Operations

Transportation-Based Companies Adding Fuel Surcharges

Posted on May 4, 2005 by LCT Staff - Also by this author - About the author

John Hildelink, a transportation supervisor for bathroom-fixture maker Kohler, dreads looking at the company's shipping bill each month. Over the last year, fuel surcharges for the Wisconsin-based outfit have doubled. "For a company our size, the effect is huge," he said. "Last month we paid $1 million in fuel surcharges."

Guy Nickson, owner of the Wishbone restaurant in Chicago, knows the feeling. A few months ago, he began noticing small fuel surcharges creeping onto delivery invoices. "There's $1.50 added to the delivery for napkins. I don't know what proportion of the truck our box of napkins takes up, but it can't be much," he said. But with 40 deliveries a week, the extra dollar or two here and there adds up fast.

Welcome to the surreal world of fuel-related surcharges. Over the last five years, most long-haul freight companies have begun adopting such fees to cushion the impact of volatile oil prices. "It's the ultimate hedge for us," noted Bill Zollars, CEO of Kansas-based trucking giant Yellow Roadway.

Yet now, with high oil prices, it seems anybody who can possibly tack a fuel surcharge onto an invoice does. And the record speed at which fuel costs build up is hitting manufacturers and small businesses right in the bottom line.

Most freight companies calculate fuel surcharges according to fuel indexes such as the U.S. Energy Dept. index that tracks the price of diesel fuel. Hence, a nearly 40% rise in the price of diesel over the last year has added as much as 14% to shipping bills.

And "we can't add it to the product, either," noted Hildelink. Locked into long-term contracts with retailers, companies like Kohler get stuck with an out-of-control expense. Farmers, whose already razor-thin profit margins are measured in pennies per bushel, find themselves in a similar bind.

And flat-fee surcharges are showing up on everything from cab and limousine rides and airline tickets to short-haul deliveries. And unlike surcharges based on an index, which goes down when prices fall, flat fees tend to stay put. Their link to actual fuel costs remains somewhat fuzzy.

"When an economy turns back on, it's normal to try to raise prices — which have been in the dumps for quite awhile. And along comes an opportunity to blame it on someone else," said Peter Berck, an economist at the University of California at Berkeley.

In Los Angeles, where gas prices are nearing $3 per gallon, Crown Limousine Service has started to tack on fuel surcharges ranging from $25 to $75 per trip, based on estimated travel distances. "The drivers buy the gas, so this way we know they're covered," said manager Jackie Rizkalla. So far, customers who are already spending hundreds of dollars to rent superstretch SUVs and Hummers haven't blinked. "It doesn't really matter to them," she observed.

Likewise, most airline travelers haven't balked at fuel-cost-driven fare hikes. Last August, United Airlines raised its "each way" surcharge by 50%, from $10 to $15, adding $30 to the cost of a round-trip fare. Other airlines, including American, Southwest and Jet Blue, have opted to raise fares by a few dollars instead. Foreign carriers, including Quantas, Lufthansa and Singapore Airlines, have also announced new surcharges in the last month.

But not everyone can so easily pass on the gas buck. Farmers locked into contracts negotiated months in advance can't suddenly raise their prices, even though they're paying considerably more to ship their goods.

More than a third of grain shipped in the U.S. travels by rail, and base rates can vary by hundreds or even thousands of dollars, according to Keith Kendall, president of the National Grain & Feed Assn. (NGFA), which represents grain shippers and processors. The rail fuel surcharge is calculated as a percentage of a variable base price of the commodity instead of by mileage, so some farmers have to fork over more in fuel surcharges than other farmers shipping goods the same distance.

"You sell a load of corn, and your margin may be 7 or 8 cents a bushel. Surcharges can jump up and literally take any profit out of the trade," said Kendall. The NGFA is lobbying for a switch to a mileage-based surcharge.

By far, however, the bulk of the nation's freight — about 70% — travels by truck. And one company's hedge is another company's headache. At Amy's, a Petaluma, Calif., organic food producer, fuel surcharges on shipments have doubled, draining more than $100,000 from the bottom line. "It's an uncontrolled cost and, if you're a manufacturer and you need to get product to market, then you're basically forced to pay it," said Susan Glowicki, Amy's customer-service manager.

Some food companies are already passing higher costs onto consumers. Campbell's recently increased prices by almost 5% across a range of product lines to cover rising prices for fuel, steel and other commodities.

Anyone planning to relocate can expect to pay more this year, too. The surcharge rate suggested by the American Moving & Storage Assn. is at 12%, up from about 5% a year ago and setting a new "high-water mark," said Steve McKenna, director of pricing at Allied Van Lines. The increase can add $200 or more to the $2,800 hauling cost for a standard residential move.

At UPS, where small-package delivery dominates, bulk fuel purchases and aggressive fuel-efficiency programs — including pilot tests of hybrid delivery trucks — have helped it manage costs. UPS has kept surcharges comparatively low — 2% for ground shipments, 9.5% for air delivery (with the latter linked to a jet kerosene index). Still, fuel costs rose 35% from 2003 to 2004, totaling $1.4 billion.

So far, the impact on online retail has been negligible. Popular free-shipping options offered by e-tailers such as Amazon have insulated consumers, while surcharges for ground transport have remained small. By law, the U.S. Postal Service can't impose surcharges. It can hike prices only through a government-approved rate increase.

Still, fuel prices are expected to climb at least through the summer. And whether you're a consumer or in business, whether you pay at the pump or pay in the form of a surcharge, you'll be paying more. Possibly a lot more.

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