Why trucking companies secretly hate rock-bottom fuel prices

• The dip in fuel is actually hurting some trucking companies.
• Less-than-truckload, or LTL, carriers count fuel as 10% to 15% of their revenues.
• Through the fuel surcharge system, truckers charge clients for the price of gas. They're sometimes able to make money off of it.
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A gallon of diesel costs 20% less than it did last year.

For the trucking industry, which consumed 39 billion of diesel in the US in 2016, such a steep decline in a major cost center should be good news. Such savings are particularly important now as the coronavirus brings the steepest declines to trucking volumes seen since 2009.

But one major sector of the trucking industry actually relies on high fuel prices to smooth out financially rocky times: less-than-truckload, or LTL, carriers.

All trucking companies charge their customers for the fuel that they spend. Because the price of gas varies wildly, and because a single trucking trip can rack up hundreds or thousands of dollars in fuel, the fuel surcharge is necessary to ensure that the trucking company can move goods profitably.

But when fuel prices hit unusual lows, as they have in 2020, that means the fuel surcharge dips.

A quirk on the LTL side means that those truckers can actually earn a small profit off of the fuel surcharge.

How it works

The typical trucking company will rent its entire trailer to a single customer. An LTL trucking company, instead, rents its services on a per-pallet basis, meaning several retailers or manufacturers will share one vehicle to move goods.

That means an LTL carrier can collect fuel surcharges from six or seven customers, instead of just one. This results in some "margin benefit," said Todd Fowler, equity research analyst at KeyBanc Capital Markets. Fowler explained why:

You're collecting a fuel surcharge on each of those pallets of freight that you're moving. If you added up all of those fuel surcharges for all the different customers in an environment where if you've got really good density and input a bunch of shipments that stack very nicely into your trailer, you might be collecting more fuel revenue than what your fuel expense is in that one instance.

For LTL giant Old Dominion, in 2012, when diesel was 50% more expensive, Old Dominion said 16.9% of its total revenue stemmed from fuel surcharges. For the first three months of 2020, the fuel surcharge for a single shipment dropped to 14% of the total revenue. That used to be much higher. In the first quarter of

Saia, another LTL carrier, reports similar shares. Some 12.8% of the company's revenue came from fuel surcharges in the first quarter of 2020. Saia did not report how much of its revenue came from fuel in the first quarter of 2012, but credited a 10.6% bump in revenues to "increased yield due to measured pricing actions and higher fuel surcharges."

Fowler emphasized that this is not a moneymaker for LTL companies. "Most trucking companies don't look at fuel as being any sort of profit center," he said. "They're really not trying to make money on fuel. There's just times where fuel can be more or less of a headwind or a cost."

Still, a boost in fuel prices, and available surcharges, would be welcome for struggling truckers, who would be able to use an increase in fuel surcharges to hedge falling revenues. Thanks to the challenging economic environment, Old Dominion reported in its most recent earnings a 5.2% reduction in employee headcount in the first quarter, while Saia has suspended salary increases and 401(k) matching for its employees.