Mandatory pass through ... part two

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It‘s all too common for middlemen in the trucking industry to push shippers to pay fuel surcharges, but only pass along a portion of those surcharges, or none at all, to the truckers who are actually transporting the goods and paying the fuel bill.” --Todd Spencer, Executive Vice President, Owner-Operator Independent Drivers Association.


It‘s no secret that fuel surcharges are an absolutely critical piece of the trucker‘s survival kit these days. Without some quick, turn-key financial mechanism for offsetting skyrocketing fuel prices, carriers and owner-operators would find themselves broke in a hurry.


Yet most shippers don‘t like fuel surcharges, largely because they feel - and there is some truth to this - that they are getting “double billed” for freight service. That‘s not to say shippers reject the whole concept of fuel surcharges, mind you - indeed, forward thinking companies like Wal Mart use them as incentives. For example, carriers that become certified under the Environmental Protection Agency‘s SmartWay program actually get a bigger fuel surcharge from the colossal retailer (talk about an incentive for going green!)


Fuel1

(Fuel costs are putting a huge dent in the wallets of big carriers and independents alike.)


On the whole, however, there is a kernel of truth in the shipper complaint about fuel surcharges. Look at some recent earnings reports and you‘ll see. For example, Werner Enterprises reported that revenues increased 2% to $512.8 million in first quarter of 2008 compared to the same period in 2007 ... but if you take out money gained from fuel surcharges, its revenues actually DECLINED 6% to $417 million in first quarter this year compared to the same period last year. That‘s almost a $100 million swing in revenues, based solely on fuel surcharges.


One complaint from small carriers and owner-operators - and this is very true - is that many brokers charge shippers a full fuel surcharge for moving freight ... yet then only pass through a small part of that to the truckers themselves. That‘s a nice way to make a tidy piece of change, but it sure leaves a hole in the trucker‘s wallet.


The Owner-Operator Independent Drivers Association (OOIDA) has fought this kind of business tactic for years and has also lobbied hard (but unsuccessfully) for a mandatory fuel surcharge for trucking. That effort got torpedoed several years ago, but now OOIDA is taking a roundabout stab at it again by supporting legislation to pass through the entire surcharge to whomever pays the fuel bill. This makes some sense, but it‘s bound to encounter some heavy resistance, I think.


Called the “Truthful Reliable Understanding of Consumer Costs” or TRUCC Act, introduced into Congress by Senators Olympia Snowe (R-Maine) and Sherrod Brown (D-Ohio), it requires that 100 % of fuel surcharges levied on shipping customers be passed through to whoever actually pays for the fuel to haul the shipper‘s goods - in most cases, that‘s truckers, says Todd Spencer, OOIDA‘s executive VP.


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(Freight's gotta move -- and that requires trucks to burn fuel, no matter how you look at it.)


“This bill will go a long way toward helping truckers survive the brutal cost of fuel,” he notes. “And it will provide needed assurance to shippers and ultimately consumers that higher shipping costs are actually because of higher fuel prices and not gouging by greedy middlemen.”


He stresses that fuel surcharges have long been the primary mechanism for trucking companies to respond to increased fuel costs. With diesel prices consistently rising, shippers are paying more now in fuel surcharges to get their freight moved than they ever have before. “It‘s all too common for middlemen in the trucking industry to push shippers to pay fuel surcharges, but only pass along a portion of those surcharges, or none at all, to the truckers who are actually transporting the goods and paying the fuel bill,” Spencer says.


The crux of the problem is that independent, small business truckers seldom deal directly with shipping customers as most of the freight they haul is acquired through third-party logistics companies or through larger trucking companies they are leased to as independent contractors. Mid-size trucking firms often have contracts with shippers for “front hauls,” but depend entirely on brokers for “back hauls” and it‘s these small and mid-sized trucking firms that are being hit hard by diesel prices that now average $4.21 a gallon.


Now, the last time such legislation came up - OOIDA looked for not only a mandatory pass through but also a mandatory fuel surcharge for the entire trucking industry starting back in 2001 - it got heavy resistance from shippers and carriers, too. The American Trucking association resisted it, because the trade group said at the time that it had not been demonstrated that failure to pass through fuel surcharges to owner-operators truly exists, thus deserving Congressional intervention.


“To the extent that motor carriers are able and willing to negotiate with shippers for fuel surcharges and collect such surcharges, those surcharges are generally passed on to those responsible for paying for fuel - if such party is not the carrier itself,” the ATA said back in 2005 right before the legislation got quashed. “Responsibility for payment of fuel costs is an item to be negotiated as part of the owner-operator lease between an owner-operator and a motor carrier. Due to the driver shortage, owner-operators are in a position where they have considerable bargaining leverage.”


The ATA also said it didn‘t know of any statute or regulation that prohibits the ability of owner-operators to negotiate either a rate that covers the owner-operator‘s fuel expense or a fuel surcharge. “They are in the same position and have the same ability to ask,” the group said.


Some 40 groups opposed the last fuel surcharge legislative effort, including the U.S. Chamber of Commerce, the National Industrial Transportation League (NITL), the Transportation Intermediaries Association (TIA), the National Association of Manufacturers (NAM), and I‘d expect at least some of them to oppose this one.


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One thing is for certain, though: fuel costs are turning this industry on its head. In 2003, the trucking industry paid $52 billion for fuel. This year, it‘s going to be north of $135 billion, according to projections from the ATA. Just 10 years ago, diesel hovered around 90 CENTS per gallon. Today it‘s over $4.21 and may go higher still. Fuel is now the number one cost - surpassing employee wages and benefits - at many carriers now and it looks like things may only get worse where fuel is concerned in the near future.

What's Trucks at Work?

Trucks at Work: Sean Kilcarr comments on trends affecting the many different strata of the trucking industry.

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