WARNING!!! MATH AHEAD! Don't be afraid, though - math is objective and isn't subject to political leanings or cancel culture (well . . . maybe it is — IDK).
There has been a lot of talk around gas and diesel prices, with both soaring into record levels lately. BTW — this was well underway prior to Ukraine, but that certainly escalated it. You can see the actual data below in the chart of diesel going back decades.
I'll jump straight to the point of this update — LTL and TL fuel surcharges and what the real math is to each and why you should be smart about it.
Fuel surcharges originated a long time ago but were dormant until the early 2000s. When diesel started staying consistently above roughly $1.20/gallon, carriers needed to figure out how to be compensated for the increased cost — and rightly so. However, transportation "pros" at the time did not want to show increased costs to an executive room that didn't place emphasis on logistics like they do today. They needed to protect their bonuses, so rather than accepting higher rates, they accepted a fuel surcharge which could be explained away.
So the fuel surcharge's original intention was a mechanism for covering the increased cost of fuel above that baseline of $1.20/gallon (or so that is debatable). This quickly deteriorated into a profit center for LTL carriers as it's always been tough to calculate the actual fuel cost on each individual LTL shipment. More on this in a bit.
Truckload fuel surcharges are easy to understand as they should all be in a cost/mile (IF you are paying % fuel for TL, wow!). It becomes a simple equation of the mileage from A to B, the truck's MPG, and diesel price. Here's a quick fun math problem (MATH!): A long-haul class 8 truck typically has two fuel tanks, each holding 120-150 gallons. So let's say 250 gallons to fill up. That truck gets 5-8 MPG, so let's say 6.5 MPG. Therefore the average truck can run 1,625 miles on one "fill-up." Throughout the craziness of 2020, that tank cost the truck about $635. Today that fill-up costs the truck $1,312.50!!!
The average TL move across our client base is around 560 miles, so that means TL costs on an average TL move have gone up a whopping $233 per load!
LTL fuel surcharges aren't so easy to understand. Due to all the complexities of weight, cube, and price, a % is the only easy and practical way to implement an LTL fuel surcharge. But what should it be??? Well, math can help! Remember that it's all about compensating the carrier for the uncontrollable cost of fuel. And while it's certainly impractical to calculate the actual fuel cost on every LTL shipment (is it, though?), we can use existing data to calculate what an individual shipper's LTL fuel surcharge SHOULD BE! And yes, that includes extra mileage considering terminal and breakbulk routings.
Did you know -
- If you are getting GREAT LTL pricing, your FSC should be HIGHER?
- On LTL shipments within 100 miles or so, your FSC should be about 5.6%
- On LTL shipments with very long distances, your FSC should be about 33%
- You can prove that one pallet, 700 lbs going 168 miles, should have an FSC of 5.5%
- You can prove that four pallets, 1,060 lbs going 940 miles, should have an FSC of 52.7%
The average LTL fuel surcharge at $4.85/gallon (week of 3/7/22) should be 18.6%. Here's the point — don't buy into the "game" that LTL fuel surcharges should now be at 40% or more - because they shouldn't be!
Data Matters!!! Do it right. Let's keep pricing as pricing and the FSC as the FSC.