Yes, you read that correctly. Major LTL carrier, Old Dominion Freight Line, is creating fuel-surcharge-free rates for non-contract shippers. We here in the LTL industry love to hate fuel surcharges, so this news sounds pretty great, right? Well, kind of: eliminating fuel surcharges is only half the story. Old Dominion is revamping their pricing structure, which will include a higher overall base rate. A move like this has real implications for shippers, so we did some research to weigh the pros and cons for you.
What is the background behind this shift?
Trucks are expensive, drivers are hard to find and diesel fuel keeps getting cheaper. In a nutshell, carriers are facing a rising cost of doing business, and the falling price of fuel means they cannot count on fuel surcharges as additional revenue centers. Equipment costs are rising, and a shrinking nationwide driver pool means it costs more to attract and retain drivers through wages and benefits. The result: An average marginal cost of $1.68/mile in 2013, compared to $1.45/mile in 2009.
Remember our post about fuel surcharges? One would think shrinking fuel prices would translate into savings for carriers. Well, it does, to an extent: the cost of fuel has fallen so low, carriers can no longer reap the revenue benefits of the fuel surcharge formulas drawn into their contracts. Without this additional revenue stream, and in addition to growing operational costs, carriers are uncertain about their future.
The ODFL 550
Old Dominion did something about that uncertainty, and it came in the form of a revamped pricing structure: The ODFL 550. It might sound like a spaceship, but the ODFL 550 is Old Dominion’s answer to the confusing and unaccountable fuel surcharges. ODFL 550 is a “re-indexed” base tariff for non-contracted shippers that excludes fuel surcharges when the average US Department of Energy price of fuel is below $3.00/gallon. Now, the older base tariff, ODFL 559, receives a general rate increase of 4.9%. Old Dominion insists customers will retain the option to choose between ODFL 550 or 559 tariff structures.
So, why the change?
The ODFL 550 seems like a no-brainer: you lose the fuel surcharges and avoid a rate hike with the 559 tariff. Old Dominion says they created the new tariff for the shippers’ benefit: “[It] will allow shippers to provide their customers with freight quotes without the frustration of estimating fuel cost as,” remarks Todd Polen, Old Dominion’s Vice President of Pricing. This makes sense—fuel surcharge formulas are enormously confusing and constantly guilty of transforming cheap freight quotes into expensive freight rates.
But what’s the catch? According to Mr. Polen, shippers using the 550 tariff will lose their bargaining power and ability to negotiate discounts. In other words, with the ODFL 550, what you see is what you get (which could be more than customers using the 559, depending on their discounts). Shippers using Old Dominion will have to choose how they approach their LTL freight pricing.
Into the Future
All in all, Old Dominion’s move away from fuel surcharges and vague pricing models is important for the LTL industry. While their intentions are to work in the best interest of shippers, we cannot ignore that Old Dominion was almost certainly motivated by shrinking revenue centers and rising operational costs when it created ODFL 550. So in an industry where discounts are everything, it’s too early to determine if the ODFL 550 (without fuel surcharges or an ability to negotiate rates) will truly benefit shippers financially. However, this industry is notorious for overly complicated pricing structures, and here at FreightorGator, we applaud any effort to simplify the process. Simple and transparent, now that’s an LTL industry we’d like to see!