Hitting the moving target on fuel surcharges: a critical conversation for shippers and carriers

TORONTO, Ont.– In a panel discussion on fuel surcharges at the CITT’s National Conference on Supply Chain & Logistics today, Lou Smyrlis, Editorial Director of the Transportation Media group, asked shippers, carriers, and oil industry experts to weigh in on the discussion about types of fuel surcharges and the need to re-examine the processes around them.

Smyrlis also said he hoped the discussion would “spark an understanding of the different points of view and also the desire to continue the conversation.”

CITT’s National Conference, Reposition 2013, is taking place in Toronto from November 3-5.

Roger McKnight, senior petroleum analyst, with En-Pro International Inc., said there are many factors affecting the price of crude, whether it’s a low inventory in diesel as a factor of weather, a refinery or pipeline issue that immediately translates into a crude price hit, and even the perception of a political crisis that affects trading on currencies like the US dollar.

Six to twelve months out, he said, it’s expected that US shale oil and oil sands production will steadily increase and there will be some relief in terms of pipeline availability. 

In the meantime fuel price volatility wreaks havoc on the transportation industry which must try to recoup some of that instability via fuel surcharges.

Ginnie Venslovaitis, director, Transportation Operations, for Hudson’s Bay Company, said that while she wouldn’t want to “take money out of the carriers’ pockets, fuel surcharges should be based on fuel consumption and not on second drops, waiting time and other accessorials that are more driver-labour related.” 

Panelists also discussed the merits of both percentage based and invoice based fuel surcharges. 

Mark Lerner, assistant vice president, Intermodal Sales, with CN Rail, said the railway uses mileage-based surcharges for carload but for intermodal, invoice based is easier for the customer to compare.

“Invoicing is more efficient for intermodal when the complexities are built in,” he said.

Jeff Bryan, president and CEO, Jeff Bryan Transport Ltd., noted that carriers have to keep on top of the changes every time there’s a different version out for a mileage program.

“The process needs to stay as simple as possible, i.e. invoice based,” said Venslovaitis, essentially keeping the potential for arguments out of the process.

If someone did want to move to mileage based, there’s no easy way to do it other than grabbing on to something that already exists within the data, noted Richard Patenaude, vice president, Wheels International Inc.

Are shippers and carriers willing to consider a revamp and a reset of fuel surcharge rates as they stand?

“Many of us as a group need to come up with what’s the new base rate and how much of getting from A to B is fuel these days. As long as it’s simple, we should raise the bar up and make fuel the right component of a freight bill,” said Venslovaitis.

“We’re open to looking at how it’s calculated. The issue happens when there is a wide swing in oil prices that may lead to the need for recalculation or recalibration,” said Lerner.

Considering the wide range of variability in fuel pricing, if carriers are hedging to that speculation, “I would make sure I overstated my base rates to compensate,” said Patenaude.

Why hasn’t someone come up with a new benchmark? Smyrlis asked.

Because it costs money, said Bryan. “The shipper has to come to us and say we want to adjust our base rates to reflect ‘X’. Everybody has their own program-it can’t be whitewashed across the board. If a shipper wants to change their benchmark they could probably do that today,” he said.

 “The reality is that we probably won’t take the initiative to change it. Everyone needs to be in alignment on the elements of what make up the charges. We also don’t need to get government involved in the process,” said Venslovaitis.

 Are FCA fuel surcharge tables-non-negotiable or can they be considered a starting point for shipper-carrier negotiations?

 “It’s a guidepost to where the true negotiation and conversation should start. It protects your agreement with the carriers to volatility-when we look at the various reasons for why fuel prices jump around-someone has to have protection,” said Venslovaitis.

 What’s the best way then for the current fuel surcharge system to evolve?

“For intermodal we’re based on WTI and we’re going to constantly look at our tariff to make it as current as possible,” Lerner said.

“I see percentage-based as a better process, as long as people have a realistic approach to what they are paying for,” said Bryan.

“Trying to reduce it to the simplest form, making it easy to use, accurate and reflective of the market would be the best thing I could predict for the short term,” said Patenaude of the evolution of the current system.