Fuel & Freight: What to Know

Fuel surcharges can seem like a way to jack up the bill, but they were designed for just the opposite. Read more...

Ever since the transportation industry embraced motor power, fuel has held a cornerstone role in dictating how much things cost, what route they travel, how long transits take, and so much more. Anyone who has worked in travel or transport for some time has certainly heard the term "fuel surcharge", and those involved in pricing know just how large of a factor that fuel can play in the total rate. But fuel surcharges are rarely fixed, and often hard to calculate. They change week to week, even when all other factors of a load stay the same. Today, between shippers, brokers, and carriers- it seems everyone handles fuel surcharges very differently.

It's important for anyone involved in the supply chain and logistics sides of a business to have a solid grasp on what is really happening behind the "fuel surcharge" line item (even if it's not explicitly billed on its own). While influencing or controlling this cost is essentially impossible, understanding and anticipating trends in fuel surcharge is a common reality for many pricing analysts and transport managers alike. Let's take a look at how Custom Pro handles fuel, how this compares to various industry players, and how you can best plan for this niche aspect of the industry in your operations.

The first 'CMV' by Winton, born of necessity to handle passenger car deliveries without driving the new car.

World History & Legislative Progress on Fuel Surcharges

But first, a brief backstory; motor carriers have been around since 1899 when Alexander Winton sold the first "horseless carriage" for commercial use. His operations were based in our great state of Ohio, albeit in the city of Cleveland (he must not have known what a logistics superpower our home of Cincy would become). The idea quickly caught on with the big rig makers of today like Mack, which opened just a year later, and others like Freightliner, Kenworth, and Peterbilt in the following decades, all enjoying great success. Despite being far less efficient than today's modern units, the term "fuel surcharge" wasn't even used until 1973.

The trucking industry was generally regarded as highly regulated at that time, with the Interstate Commerce Commission (ICC) exercising broad control over all commercial transportation activities. The ICC was made with the focus of regulating railroad activities, but expanded to include trucking as the aforementioned brands saw booming truck sales and the industry grew into a well-established point of employment and commerce. However it was not the ICC that spurred fuel surcharges ("FSC") into existence, but international events.

1973 saw an oil embargo against the US by OPEC, who still today controls nearly 90% of oil reserves and produces roughly 60% of the oil consumed globally. Their dominance was arguably even greater at the time, and US fuel prices saw jumps exceeding 200% in the year following this embargo. In response, the ICC had issued new guidelines which allowed motor carriers to add up to 6% of the total to cover fuel expenses. The OPEC embargo would conclude by '75, but the impacts were still felt for some time. Likewise, the ICC would see it's influence in trucking weakened by the passage of the Motor Carrier Act of 1980, yet the peculiarities of FSC billing would continue to play an important role for years to come.

The Basics: How Carriers Calculate Fuel Surcharge

Before we take a deep dive into today's market, let's first understand how shippers, carriers, and 3PLs alike calculate the fuel surcharge amount. Of course not all of these entities still do this, but even those which bill only an "all-in" rate must understand how to isolate the fuel component of the bill for business partners who still prefer to see that priced separately. Otherwise, it would be impossible to quote competitively versus other providers who exclude the amount from their total quote when requested. Moreover, often requests for quote which require that fuel be excluded are made by buyers who employ their own custom fuel surcharge table, so you must adjust your "base" rate to account for the difference in their fuel amount versus the industry expected amount, for the same reasons of maintaining competitiveness and an accurate final bill amount.

Generally though, these scenarios are exceptions to the norm, usually only seen when transacting with very niche businesses or those that have massive freight spends (and likewise can dictate the terms of the bill). MOST shippers and carriers who still calculate a dynamic FSC use the industry-standard "1-to-6" rule, where each 6-cent increase in the national diesel fuel price equate to a 1-cent-per-mile increase in freight costs. This ratio is derived from the average fuel economy of trucks, which is why some pricing providers will estimate a lower FSC per mile for reefer and van units than flatbeds (which have the worst economy; dry vans operate around 6.0mpg, reefers at 5.5mpg and flat beds closer to 5.0mpg, depending on load and road conditions).

This requires establishing a base price of diesel at which there is no FSC billed- typically this is $1.20/gallon, which is approximately the cost of diesel when the aforementioned OPEC embargo occurred. Supposing today's price was $4.00, the difference in prices ($2.80) divided by 6 yields a 46-47 cents-per-mile (cpm) fuel charge in addition to the "linehaul" portion of the rate. If diesel costs increased to $4.06, the result would be a FSC of 47-48cpm. Some carriers opt for a much higher, modern baseline and as a result their FSC cpm cost is much less, but you can expect the linehaul (base freight) portion of their bids to be much higher as a result. In theory, if diesel prices dip below the chosen baseline, the carrier would then reduce the total bill from the linehaul amount. In practice, no carrier will voluntarily discount the total bill, although some shippers expect it.

