Fuel Surcharge Alternatives September 22, 2008 Steve Graham Schneider National.

Fuel Surcharge AlternativesSeptember 22, 2008

Steve GrahamSchneider National

Fuel Conservation and Management Symposium

Fuel surcharge cost has risen 380% in the last 4 years.

$ 1,086 FSC

FSC

35% overall increase

Line haul rate

Line haul rate

Hypothetical example using typical industry data

Why is fuel surcharge a big issue?


• A representative index of the true change in the carrier’s cost of fuel.− Ability to audit the fuel charges− Transparency to fuel costs

• Reduce my budget variances.− Hedging solutions

• Commitment to improve mpg.− Competitive advantage vs. industry advancement

What are customers asking for?


1. The “Trigger” - the point where fuel surcharge starts. As long as the index price of fuel stays below this point , no fuel surcharge is applied. If price falls below this point, contracts may contain a provision for the carrier to credit the shipper.

2. The “Peg” - the ratio that converts a cents per gallon cost change into a cents per mile surcharge rate change. A peg of 5 or 5:1 assumes that the carrier’s consumption rate is 5 miles per gallon on the miles paid to the carrier. A 5 cent increase in fuel cost converts to a 1 cent increase in fuel surcharge.

3. The “Index” – the trusted source of fuel price information that a shipper and a carrier agree best represents the upward or downward movement in the carrier’s true cost of fuel.

Fuel surcharge has 3 components.


• Paid based on “shortest” miles, but travel practical miles.

• Differences between the “peg” and the carrier’s actual paid miles mpg.

• Difference between regional fuel cost and DOE National Retail Average (mostly due to fuel tax differences).

• Discounted actual fuel cost vs. DOE National Retail Average.

• Sometimes, weight, terrain, city driving and other factors favorably or unfavorably impact fuel economy.

Carriers adjust base rate to cover differences between true cost and fuel surcharge recovery.


Shippers generally pay carriers for loaded miles only.The miles paid are based on Household Movers Guide “shortest.” Schneider routes drivers based on “practical” route/miles.

Definition of miles using a hypothetical load and industry average inefficiencies

Miles billed to customer – Household Movers Guide (HHG) “shortest” 80 miles

Difference between HHG/PC Miler Shortest and HHG/PC Miler Practical 4 miles(Practical is the likely/most efficient route taken by the driver)

Miles incurred to fuel, take breaks, conduct truck maintenance, 6 milestake detours, avoid congestion and get the driver home

Empty miles from last drop to next pick up 10 miles

Total odometer miles or true traveled miles 100 miles

Gallons of fuel consumed by carrier16.66 gal.

Using this example the carrier’s odometer mpg is 6.0 based on 100 miles traveled, but only 4.8 mpg based on 80 miles billed to the customer. A 6 cent peg is inadequate to cover the carrier’s rising cost of fuel.


Carriers that do not have adequate recovery through fuel surcharge do not stay in business when fuel prices rise sharply.

$1.20

$1.35

$1.50

$1.65

$1.80

$1.95

$2.10

$2.25

$2.40

$2.55

$2.70

$2.85

$3.00

$3.15

$3.30

$3.45

$3.60

$3.75

$3.90

$4.05

$4.20

$4.35

$4.50

$4.65

$4.80

$4.95 $-

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

Relationship Between 6 Cent Peg & 4.8 Cent Peg as Price of Fuel Rises

Fuel Surcharge Recovery

Carrier Cost

CPG

Fuel

Sur

char

ge C

PM

At $3.50 per gallon, the shortfall is $.15 per mileAt $2.50 per gallon,

the shortfall is $.10 per mile

At $4.50 per gallon, the shortfall is $.19 per mile

If fuel surcharge is inadequate, then a carrier must make assumptions about the direction of fuel price when submitting a base linehaul rate.




• Difference between regional fuel cost and DOE National Retail Average (partially due to fuel tax differences).



