcharge when the average fuel price hits $1.10. The Roadway Express surcharge jumps to 1% when the average price hits $1.15.
Still, despite the varied increases, Roadway representatives say customers are behind the LTL companies and their work.
"Customer reaction is pretty good," says John Hyre, director of investor relations for Roadway Express. "It [the increases] is fair, and they perceive it to be fair. They are experiencing those rises at the pumps themselves, so the vast majority of customers have no problem with it."
Hyre admits that manufacturers inevitably have to pass the extra cost on to customers. But he also believes that both customers and manufacturers understand how this is part of the game.
"That is a force that is well beyond us," Hyre says. "That is an economic force dealing with rising and falling fuel, and it impacts everybody."
A connection
In some cases that may be so. Some manufacturers say consumers must understand the connection between rising transportation costs and rising fuel costs. It is a price they know they have to pay.
"It gets pushed off to the consumers," says Pat Schulenburg, expeditor for Wisconsin-based evco Plastics. "It's part of the purchased product."
But despite some backing here and there, not all carriers are convinced that consumers are going to accept the increases forever. Some representatives from the LTL industry are concerned about how manufacturers are responding to the increases. They worry that as manufacturers continue to pay ever-escalating rates, LTL may seem like less of a bargain in the years to come.
"There's an awful lot of factors that go into the finished product: Efficiency of the manufacturing, the number of men involved--there are just so many factors," says Jeff Michalson, president and CEO of Missouri-based Middlewest Motor Freight Bureau. "Holding all those things constant, if you increase one cost factor, consumers will either be forced to accept it or stop buying it."
"The purchasing managers are going to say, 'Hey, I don't like this guys. I'd like to see it go back in line,'" agrees Keith Lovetro, vice president of marketing for California-based Viking Freight Inc.
Ironically, many carriers still argue that fuel is not the biggest factor leading to LTL rate increases. Fuel costs for Roadway Express, for example, only account for about 3% of the company's annual costs. Much of the company's increased costs--64%--are due to labor, Hyre says. And those costs will go up again April 1, when Teamster contracts are renewed.
"When you look at LTL, you have to maintain distribution centers, and along with the capital intensity we have labor intensity, which is a distinct segment in the trucking industry," Hyre says.
McCallie of Southeastern Freight Lines agrees.
"In LTL, it is not that big," McCallie says. "Our big costs are labor and the capital investment of tractor-trailers."
Skepticism exists
Both arguments--fuel increases and labor costs--lead to a certain amount of skepticism about the industry. And they also breed a fatalistic attitude among some manufacturers who depend on LTL trucking, which features short trips with comparatively small deliveries.
"I'm not saying I agree with it 100%, but I understand their position," says David Bauerle, purchasing manager for the Indiana-based Quality Machine & Tool Works Inc. The company depends on LTL to ship raw materials, castings, oils and maintenance parts.
"You and I buy gasoline, and we know it's going up," Bauerle continues. "They can't keep accruing those extra costs. If they do, they're not going to be around for us."
"I say if the fuel is going up, they have to recoup somewhere," agrees Sally Fetherston, purchasing manager for evco Plastics.
But Conner says those who blame the industry have got to take in the bigger picture. He points out that the LTL industry is now going through a period of consolidation due to increased costs and decreased profits.
"Last year, three carriers exited the industry," Conner says. "Financially, they just can't make it. The rates in the marketplace just don't support the investment.
"If you are not compensated, you can't stay in the business," he continues. "Shareholders won't invest in you. They [rates] have to go up."
McCallie has some advice for LTL customers: If they don't have a contract, they should get one. Such agreements can provide some degree of protection, or at least warn manufacturers about what to expect in the future.
"If a shipper does not have a contract, they are subject to any general increase that may go," he says. "Customers with sufficient transportation of their own interest should pursue a contract with their trucking providers, deal with the price, and give them input in the negotiation process. Customers aren't totally hostages."
Meanwhile, purchasing pros like Schulenburg are holding out hopes that the fuel prices will drop. But still, she's not confident that they will drop much.
"I would hope there would be a plateau," she says. "I can remember when gasoline was 35¢. I don't think we'll ever see that again."
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