For readers old enough to recall the 1973 energy crisis, dramatic fuel-cost run-ups like what we’ve seen this past month might feel like time traveling. Diesel prices grab headlines. Gawking at them overtakes almost any necessary activity.
But it was different back then. Shift gears and grab hold of your CB and start asking your fellow truckers not just where the lowest price for fuel might be but what truck stop might actually have some fuel to sell.
Skip ahead a few years to 1979. The Iranian revolution triggered another oil shock. The oil supply only dropped about 4%, but as the political divides set in, all the problems led to a certifiable panic.
The cost of fuel doubled with that event.
When Iraq invaded Kuwait 11 years later, the resulting war created another shock. Many in the audience will have strong emotional memories of the 1990-’91 recession; many no doubt also served in the resulting U.S. operation in Iraq and Kuwait. Thank you, sincerely, for that.
And many if not most of you, I’d wager, well remember the spike in fuel leading into the Great Recession, starting near the end of 2007 into ‘08. It seemed strange at the time that prices went up so fast during a recession, but worldwide demand was increasing -- prices fell off fast by the end of that year as freight fell off a cliff and recessionary conditions set in across the globe.
It all took a very, very heavy toll on U.S. trucking, and today’s fuel spikes seem to add insult to injury after the long freight-rates drought of the last several years. Yet emotional reactions won’t help you make decisions with respect to maintaining profits.
For a small-business owner, the price of fuel is going to be what it’s going to be. Tomorrow, here’s hoping it’ll be less than it is today. Meantime, breathe a bit, slow down your thinking, and put pen to paper to see where you really stand.
Getting past insult-to-injury dynamics
Many owners I work with indeed have shared in recent months that revenues appeared to be recovering, with loads and rates returning to a level they hoped to see, some even exceeding hoped-for improvement.
There's evidence that's continued for many even since the fuel spike, as the spot freight update this week showed.
[Related: Fuel price surge slows, except in $7+ California, as spot rates react]
It's wise to anticipate that when gross rates rise, an increase in the cost of operating will follow. Demand for our largest fixed cost, the trucks and trailers, will drive those costs higher. Creative lease/finance advertisements will be all over the place. They'll try to capture the attention of drivers who’ve been waiting for what they think is the right time to make the leap to ownership.
If that describes you, use caution in a time like the present.
On the variable-cost side, the intermittent cycle of parts, repairs, tires and tolls, parking fees and personal needs all add up, too. Again, it's likely that as freight and rates improve, demand for all of those items increases as well, sending costs up.
I recently had a discussion with an owner-operator about a new plan to deal with cash flow when there is an expense like a depreciable repair, or investment in preventive/predictable maintenance. Cash flow pressures mount when a big-ticket item hits unexpectedly, quite often triggering owner-operators to shift load selections with priority on finding the one that pays the greatest gross revenue, simply put, and fast.
Yet it’s important once more to breathe, relax, slow down and consider all the costs involved in any move to take the most-efficient path to profit instead.
[Related: Overdrive's Load Profit Analyzer: How to use to assess rates, costs]
The unexpected hit today is the fuel shock, no doubt the No. 1 concern on the variable cost side, presenting the immediate need to solidify your own best fuel-purchasing plan. Set aside personal and brand-name biases, and investigate every discount purchase program you can find, whether through your leasing fleet or elsewhere in the market.
There are so many options in this day and age, from traditional-type card programs to mobile services like the well-known Mudflap app aggregating discounts at independent truck stops and others. Some cards and programs could be better for different states/regions, making it wise to run with more than just a single one. (Never assume what others say is best for yourself.)
If you’re getting a fuel surcharge adjustment from your motor carrier or working direct with a shipper where it’s reflected in the contract, it can be tempting to lean too strongly on that in your advice to your peers looking for ways through the shock. Such as:
Just demand they pay an FSC!
It’s not so simple. Spot and contract negotiations are two completely different games. Most brokers just don’t work with owner-operators on a surcharge framework. As ATBS and Overdrive editors both have emphasized recently, you’ve got to back the cost of any fuel spike into your rates in spot negotiations.