Due to lane characteristics and hours restrictions, truckers rarely get to choose when or where to refuel, and often stand to pay a higher regional price.

The Persistence of Fuel Billing Practices

Despite the international escalation having came and went over 50 years ago, many companies still today choose to quote and bill for FSC separate from the "linehaul" or "base" rate. To understand why this method continues to be favorable to motor carriers (and many others who use fuel, from cruises to Ubers), we first need to understand how these entities compute the amount and how it changes relative to real fuel prices.

The practice of fuel surcharge calculation varies widely from carrier to carrier. Generally, outside of the freight and logistics industries, FSC is expressed as a flat rate percentage of the total bill. For example, a ferry might post a FSC rate of 25.0%, meaning that if your ticket itself costs $100.00, your total would end up at $125.00. This is the easiest calculation method, but it does not account for changes in the price of fuel unless the seller also changes the base ticket price. Usually some type of table will be used to apply a higher percentage on customers who use more space and/or weight, and thus proportionately more of the total fuel consumption. In our ferry example, a heavier/longer truck would pay a higher percentage on top of their ticket price than a car. This model is much closer to a simple service charge than the traditional 1-to-6 FSC method described above.

Simplifying the Bill with All-In Pricing

Virtually every popular method of computing FSC shares inherent flaws in accurately reflecting the fuel cost, which is the whole point of making the calculation. This has led the majority of logistics players to shift away from the "linehaul plus fuel" model to a more simple, all-in rate. Thinking critically about the various methods and formulas, they tend to either oversimplify the cost estimate, or add needless complexity to pricing tasks. Since trucks have wildly different fuel economies in practice (driver behavior, routing, weather, stops, etc.), and the fact that diesel prices vary wildly in different regions of the country, all of this math is often moot. Universal methods of separating fuel costs might be reflective of the industry average at some point in time, but they hardly equate to the actual budgets and expenses of individual carriers. Brokers/shippers also can't control the route used or the exact mileage by a particular carrier on a lane, as this constitutes dispatching.

This also explains why load providers cannot offer a rate-per-mile pay, but instead a total freight budget.

For these reasons, more and more folks prefer to transact in simple terms with just one payment total. This makes the cost/pay more predictable for all parties. Both carrier and broker/shipper simply internalize their estimation of operating costs and desired profits, and nobody has to convert rates or equate FSC charges. Parties on all sides of freight transactions already do this with countless overhead costs, like employee pay, taxes, registration, fees, and more which are never seen by the other side. Fuel and insurance have for long been seen as exceptions to this pricing due to their variability, but in reality the stability of fuel pricing is much different than was felt mid-1980s under OPEC embargo, and most providers today have included insurance costs in their total pricing for years (especially when the commodities and risks involved are relatively usual). In short, there is little reason to keep fuel surcharges complicatedly separate from the total freight charges.

Electric infrastructure for CMVs is rapidly growing, as the first electrified fleets have begun seeing road-miles in USA.

Moving Forward, Without Fuel

Ultimately, many industry experts expect that FSC billing models will disappear entirely from freight in the coming years. There is near unanimous agreement as to the outdated and inaccurate nature of current calculation methods, and new innovations in hybrid-electric power units (and more efficient ICE tractors) only widen the gap between estimable and realized costs. In any case, the actual rates of electric adoption and the variability of oil/diesel prices in the meantime will likely dictate how long the FSC billing practice lives on. Nonetheless, any logistics manager or supply chain agent benefits from understanding how carriers have historically calculated their prices. And none of this is to say that fuel doesn't play a massive role in freight; depending on the lane, current FSC amounts make up 20-40% of the true going rate-per-mile in that market.

But considering the remainder of lane prices are already determined by similar supply-demand economics with respect to equipment availability or lane desirability, it makes little sense continue to focus on fuel prices independently. So if you currently allocate time and resources to accommodate FSC pricing, try using a more inclusive all-in flat rate for your next load. You should find no greater friction and improved cost predictability.

Still have questions? Custom Pro has the answers and we'll be happy to help you though any logistical problem! Reach out today to connect with our experienced brokers and enjoy our service excellence and strong grasp of the industry caveats. With a trusted broker like CPL, you can worry less about complicated math and fuel pricing, and focus on getting your loads moved in a simple and efficient manner!