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Fuel Surcharge Alternatives September 22, 2008

Fuel Surcharge Alternatives September 22, 2008. Steve Graham Schneider National. Why is fuel surcharge a big issue?. Hypothetical example using typical industry data. FSC. Line haul rate. $ 1,086. 35% overall increase. Line haul rate. FSC.

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Fuel Surcharge Alternatives September 22, 2008

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

  2. Why is fuel surcharge a big issue? Hypothetical example using typical industry data FSC Line haul rate $ 1,086 35% overall increase Line haul rate FSC Fuel surcharge cost has risen 380% in the last 4 years.

  3. What are customers asking for? • 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

  4. Fuel surcharge has 3 components. • 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. • 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. • 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.

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

  6. 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 carrier 16.66 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.

  7. Carriers that do not have adequate recovery through fuel surcharge do not stay in business when fuel prices rise sharply. If fuel surcharge is inadequate, then a carrier must make assumptions about the direction of fuel price when submitting a base linehaul rate.

  8. Carriers adjust base rate to cover difference between true cost and fuel surcharge recovery. • 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 (partially 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.

  9. 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. STATEFUEL & USE TAX RATES • 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. PEI .202/ltr .1769/ltr British Columbia .162/ltr Quebec .090/ltr Alberta .115/ltr Manitoba .150/ltr Saskatchewan New Brunswick .143/ltr Ontario Nova Scotia .154/ltr .169/ltr (VT) .26 .296 ME .375 WA .23 ND .18(NH) .2775 MT NY .3665 .0462ml .225 MN .21(MA) .3290 WI .22 SD .392 MI .1316ml OR ID .250 .30(RI) .381 PA .434(CT) .14 WY .225 IA .28 OH .175(NJ) .26 NE .375 IL .27/.16 IN .22(DE) WV .322 VA .21/.175 .270 NV .2450 UT .265/.181 .0285ml .2425(MD) .26 KS .170 MO .205 CO KY .299 NC .366 CA .17 TN .16 SC .21 .04378ml NM .130 OK .2250 AR .260 AZ .167 GA .19 AL .18 MS .20 LA .20 TX .3107 FL Blue = High Tax States/Prov. Green = Low Tax States/Prov. Yellow = Medium Tax States/Prov. Canadian Conversion 1 US gal = 3.785412 ltrs

  10. In addition to a national average, the EIA/DOE provides regional indices which may be preferred by regional shippers. +2 -4 +11 +1 -7 +/- expressed in cents per gallon difference to EIA/DOE Diesel Fuel National Retail Average from June ‘07 through June ‘08

  11. Carriers adjust base rate to cover difference between true cost and fuel surcharge recovery. • 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. • According to Pilot Travel Centers, approximately 80% of trucking companies receive a discount off of retail price. • Sometimes, weight, terrain, city driving and other factors favorably or unfavorably impact fuel economy.

  12. Carriers adjust base rate to cover difference between true cost and fuel surcharge recovery. • Paid based on “shortest” miles, but travel practical miles. • Differences between the “peg” and the carriers 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.

  13. The dynamics of truck stop pricing which converts to the fuel surcharge that shippers pay carriers.

  14. New York Mercantile Exchange (NYMEX) Major spot market price Wholesale price Retail price But…

  15. 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. STATEFUEL & USE TAX RATES • 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. PEI .202/ltr .1769/ltr British Columbia .162/ltr Quebec .090/ltr Alberta .115/ltr Manitoba .150/ltr Saskatchewan New Brunswick .143/ltr Ontario Nova Scotia .154/ltr .169/ltr (VT) .26 .296 ME .375 WA .23 ND .18(NH) .2775 MT NY .3665 .0462ml .225 MN .21(MA) .3290 WI .22 SD .392 MI .1316ml OR ID .250 .30(RI) .381 PA .434(CT) .14 WY .225 IA .28 OH .175(NJ) .26 NE .375 IL .27/.16 IN .22(DE) WV .322 VA .21/.175 .270 NV .2450 UT .265/.181 .0285ml .2425(MD) .26 KS .170 MO .205 CO KY .299 NC .366 CA .17 TN .16 SC .21 .04378ml NM .130 OK .2250 AR .260 AZ .167 GA .19 AL .18 MS .20 LA .20 TX .3107 FL Blue = High Tax States/Prov. Green = Low Tax States/Prov. Yellow = Medium Tax States/Prov. Canadian Conversion 1 US gal = 3.785412 ltrs

  16. 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.

  17. Cents per gallon 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.

  18. NYMEX HO, Platts Spot and OPIS Wholesale prices change daily and EIA (DOE) National Retail Average changes on Monday of each week. Good time to buy using retail index Good time to buy using wholesale index EIA (DOE) National Retail Average buffers the volatility of wholesale (OPIS) and spot (Platts) pricing.

  19. An option to the EIA/DOE weekly average is lane specific, daily reset pricing. Fuelsurchargeindex.org powered by ProMiles

  20. 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.

  21. A Third Option • Replacement of a variable index based fuel surcharge with a fixed fuel cost. + Buy NYMEX HO future contract Buy the NYMEX HO to DOE basis Heating Oil + Or carrier simply buys physical fuel at a fixed price and provides the shipper with a fixed rate per mile, including fuel, for the duration requested by the shipper.

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