Because of low oil prices, fuel surcharges are relatively low, which helps ease the cost of transportation for shippers. Current carrier pricing is better than it has been in years, but this trend won’t last.
FedEx increased their fuel surcharge for the second time in 2015, which came as a surprise to many in the transportation industry. This rate increase was especially interesting because:
- Fuel prices are currently so low that it seems counterintuitive to raise the fuel surcharge.
- In recent history, all of FedEx’s annual general rate increases (GRIs) have been accompanied by reductions in fuel surcharges to ease the impact of the GRI, but this year’s GRI was partnered with two fuel surcharge increases, and 2016 will be the same.
The price of oil is expected to remain low for the next couple of years. So why did FedEx raise their fuel surcharges?
A FedEx spokesperson, Jess Bunn, said the rapid growth of e-commerce plays a role in the rate increase. FedEx understands that fuel prices won’t be this low forever. They’re looking to prepare for future industry conditions, and other carriers may very well follow suit.
For years, carriers have been hammered by high fuel prices and operated on razor-thin margins. And now, even in this short reprieve, oil prices are expected to increase after a couple of years, which will make hauling freight more expensive for carriers. At the same time, the number of drivers will shrink, which severely limits a carrier’s ability to grow and make a profit.
On top of all these extra costs in the future, the government requires carriers to invest in new, green equipment. This is great for the environment, but really strains the bottom line for trucking companies. Also, net pay in the transportation sector has increased 2.5 percent in the past year. Carriers need to pay drivers more to increase retention and attract new drivers.
Carriers are being proactive now, making investments in equipment, technology and employees, in order to be successful in the future. It’s likely carriers will follow FedEx’s lead to compensate for future conditions, when fuel isn’t as cheap as it is now, and there are far fewer drivers.
Shippers are now rushing to lock in carrier contracts while fuel surcharges are low and capacity is looser, trying to get the best rate. Truck contract rates are rising as shippers sign more contracts and lock up more capacity.
With all of these conditions in mind, it’s important to negotiate a carrier contract now, before it’s too late. The price of oil won’t stay low forever and the capacity crisis due to the driver shortage is not far off.
Some shippers are choosing to outsource transportation to a 3PL in order to gain a competitive advantage in the market with fair carrier rates, secure capacity and better freight management. 3PLs are able to provide detailed analytics and customized services to keep transportation management an efficient, cost-effective function of the supply chain.