How the cost of diesel fuel impacts freight rates.
May 4, 2016
Filling up at the gas pump has been far less painful lately. Oil prices, and subsequently retail gasoline prices, have plummeted from historical highs. Motorists often have enough left over after gassing up their SUVs, minivans and sedans to spend on extras like morning coffee, eating out and even taking vacations further from home.
Now imagine your income was tied to the price of gas. Instead of having extra money in your pocket by spending less on fuel, you basically have the same amount of money to spend because your paycheck is lower as well.
That's been the experience of truckload and LTL carriers the past two years. They're paying about half as much per gallon for diesel fuel today than two years ago. So one might think they can use those savings to address higher costs in other areas and/or lower shipping rates to customers. But it isn't that simple.
That's because a carrier's fuel costs are covered through fuel surcharges that are linked to the average price of diesel. So while trucking firms are essentially paying half as much per gallon, they're also generating less revenue from fuel surcharges.
Many LTL carriers use a percentage table to determine fuel surcharges on a weekly basis. The chart designates a percentage based on the current price of diesel fuel, much like this one from YRC Freight. As the fuel rates rise, so do the surcharge percentages.
Full truckload carriers usually assess fuel surcharges on a per-mile basis. They are typically added whenever diesel costs more than a base rate, such as $1.17 a gallon. The higher diesel climbs above the base rate, the more the per-mile charge. For example, if the current U.S. national average diesel fuel price is $2.12 per gallon, that translates into a per mile surcharge of $0.16. In comparison, just a year ago the price of diesel was $2.86 per gallon with a surcharge of $0.29.
The lower fuel prices have helped to ease rising base freight costs. The base rate increases are likely driven by higher wages for drivers due to the ongoing shortage combined with other rising costs such as compliance, maintenance and equipment upgrades outlined in the ELD mandate.
For LTL carriers, these higher costs have resulted in average General Rate Increases (GRIs) of nearly 5 percent across the industry in each of the last two years.
The Cass Truckload Linehaul Index, which measures market fluctuations in per-mile truckload linehaul rates, independent of additional cost components such as fuel and accessorials, showed year-over-year increases between 5 percent and 7 percent each month between March 2014 and March 2015. For much of last year, the year-over-year increase each month ranged between 3 percent and 4 percent. Since October 2015, the index has climbed less than 2 percent year-over-year, including a 0.4 percent hike in January 2016.
The bottom line: Even with a 50 percent decline in diesel fuel prices it's still costing more, on average, to ship goods via truck today than it did two years ago.
While we are experiencing lower fuel surcharges, base rates are still on the rise. The lower fuel has been helpful in slowing the rise of freight costs, but has not combatted it entirely. Fuel is only a portion of what determines the cost to ship your freight.
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