Carriers adjust base rate to cover difference between true cost and fuel surcharge recovery.


Through a true up process, trucks pay state/provincial fueltax based on the miles traveled in the state/province, and notwhere the fuel was purchased.

Canadian Conversion1 US gal = 3.785412 ltrs

Blue = High Tax States/Prov.Green = Low Tax States/Prov.Yellow = Medium Tax States/Prov.

.375 WA

.1316ml OR

.366 CA

.20TX

.270 NV

.296 ME

.3290 WI

STATE FUEL & USE TAX RATES

.260 AZ

.2450 UT

.2775 MT

.23 ND

ID .250

.14 WY

.205 CO

.21.04378ml

NM

.22 SD

.26 NE

.26 KS

.130 OK

.225 MN

.225 IA

.170 MO

.2250AR

.20 LA

.18MS

.19 AL

.375 IL

.17 TN

.167 GA

.3107 FL

.16 SC

.299 NC

.2425(MD)

.175(NJ)

NY.3665.0462ml

.1769/ltrBritishColumbia

.090/ltrAlberta

.150/ltrSaskatchewan

.115/ltrManitoba

.143/ltrOntario

.392 MI

.434(CT)

.22(DE)

.30(RI)

.21(MA).18(NH)

.28 OH

WV .322

VA.21/.175

.381 PA

.162/ltrQuebec

KY

.265/.181.0285ml

.27/.16 IN

(VT) .26

New Brunswick

.169/ltr NovaScotia.154/ltr

PEI.202/ltr

• Fuel tax is as low as 13 cents per gallon in Oklahoma to as high as 43 cents in Connecticut.

• Current Federal tax is 24.4 cents per gallon for diesel fuel.


In addition to a national average, the EIA/DOE provides regional indices which may be preferred by regional shippers.

+11

+2-4

-7

+1

+/- expressed in cents per gallon difference to EIA/DOE Diesel Fuel National Retail Average from June ‘07 through June ‘08






• According to Pilot Travel Centers, approximately 80% of trucking companies receive a discount off of retail price.





• Differences between the “peg” and the carriers actual paid miles mpg.






The dynamics of truck stop pricing which converts to thefuel surcharge that shippers pay carriers.


But…

New York Mercantile Exchange (NYMEX)

Major spot market price

Wholesale price

Retail price


Through a true up process, trucks pay state/provincial fuel tax based on the miles traveled in the state/province, and not where the fuel was purchased.

Canadian Conversion1 US gal = 3.785412 ltrs

Blue = High Tax States/Prov.Green = Low Tax States/Prov.Yellow = Medium Tax States/Prov.

.375 WA

.1316ml OR

.366 CA

.20TX

.270 NV

.296 ME

.3290 WI

STATE FUEL & USE TAX RATES

.260 AZ

.2450 UT

.2775 MT

.23 ND

ID .250

.14 WY

.205 CO

.21.04378ml

NM

.22 SD

.26 NE

.26 KS

.130 OK

.225 MN

.225 IA

.170 MO

.2250AR

.20 LA

.18MS

.19 AL

.375 IL

.17 TN

.167 GA

.3107 FL

.16 SC

.299 NC

.2425(MD)

.175(NJ)

NY.3665.0462ml

.1769/ltrBritishColumbia

.090/ltrAlberta

.150/ltrSaskatchewan

.115/ltrManitoba

.143/ltrOntario

.392 MI

.434(CT)

.22(DE)

.30(RI)

.21(MA).18(NH)

.28 OH

WV .322

VA.21/.175

.381 PA

.162/ltrQuebec

KY

.265/.181.0285ml

.27/.16 IN

(VT) .26

New Brunswick

.169/ltr NovaScotia.154/ltr

PEI.202/ltr

• Fuel tax is as low as 13 cents per gallon in Oklahoma to as high as 43 cents in Connecticut.

• Current Federal tax is 24.4 cents per gallon for diesel fuel.


