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Paradigm Shift: Linehaul + Fuel Surcharge is the New Linehaul

August 13, 2014

Pop quiz: A carrier has two customers that ship from Indianapolis to Dallas. Customer A pays $1.56 linehaul per mile plus FSC (fuel surcharge). Customer B pays $1.73 linehaul per mile plus FSC. Which customer has the better rate?

Correct answer: It depends on the FSC for each customer.

The long-established truckload industry practice of using linehaul rates to compare shippers’ rates on a given lane is no longer valid and can be extremely misleading.

Each of our clients has a standard FSC; however very few of our clients’ customers utilize that standard. In today’s world, the shipper drives the FSC using one of many methodologies: shipper standard FSC, PADD-specific FSC, Breakthrough® Fuel, Zero Peg Fuel, all-in-rate, etc. Most, but not all, of these methodologies use the Department of Energy’s (DOE) National Retail Diesel Average as the source to calculate the FSC.

The standard FSC today is that there is no standard. To understand the reason for this we must take a quick look at the history of fuel surcharge in the industry. Fuel surcharge came widely into play during the early 1990s as a by-product of The Gulf War. Fuel had been consistent over a long period of time since the oil embargo of 1973; with the uncertainty of supply created by the war, fuel prices spiked to unprecedented levels and carriers and shippers searched for a means to mitigate the uncertainty of fuel cost. Truckload carriers and their customers created a FSC system with a base price based on the DOE of $1.15 or $1.20 per gallon with the carrier receiving a FSC of .01 for each .05 increase over the base (based on trucks getting then around five miles per gallon). This system was fair and bilateral as there were times when carriers were applying a negative FSC when the DOE went below the base. What was implemented as a temporary solution has become an integral part of today’s pricing landscape.

Fast-forward to today and there is no standard FSC that is applied by carriers and shippers. Carriers and shippers negotiate based upon an “all-in-rate” and push the dollars to either the linehaul or FSC buckets depending on the optics that will help finalize the deal  and make the rate appear most favorable in the eyes of (generally shipper) stakeholders.

The ability to compare rates is critical when working bids, comparing rates to indices, managing metrics and trends, or analyzing specific shippers or lanes. It is critical in all of these endeavors to compare “apples to apples.” To that end, KSM Transport Advisors has created a new metric LH+F (linehaul+ FSC) that has been implemented in all of our work products, methodologies and processes. We are encouraging our clients, and everyone with a stake in a truckload carrier, to shift their rate paradigm from linehaul to LH+F.

To learn more about trucking metrics, LH+F, or our trucking company consulting services, contact KSM Transport Advisors today.

David Roush President, KSM Transport Advisors & KSMTA Canada

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