When fuel’s moving up fast, take the difference in the national or your regional average price week to week, even day to day, divide that by your fuel mileage, and the result is a per-mile fuel-cost premium figure to add to your rate.
Say you’re getting 7 mpg and booking a load after seeing diesel prices skyrocket 96 cents/gal, as they did the first week of March. It's easy, but for illustration purposes:
- 96 cents/gal. divided by 7 mpg = 14 cents/mile in added fuel costs.
Consider that the minimum rate increase you’ll need to adequately cover the cost. Odds are it'll just keep rising when war turmoil hits the Middle East.
[Related: Owner-op income up, as ‘capacity-driven recovery’ ongoing, fuel-cost wildcard]
Keep surcharge revenue in perspective
Owners who are benefiting from adjusting surcharges in contracts often tend to manage surcharge revenue by lumping it in with linehaul freight revenue and all other compensation, rather than treating it like the line item it should be.
In my days leased to Landstar, I found a way to keep the emotion out of a rapidly escalating pump price in part by keeping the surcharge broken out in a column of its own, visually near to real fuel expense. I built into my profit and loss tracking a way to calculate real fuel cost per mile, subtracting fuel surcharge revenue per mile from actual fuel money spent.
It kept the emotions out of the big price swings, as fuel surcharges do what they’re intended to do -- account for an increasingly volatile expense with weekly adjustments. Back then, I found my real fuel expense tracked between 7 and 11 cents/mile after surcharge offsets.
Here's what I did after fillup:
- I calculated mpg for that tank,
- Noted the actual discounted price/gal. I paid,
- Calculated my actual discounted gallon cost per mile.
- Then figured up my actual fuel surcharge revenue per mile, subtracting that from the discounted gallon cost.
Here's an example, using a discounted price I know was available in Illinois a couple weeks back, $4.479/gal. with a 50-cent/mile fuel surcharge and an owner averaging 7 mpg, just less than the average owner-operator among ATBS clients.
- $4.479/gal. divided by 7 mpg = $0.64/mile fuel cost
Cost minus the fuel surcharge revenue:
- $0.64/mile-$0.50/mile = $0.14 real cash cost/mile for fuel
Potential gains with increased fuel efficiency get really easy to see. Do some quick comparisons with different fuel mileages and you’re up to a big fat 0 cents/mile in real fuel cost for an owner-operator with better efficiency at 9 mpg.
Get to where owner-operator Steve Kron was recently with a new International LT spec’d for max efficiency (no late April Fools jokes here -- a whopping 12.5 mpg on a recent trip), and you’re fully in the black:
- $4.479/gal divided by 12.5 mpg = $0.36/mile fuel cost
Cost minus the fuel surcharge revenue:
- $0.36/mile-$0.50/mile = -$0.14 real cash cost/mile for fuel
Yes, in that case, a negative really is a positive.
In any event, despite the old “horror of high fuel” we experience as pump prices go up and up, a fuel surcharge will deliver a big boost on the top line.
Consider the case of an owner I work with who recently saw his surcharge revenue add an extra 9 cents/mile to his production in just a week as his leasing fleet adjusted surcharges to the price hikes.
Over the course of a couple of months, assuming prices remain elevated, the added revenue will look great, worth an extra $1,600 over 20,000 miles run, say.
With freight rates gaining ground, even against the fuel increases in the latest week, April 15 is coming quick. Let tax day be a reminder another one will be here sure as the sun will rise tomorrow.
Always keep real income in mind. If freight keeps improving and better income is the result, that means bigger tax liability compared to the last few down years.
Big revenue too often results in big desire for the luxuries, “adult toys” like a new Harley, a pickup, a myriad of other things we’ve dreamt of plunking down cash for. Even with the old horror, it’s clear there’s some positivity about trucking markets afoot.
Don’t let a rash purchase decision, or a big tax bill you don’t have the cash to pay, ruin the party. Slow down, breathe, think, and make the right moves.
[Related: Trucking 101: Understanding fuel surcharges]
