As diesel prices rise, many surcharge programs fail to cover fuel costs for struggling owner-operators.
Record-high diesel prices have thrown a kink into the trucking recovery that has been under way since last year.
More carriers have begun collecting fuel surcharges to compensate for diesel prices that for weeks have averaged above $1.80 a gallon nationwide and well more than $2 in California. However, the surcharges are not always sufficient to cover owner-operators’ increased fuel costs, either because the surcharge is too small, no surcharge is collected or the carrier doesn’t pass along the entire surcharge. Consequently, some owner-operators see them as a Band-Aid on a gaping wound.
Assessments vary as to how regularly fuel surcharges are collected and how well they cover rising prices.
“More and more people are getting paid some fuel surcharge, but it will never cover the increase in fuel,” says Gary Aitken, an Indianapolis-based accountant for owner-operators.
Todd Spencer, executive vice president of the Owner-Operator Independent Drivers Association, estimates half of owner-operators receive fuel surcharges, some of them enough to cover diesel hikes. In an eTrucker.com survey of owner-operators during August, a third of respondents say they get a fuel surcharge on less than a third of their loads; of those who do receive a surcharge, almost half say it covers only 25 percent or less of their increased fuel costs.
A more positive report comes from Colorado-based American Truck Business Services, which has 20,000 owner-operator clients. Their records indicate surcharges sufficiently compensate for diesel spikes, says Todd Amen, president of ATBS. Most carriers are paying a surcharge of 8 to 11 cents per mile, he says. For a truck getting 6 miles per gallon, that’s 48 cents to 66 cents per gallon.
Owner-operator Joey Holland says Kennedy Trucking of Preston, Ga., has had fuel surcharges for the seven years he has worked for the carrier. The surcharge has ranged from 5 percent to 9 percent of gross load, based on regional prices of where he is hauling, and Kennedy passes on 100 percent of any surcharge it receives to owner-operators.
“It helps but it doesn’t cover it,” says the Georgia resident, who is paid on percentage of revenue.
Owner-operator Robert Hartog, who has trucked for four decades, feels the same way about his surcharge. “It’s way short,” says Hartog, who hauls flammables and corrosives for Florida-based Quality Carriers.
A spokesman says the carrier’s owner-operators receive 7.5 percent to 11.5 percent of the gross as a surcharge, depending upon where the load is going.
Danny Pike, who is leased to a small Alabama carrier, says that company’s surcharge of 1 cent per mile has been in effect for at least three years. “If it pays enough, I take the load, even if there’s no surcharge,” Pike says. “I can live with it, even though I’m not making near the profit I did five years ago.”
The rise in fuel costs comes at a time when carriers are competing more feverishly than in years past for owner-operators and when truck makers are enjoying a major rebound in sales and orders. In spite of these bullish developments, New York-based Nassau Asset Management has seen a reversal of the two-year decline in truck repossessions. Truck repos rose by a third in the second quarter of 2004 from the first quarter.
“Perhaps the economy is not as robust as we are being told,” says Ed Castagna, senior executive vice president of Nassau. He blamed the increased truck repos on “a number of factors, including rising fuel prices and insurance costs.”
In July, the New York based Standard & Poor’s Ratings Services reported surcharges have offset much of the fuel price increases for carriers, which have increased freight rates an average of 7 percent for less-than-truckload shipments and 14 percent for truckload shipments.
Not all fleets pass along 100 percent of the surcharge to owner-operators, though, notes Spencer. “Money getting skimmed is common in trucking, but may be more common in ports,” he says. The spike in fuel prices was one of the major factors that sparked the outcry from owner-operators in intermodal ports this spring and summer, resulting in shutdowns and other protests.
Federal law requires that owner-operators paid on percentage of revenue be allowed to see documentation of how much the carrier was paid for the load. However, the law does not demand this of carriers who pay on mileage, Spencer says. Truckers and carrier representatives say some fleets are willing to share this information with owner-operators receiving cents-per-mile payments, while others refuse.
In recent years, OOIDA has lobbied for federal fuel surcharge legislation that would have required all carriers, brokers and freight forwarders to impose a minimum fuel surcharge when fuel prices spike. There is no active surcharge bill this year, Spencer says.
