Fuel Surcharges

Fuel Surcharges

The entire investment of a small carrier can be in motor trucks. Even for the largest carriers, by far the greatest share of investment is in trucks. For this reason, fuel costs are second only to labor costs as a percent of total variable costs. Truckload carriers can have fuel costs as high as 30 percent of their total costs, while LTL carriers usually are closer to the 10 percent mark. The reason for the difference is that LTL carriers have higher fixed plant and labor costs associated with the consolidation of many smaller shipments for each trailer loaded. Fuel prices for LTL carriers represent a smaller percent of greater total costs.

The most unusual thing about the implementation of fuel surcharges by motor carriers is that the carriers with the highest ratio of fuel costs to total costs have not been the first to implement the surcharges. These surcharges have been instituted first by the LTL carriers.

One explanation for this is that the LTL pricing structure is more conducive to the acceptance by shippers of these extra charges. The complex system of LTL freight classifications, combined with regular base rate increases, has created an atmosphere of acceptance of charges that are imposed by all carriers in the LTL market simultaneously. The truckload carriers that charge on a per-mile/lineal foot basis are in a more competitive situation. With no base rates to increase as a group, they individually decide when to add fuel surcharges. For this reason, they usually follow the LTL carriers in implementing fuel surcharges. However, the smaller profit margins of the LTL carriers probably also contribute to their being first to implement fuel surcharges.

Although motor carrier deregulation has been good for the economy in general, it is agreed that there are instances where regulation is good for everyone. I propose that government-mandated fuel surcharges would benefit all parties. They would make the motor carrier industry more competitive by leveling the playing field for all carriers, by weakening the fuel surcharge advantage of certain carriers. Mandated fuel surcharges would bring uniformity of fuel surcharges and predictability for both shippers and carriers.

Are surcharges bad for the economy? At worst they fail to protect the U.S. consumer, in the short run, from the inflationary effects of oil supply shocks. Fuel surcharges actually may be good. Passing price increases quickly down the economic chain causes the adjustment mechanism of decreased demand for oil to occur more quickly. Protecting consumers from the effects of oil price shocks simply prolongs the crisis. Mandated fuel surcharges make good sense.