Newsletter Archive

How to protect margins during fuel spikes

What to watch: FSC gaps, cash timing and fuel efficiency

(Image courtesy Craig Decker)

Diesel prices this week ballooned to an average $5.401 per gallon, with rates well above $6 on the West Coast. With no end in sight to diesel's climb, how can trucking companies budget for the near- and long-term future, keeping as many costs under control as possible?

For advice, we turned to Craig Decker, managing director and head of transportation and logistics at Brown Gibbons Lang & Company. He shares actionable tips to lessen the impact of higher fuel costs and help the overall balance sheet.

—Interview by Shefali Kapadia, edited by Bianca Prieto

Are owner-operators and smaller carriers more impacted by fuel spikes or at a bigger disadvantage than larger trucking companies?

Generally speaking, truckers have a fuel surcharge (FSC) mechanism built into their pricing to protect them from fuel price swings. While truckers may calculate their FSC differently, the inclusion of the FSC protects them from rising fuel prices. The FSC is negotiated between the shipper and carrier, or in certain circumstances, it is provided to the carrier as a general FSC rate. Larger carriers have the ability to negotiate more favorable FSCs than smaller carriers due to their scale and importance to the shipper.

Another risk to all carriers, but particularly smaller carriers, is their ability to collect the full FSC from the customer. While not a regular practice, shippers could withhold some of the FSC upon payment in periods where their costs (including fuel) have increased materially.

How can trucking leaders at small carriers budget for higher fuel costs in the near-term future?

Budgeting for a rising fuel environment is generally a cash flow timing exercise. The FSC mentioned above will cover the rise in fuel prices, but the carrier will have to purchase and pay for fuel prior to running the freight and collecting from the customer. One way to partially mitigate the impact of the cash flow drain in a rising fuel environment would be to tightly monitor the cash conversion cycles. The carrier should review the days' sales outstanding and attempt to collect outstanding receivables quicker. Conversely, the carrier should monitor days payable outstanding and assess which suppliers can withstand a longer payables cycle without negative repercussions.

Is there anything they can do to mitigate high fuel prices?

Some will argue that alternative propulsion trucks (natural gas, electric, etc.) will have a lower operating cost from a fuel and maintenance perspective, but that is only one component of cost. There is a significant increase in cost for both the trucks and infrastructure when considering alternative fuels, and this is compounded by their inability to meet the duty cycle of a conventional truck. Together, these costs contribute to the argument that they are an economically unviable alternative to conventional trucks.

A simpler mitigant would be to increase mpg during operations, which can be achieved by monitoring tire pressure, installing trailer skirts and similar equipment, and regulating a maximum allowable speed via engine controls. These will lessen the fuel burn and reduce fuel consumption, hence, fuel cost.

What advice would you offer to control costs in other areas while fuel costs increase?

Regardless of the fuel cost environment, the cost of owning and operating a truck has increased steadily over the years, while rates have not increased in a similar fashion. Capacity is starting to slowly leave the market, but there is still an overcapacity of supply, and raising rates in this environment can be viewed as anti-competitive unless the carrier is of a specialized nature (i.e., specialized assets such as tank trucks with less opportunity for substitution).

Items to consider in terms of operating efficiently include:

Stay current on preventative maintenance.

Identify key vendors and negotiate rates for equipment and services provided.

Ensure that safety programs and protocols are current and enforced.

Attempt to keep driver turnover low, as the cost of screening, training and onboarding a new driver is very costly.