Many large carriers have managed to do without federal intervention and establish a strong fuel surcharge on their own. U.S. Xpress was paying 9 cents per mile in late July, passing along 100 percent of the surcharge to the owner-operator, says Gary Kelley, recruiting vice president.
Sean Claton, a regional operations director for 15,000-truck Wisconsin-based Schneider National, says very few customers have failed to pay surcharges, and owner-operators receive a full surcharge on loaded miles even if the customer doesn’t pay it.
Schneider’s surcharge policy kicks in when the national average price is $1.21 or greater and increases 1 cent per mile for every 6-cent increment in diesel prices. As of Aug. 3, it was 9 cents per mile. Customers pay surcharges only on loaded miles, so owner-operators are likely to have extra miles not covered by a surcharge, such as stopping for a repair or for deadheading, Claton says.
Large carriers also tend to be more able to help owner-operators with good fuel discounts. Schneider has 25 national operating centers that offer the lowest price in that state on the day of purchase, as well as a national fuel card providing a 2.5- to 4.5-cent savings at four major truck stop chains. Additionally, owner-operators can be routed with suggested locations for the cheapest fuel stops when they get their work assignment, Claton says.
Tennessee-based U.S. Xpress buys fuel in bulk and monitors fuel prices hourly, Kelley says. Its fuel network is several cents per gallon less than what a contractor might otherwise pay.
While most surcharges are based on the national average of diesel prices, in some cases, particularly with dedicated routes, they are based on regional prices. For example, carriers hauling freight in West Coast states, especially California, have been instituting regional surcharges of 11 to 12 percent since last spring, says Amen of ATBS.
“I run a lot out West, so I’ve been getting 8 to 9 percent,” says Donald Reese, Vice President of USA Trucking, a small Ohio company. “I’ve had the same customers for years, so I haven’t had too much problem with fuel surcharges.” For every nickel the average diesel price exceeds $1.25, the carrier charges a surcharge of 1 percent of the gross paid to the carrier; 100 percent of that is passed to the owner-operator. The surcharge is based on regional fuel rates, but doesn’t completely cover fuel price hikes.
But regional pricing can be a double-edged sword with customers, says Claton. The same company that will pay extra for loads traveling only in Western states might ask for a discount on trips within the lower-priced Gulf states, he says. In recent months, average prices have often differed by 25 cents or 30 cents between California and the Southeast.
Looking ahead, no one inside or outside the industry has predicted a plunge in fuel prices, and they could go higher. Claton says Schneider’s plans are based on expectations of high fuel costs. Diesel prices generally follow crude oil prices, and analysts expect those prices to remain high.
Faced with current costs and potentially higher prices, owner-operator Holland of Kennedy Trucking says he copes by maintaining a “grin and bear it” attitude. “I hope for the next load to pay better and catch up with the last load,” he says.
Surviving as an independent
Independent owner-operators often find themselves in a tough situation regarding fuel surcharges because some customers won’t pay them. Janice Wilson, who team-drives with her husband Merton Wilson, says they’ve survived as independents since the 1980s by refusing to haul low-paying loads, knowing their cost per mile and idling less.
“I turned down four loads on Monday until we got one that paid enough,” Janice says. Their truck and trailer is paid off, which gives them more leeway to say no, she adds.
Independent Edward Lester solves the problem by usually hauling for Kennedy Trucking of Preston, Ga., which passes its full surcharge to him. “Unless the carrier deals with it, it is very hard (for an independent) to get a surcharge because it’s so competitive,” the Georgia resident says.
Like the Wilsons, former owner-operator Ron Brown stresses that owner-operators need to carefully evaluate each potential haul. And always ask for a surcharge. “If a customer says no, you have the choice to haul or not to haul,” says Brown, who operates Transport Training of America, a broker training school, and H.I.S. Inc, a property broker and logistics service provider. “If it doesn’t cover their fuel, they’re going in the hole.”
When a contract isn’t clear, ask a lawyer or other professional to explain it before you sign, Brown advises. “When approaching a shipper or broker, don’t do anything without getting it in writing,” he says. “If you have it in writing, you can take the shipper to small claims court.” If a broker doesn’t honor a written agreement, you can file against the broker’s bond, he adds.
How to figure what a surcharge is worth
As long as you know your truck’s fuel economy, you can calculate how well a fuel surcharge compensates you for rising prices. If you’re consuming less fuel than average drivers, a healthy surcharge might even be putting extra money in your pocket.
