Fuel Charges Hit Shippers

Date: Nov 01, 2005

The recent dramatic global increase in oil prices that has so significantly affected this nation and its economy has, of course, had an impact on the converting industry, since oil is a basic raw material for many industry products.

In addition, those increases now have prompted numerous motor carriers that transport raw materials, packaging, and finished products to reevaluate the bases on which they calculate and impose fuel surcharges to be borne by the shipper community. The motor carrier community's concerns have been exacerbated further by the aftermath of Hurricane Katrina and Hurricane Rita. These surcharges have an effect on members of the converting industry and their customers.

Given the extreme volatility in oil pricing, a fuel surcharge paradigm predicated on rolling average fuel prices that span a period of several weeks no longer may be an adequate formula for ensuring a given carrier can recapture a significant percentage of fuel costs.

With fuel prices escalating so rapidly, carriers adhering to historically sufficient fuel surcharge models now are finding themselves unable to secure relief quickly enough. To a great extent, the result has been a concerted effort on the part of many carriers to revamp their schedules of rates or, in the case of contract carriage, revisit their agreements with shippers, in an effort to shorten significantly moving average periods that form the foundation for the fuel surcharge.

Unfortunately for carriers, the staggering increases in fuel prices seen in September occurred on the heels of the relatively modest freight volume generated nationally this past summer, reducing freight revenues and adding to carriers' woes. As a result, if fuel prices remain at their current level, or even worse, continue to rise, shippers should anticipate that carriers will make a concerted effort to restructure their fuel surcharges broadly.

Already evident are the initiatives many carriers have implemented to reduce the increments they have relied upon as benchmarks for triggering invocation of fuel surcharges. To illustrate, if a carrier's pricing structure historically called for a surcharge of 1 cent in the event of an increase of 7 cents in the price of fuel, the carrier might now be seeking to lower the surcharge threshold catalyst to any fuel price increase of 5 cents. In an environment where fuel charges are fluctuating wildly, often from one day to the next, this leads to much greater price volatility and unpredictability for shippers.

Another tactic carriers may try to avail themselves of is to fractionalize the factor that would normally trigger imposition of the surcharge Hence, if a fuel surcharge of 1 cent normally were imposed in the event of a 5-cent increase in the price of fuel, fractionalization would allow the carrier to impose a surcharge of one-fifth of a penny for every 1-cent increase in fuel prices. Carriers then could accelerate the pace at which they would qualify for some dimension of surcharge relief.

Recognizing the harsh realities of the current fuel pricing environment, it is clear shippers should prepare for what certainly will be a much harder line from carriers when negotiating future freight service contract negotiations.

In anticipation of those negotiations, shippers would be well advised to review thoroughly the provisions of their existing carriage agreements and the status of their carriage needs and objectives. This will allow them to make informed business judgments about whether they are capable of granting concessions to carriers in return for the latters' agreeing to minimize fuel surcharge increases they would otherwise seek to impose.

For example, a shipper may find it can accord a carrier an increased volume of shipments, perhaps due to the shipper's establishment of additional plants or distribution centers. Similarly, a shipper might conclude it is able to offer a carrier a greater percentage of hauls from certain origin points that more easily allow that carrier to capture productive and more lucrative backhaul traffic as well.

In the final analysis, the current fuel surcharge dilemma mandates that shippers throughout the converting industry apply heightened creativity and novel strategies in the course of their freight contract negotiations.

Reproduced with the permission of Paper, Film & Foil CONVERTER magazine (312.726.2802). Copyright © 2005 by Intertec Publishing. All rights reserved.

Sheila A. Millar, a partner with Keller and Heckman LLP, counsels both corporate and association clients. Contact her at 202/434-4143; millar@khlaw.com.