• No retailer wants to be the first to raise retail price for fear of driving business to another retailer who delayed the increase.

• Consequently, retail margins compress when the truck stop’s fuel costs rise and grow when fuel costs fall.


OCT

04NO

V04

DEC0

4JA

N05

FEB0

5M

AR05

APR0

5M

AY05

JUN0

5JU

L05

AUG0

5SE

P05

OCT

05NO

V05

DEC0

5JA

N06

FEB0

6M

AR06

APR0

6M

AY06

JUN0

6JU

L06

AUG0

6SE

P06

OCT

06NO

V06

DEC0

6JA

N07

FEB0

7M

AR07

APR0

7M

AY07

JUN0

7JU

L07

AUG0

7SE

P07

OCT

07NO

V07

DEC0

7JA

N08

FEB0

8M

AR08

APR0

8M

AY08

JUN0

8JU

L08

$-

$0.050

$0.100

$0.150

$0.200

$0.250

$0.300

$0.350

$0.400

f(x) = 8.4884366327474E-05 x + 0.109224782608696

Difference between the truck stop's cost and their selling price, i.e. their gross margin

Cen

ts p

er g

allo

n

Through all of the volatility, trend on retail gross margins remains flat at 11 cents, therefore, no trended advantage of wholesale price basis vs. retail price basis.


NYMEX HO, Platts Spot and OPIS Wholesale prices change daily and EIA (DOE) National Retail Average changes on Monday of each week.

EIA (DOE) National Retail Average buffers the volatility of wholesale (OPIS) and spot (Platts) pricing.

1/7/

081/

12/0

81/

17/0

81/

22/0

81/

27/0

82/

1/08

2/6/

082/

11/0

82/

16/0

82/

21/0

82/

26/0

83/

2/08

3/7/

083/

12/0

83/

17/0

83/

22/0

83/

27/0

84/

1/08

4/6/

084/

11/0

84/

16/0

84/

21/0

84/

26/0

85/

1/08

5/6/

085/

11/0

85/

16/0

85/

21/0

85/

26/0

85/

31/0

86/

5/08

6/10

/08

6/15

/08

6/20

/08

6/25

/08

6/30

/08

7/5/

087/

10/0

87/

15/0

87/

20/0

87/

25/0

87/

30/0

88/

4/08

8/9/

088/

14/0

88/

19/0

8

300

320

340

360

380

400

420

440

460

480

500

Comparison Between DOE Retail Avg. & NYH ULS diesel + $.78

DOE Retail NYH diesel +78 cents

Cent

s/Ga

llon

Good time to buy using retail index

Good time to buy using wholesale index


Fuelsurchargeindex.org powered by ProMiles

An option to the EIA/DOE weekly average is lane specific,daily reset pricing.


Fuel tax cost is based on the miles traveled through states and provinces. Fuel cost is based on the weighted average cost of fuel on the lane.


A Third Option• Replacement of a variable index based fuel surcharge with a fixed fuel cost.

Heating Oil

Buy NYMEX HO future contract

DOE Retail NYMEXYear US Ave. Average Diff. Crude Avg. DOEvsCrude

Average '01 1.404 0.713 0.691 25.920 0.787Average '02 1.315 0.685 0.630 26.080 0.694Average '03 1.508 0.841 0.668 31.040 0.769Average '04 1.808 1.124 0.684 41.410 0.822Average '05 2.398 1.637 0.761 56.556 1.052Average '06 2.705 1.841 0.864 66.175 1.129Average '07 2.882 2.039 0.842 72.312 1.160

Buy the NYMEX HO to DOE basis

Or carrier simply buys physical fuel at a fixed price and provides the shipper with afixed rate per mile, including fuel, for the duration requested by the shipper.

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Fuel Surcharge Alternatives September 22, 2008 Steve Graham Schneider National.

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Transcript of Fuel Surcharge Alternatives September 22, 2008 Steve Graham Schneider National.