Many carriers pay a surcharge when the national (or regional) average price for a gallon of diesel, as reported by the U.S. Department of Energy, exceeds a certain price, often $1.10 to $1.25. The surcharge increases incrementally with diesel prices, either on a cents-per-mile basis or on a percentage of what the customer pays the carrier for the load. Carriers often base their surcharge scale by assuming their trucks get 5 or 6 miles per gallon.
SURCHARGE FIGURED AS PER-MILE. Suppose a carrier’s surcharge is designed to cover increases above $1.25, and fuel now costs $1.70. Ideally, you’ll receive a surcharge covering that 45-cent spread.
If your truck gets 6 miles per gallon, divide 45 cents per gallon by 6 mpg. That equals 7.5 cents per mile. A surcharge at that level allows you to break even.
Now assume you get 7 mpg. Dividing the 45 cents by 7 means a surcharge of only 6.4 cents per mile is needed to break even. If you’re driving for a fleet that has a surcharge based on its company trucks’ 6 mpg average, you come out 1.1 cpm ahead. At 10,000 miles a month, that’s $110 extra.
Of course, the opposite is also true. If you’re getting only 5 mpg, divide that into 45 cents; you’ll need a surcharge of 9 cents per mile to cover your costs. If you’re getting paid a surcharge based on 6 mpg (yielding 7.5 cpm surcharge), you’re losing 1.5 cpm.
SURCHARGE FIGURED AS PERCENTAGE. An owner-operator offered a surcharge that is a percentage of gross revenue does a similar calculation.
Take the same situation – you get 6 miles to the gallon and diesel has jumped 45 cents, so you need a surcharge of 7.5 cpm. Assume you’re offered a 1,000-mile haul for $1,100 in gross revenue. Start with your 7.5 cpm target for a surcharge and multiply by miles.
Now see what your $75 surcharge would be as a percentage of the gross. Divide $75 by $1,100, to get 6.8 percent.
Some owner-operators make as much as 2 cents per mile profit from their carriers’ surcharge because of good fuel economy practices, notably reduced idling, says Richard DeForest, American Truck Business Services vice president. “If you are willing to economize, absolutely, you’ll make a profit,” he says.
A recent ATBS newsletter points out ways other than idling reduction to achieve better mileage: proper tire inflation and alignment, slower acceleration and de-acceleration, and slower on-highway speeds. These habits not only improve fuel economy, they also save maintenance costs. Also, improved mileage means fewer fuel stops, which increases productivity.
Keeping it simple: The 99-cent fuel guarantee
Iowa-based Barr-Nunn Transportation has taken an unusual approach to keeping fuel costs under control for its owner-operators. It guarantees that owner-operators and new lease-purchase owners will not pay more than 99 cents for fuel during the rest of 2004 if they follow certain conditions.
Barr-Nunn, which also has company drivers, started the program to increase its owner-operator fleet. “The response from owner-operators has been purely positive,” says Recruiting Director Doug Albrecht. The carrier will review the program, which began in August, at the end of this year.
For the past year, owner-operators were guaranteed $1.04 to $1.08 diesel if they fueled 100 percent at Flying J, Pilot and other truck stops in the carrier’s network. Now, if they fuel 100 percent in-network for the month, they also receive a rebate for the difference between the Barr-Nunn discount price and 99 cents. Owner-operators receive fuel surcharges for all dispatched miles, loaded and empty, as well as if Barr-Nunn is stiffed by a customer.
Keeping pace
Even though fuel cost-per-mile has risen 3 cents in the first six months of this year versus the same period last year, owner-operator revenue per mile has risen 5 cents, according to American Truck Business Services client averages. The increased revenue reflects higher base rates of pay and fuel surcharges, as well as fuel-saving efforts by ATBS’ owner-operator clients.
Resources
The Owner-Operator Independent Driver Association offers online guides useful to leased and
independent owner-operators interested in controlling fuel costs:
- How to Implement a Fuel Surcharge
- Owner-Operators: A Guide for Working with Brokers
- Interviewing the Interviewer: How to turn the tables so you can get the information you need before you sign on.
More information is available by visiting this site or by calling (800) 444-5791.
–Jill Dunn
