The new challenge: compensating for higher fuel costs

The recent run-up in fuel prices could lead to a number of secondary issues that will vary from fleet to fleet. Private fleets, for example, have to absorb the entire fuel-price increase, which is reflected in the parent company's cost of doing business.

Since there's virtually no room for negotiation with the private carriage portion of the business, companies are faced with the following choices: develop other cost savings to offset the fuel-price increase; accept a reduction in earnings; pass the cost increase on to customers; or some combination of these alternatives.

Cost reductions can always be made in the areas of maintenance and fuel grade, although not without negative consequences.

Postponing training and equipment upgrades would also help reduce costs. Assuming the training and upgrades were necessary in the first place, however, postponement means that the fleet takes the risk of losing the benefits they would bring. While this may be acceptable for a three- to six-month period, beyond that the loss of benefits will have a negative impact on operational costs.

Since the operating cost of the private fleet isn't the only thing at stake, it's more likely that companies will institute cost reductions elsewhere in their businesses or pass along the fuel-price increase to customers.

Companies will need more cash to meet higher fuel prices, which means bigger finance charges. A carrier that purchased $500,000 of diesel fuel last year, for example, will have to pay about $650,000 for the same amount this year. Assuming a finance charge of 12.5%, it will cost the fleet $9,375 in interest alone to buy the additional $150,000 worth of fuel, assuming fuel is purchased uniformly throughout the year. This finance charge adds 1.9% to the operating cost of fuel over '99.

All of this applies to for-hire carriers as well - but with an added twist. The for-hire carrier develops its overall net worth based on transportation services. Since the vast majority of for-hire carriers don't have logistics operations, a reduction in earnings will be immediately reflected in the carrier's overall profitability.

Reduced earnings mean an increase in the cost of working capital, as well as the need to reevaluate the profitability of each load, since fuel-cost increases do not affect the cost of transportation uniformly across all types of freight.

If a for-hire carrier is strictly linehaul, with little or no pickup-and-delivery service, transportation costs are relatively uniform, regardless of the type of freight. But if the carrier has a more uneven cost structure, the impact of higher fuel prices will vary.

Regardless of the structure of the for-hire carrier, one way or the other all cost increases must be allocated. Also, consider what the impact of secondary cost increases will be. If these costs are not offset by savings in other areas, which is pretty hard to do in this competitive environment, then carriers will have to make rate adjustments.

Whether private or for-hire, if fleets don't have the appropriate benchmark data to assess how secondary costs affect overall profitability they'll underestimate the relief they need. In other words, they won't be able to accurately communicate the impact of these fuel-price increases on their bottom line.

But federal and state governments will eventually get the message. The income stream that's dependent on revenue-based taxes from carriers will start to fall off. And carriers' tax liabilities in general will decrease as secondary costs rise.

If the recent increase in fuel prices had occurred during any other time in the country's economic cycle, recession would certainly be in the forecast.