Tim Fawkes, Managing Director, 3T Logistics

Can hauliers afford to pass on falling fuel prices to customers?

Managing Director | 3T Logistics

The combination of falling oil prices and economic recovery has created more positive conditions for the haulage industry than we have seen for almost a decade.  After years of continually rising fuel costs reducing profit margins to the limit, at last hauliers – and their customers – have some good news.

Since June 2014, global oil prices have been steadily falling from a high of £1.17 per litre to £0.85 per litre, resulting in lower prices for consumers and haulage companies for the first time since September 2009.

So what does this mean in real terms?  At the start of 2014, fuel accounted for around 37% of the total cost of running a 44 tonne truck – equating to an annual spend of £52,000.  However, with current fuel prices, this cost has now reduced to an estimated £43,000.  This means that, in theory at least, hauliers should now be able to pass these lower costs onto their customers, whilst maintaining reasonable margins.

The real impact on the freight industry

However, despite the fact that fuel prices have fallen by around 20% since January 2014, it is debatable whether many freight companies are experiencing equivalent reductions in operating costs in real terms.  According to the Freight Transport Association, the falling cost of oil has only been passed on ‘to an extent’ to the transport industry.  Factors such as fuel duty of 57.95p per litre and the fact that oil is traded in dollars have offset the reduction.  Furthermore, falling fuel prices have been counterbalanced by increases in other areas, such as higher ferry rates to Europe which were introduced in January – an increase of around €17 on average per one-way trip due to the implementation of new EU sulphur emission regulations.

This means that it is only those who are managing fuel in a fuel surcharge (and rebate) mechanism who will be able to really take advantage of reduced fuel prices.  For example, for rates agreed this time last year, fuel costs would have represented approximately 33% of the transport rate.  With a 20% reduction in fuel during this period, this should materialise as a 6.85% rebate for customers – which on a rate of £350 would be £24.

Surcharge reductions

Over the coming months, it will be interesting to see how many companies do pass on savings to their customers.  For example, one major haulage company reports that their fuel surcharge for regional deliveries has fallen from 7.5% in January 2015 to 5.5% in March 2015.  In this particular example, the surcharge is linked to the consumer price in Euros of diesel fuel inclusive of duties and taxes.

Another haulage company in the Midlands recently stated that their surcharge on delivery services is now 0%, an announcement that resulted in a visit from Chancellor George Osborne and considerable media attention.  However, as an independent expert in transport management, I would question the legitimacy of such a statement.  In this instance, if fuel now costs less than when prices were originally agreed (which means they would need to have been agreed in September 2009), and the fuel mechanism is managed properly, customers should rightly expect a rebate from hauliers to align prices.  So, a company may say they have a zero fuel surcharge, but unless their prices were agreed pre-September 2009, they are making money out of the reduced price of fuel at the customers’ expense.

Automating price management

It can be quite complex for companies to work out fuel for different carriers with rates agreed at different times for different service levels (another reason to support a completely transparent fuel mechanism).  This is why our proprietary transport management system SOLO manages all the complexity on behalf of our customers.  Fuel is based at the date the rates were submitted.  As fuel prices increase a positive fuel surcharge is added, and as they decrease a negative fuel rebate is applied.  This is a fair and transparent process agreed with carriers at the time of negotiation, applied automatically on the invoice calculation for the carrier to raise their invoice against.

Of course, the very best way to reduce transport costs for both the haulier and the customer is by working in partnership to optimise transport processes.  This can be achieved by introducing a programme of enhanced vehicle utilisation, reduced empty running and the implementation of continuous improvement to help remove waste from the supply chain.

As an expert in transport management, I believe that the effect of price fluctuation should be stripped out of the transport cost altogether – ultimately it benefits no one to lose or gain from the price of fuel.  Transparency and fairness are essential if hauliers and their customers are to work together to achieve high levels of customer service at a competitive price.  This is the way that everyone will truly benefit.

3T Logistics