Fuel Surcharge Performance Report

Presented by:

Seth Lang Dan Turner

5/11/2011

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ACKNOWLEDGEMENTS

The following individual’s contributed in making this project possible.

This project could not have been successfully completed without a steady flow of support,
guidance and leadership that was provided to us throughout our Directed Studies experience.

A very special thank you goes to the following:

Mountain Equipment Co-op

Debbie Sung Mike Au Paul Robles
Manager Supply Chain
Logistics Analyst Logistics Analyst
Services

British Columbia Institute of Technology

Gordon Kennedy
Instructor
and
Project Advisor

And all others who offered advice and assistance in contribution to the

Mountain Equipment Co-op Directed Studies 2011.

THANK YOU!!!

And a special thank you goes to our families for your patience and understanding with late
nights, early mornings, and high stress moments!!

“In helping others, we shall help ourselves, for whatever good we give out completes
the circle and comes back to us”

Flora Edwards

Mountain Equipment Co-op – Directed Studies 2011

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EXECUTIVE SUMMARY

The purpose of this report is to provide the Mountain Equipment CO-OP (MEC) with information,
understanding, and methodology that MEC can use to manage fuel surcharge rates. This report will
look at how the fuel surcharge rates that MEC has paid select carriers, from 2008 through 2010,
compare to industry rates for this period. This report will allow MEC to reach a clear understanding
of where they stand relative to industry norms, as well as provide the reader with a full
understanding of the components and methodology carriers use to calculate their fuel surcharges.
The purpose is also to provide an understanding of how fuel surcharges may be reduced, or gains
may be made through negotiation with carriers. This report was prepared at the request of Mr.
Mike Au, Manager of Supply Chain Services at Mountain Equipment CO-OP. It can be separated into
four separate sections.

Understanding Fuel Surcharges: This section is purely informative. It includes fuel surcharge
history, application techniques, components, rate methodology, and industry practices.

Fuel surcharge analysis: The section of the report looked at a total of 1017 invoices from seven of
MEC’s major ground carriers used to transport merchandise through their supply chain in North
America. This information was used to compare MEC’s carriers to each other, and to a select group
of 8 companies that are comparable to MEC’s carriers. The carriers were categorized into cross
border and domestic hauls. Their fuel surcharge rate types were also separated by less than
truckload (LTL) and truckload (TL) rates. Next, a benchmark was established using the Freight
Carriers Association of Canada’s (FCA) fuel surcharge formula, and a trend analysis was conducted.
The findings key findings of the analysis are:

 MEC had an overall weighted fuel surcharge score of .99 times the combined LTL/TL FCA
benchmark for the period between January 2008 and December 2010.
o Weighted LTL = 1.25 times the FCA benchmark
o Weighted TL =.73 times FCA the benchmark
 Using the r-squared statistical formula, MEC is able to rate carriers based on the strength of
the relationship between movements in fuel prices and movements of their corresponding
fuel surcharges. This information can be used to avoid or take advantage of fuel surcharge
adjustment lag time in the short run.

Negotiating fuel surcharges: This section is also information based and provides guidance when
negotiating fuel surcharge rates. Included is the case for and against fuel surcharges, MEC’s
bargaining position, areas for improvement, evaluating gains, and a case of changing culture.

Recommendations: This report recommends that MEC:

 Implement a fuel surcharge information management system
 Employ the “Fuel Surcharge Assessment Tool” that is attached to this report
 Develop bargaining position assessment methodology
 Enforce a policy were new carriers must be “SmartWay Transport Partners”, and provide an
annual sustainability report.
 Value improvements made in fuel efficiency by carriers as reductions to fuel surcharge rates


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TABLE OF CONTENTS

Executive Summary ................................................................................................................................................................ 2
Table of Figures ........................................................................................................................................................................ 4
Part 2: Fuel Surcharge Analysis ......................................................................................................................................... 4
Introduction ............................................................................................................................................................................... 5
Purpose and Objective ...................................................................................................................................................... 5
History of Fuel Surcharges.............................................................................................................................................. 5
Establishing Rates ................................................................................................................................................................... 6
Fuel Surcharges by Country ...................................................................................................................................... 6
Formula Method ............................................................................................................................................................. 7
Industry Standards ............................................................................................................................................................ 9
Industry Fuel Surcharge Analysis ..................................................................................................................................... 9
Data Used ............................................................................................................................................................................... 9
The FCA Benchmark ........................................................................................................................................................ 10
Analytical Methodology ................................................................................................................................................. 10
Introduction to Analysis ..................................................................................................................................................... 11
Cross-Border Analysis ......................................................................................................................................................... 12
YRC Reimer.......................................................................................................................................................................... 12
Hercules ................................................................................................................................................................................ 13
Industry Cross-Border Carriers .................................................................................................................................. 14
Domestic Analysis ............................................................................................................................................................ 16
Internal Analysis .................................................................................................................................................................... 25
Relationship and Predictability of MEC’s Carriers .............................................................................................. 25
Weighted Findings ........................................................................................................................................................... 26
Negotiating Fuel Surcharges ............................................................................................................................................. 27
Justification ......................................................................................................................................................................... 27
MEC’s Bargaining Position ............................................................................................................................................ 27
Disclosure ............................................................................................................................................................................ 27
Improving Efficiency ....................................................................................................................................................... 28
Updating the Base Rate .................................................................................................................................................. 29
Changing Culture .............................................................................................................................................................. 29
Summary ................................................................................................................................................................................... 29


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Recommendations................................................................................................................................................................. 30
Bibliography ............................................................................................................................................................................ 31
Appendences ........................................................................................................................................................................... 32
Appendix (1) Freight expenses 2008 to 2010 ...................................................................................................... 32
Appendix (2) Weighted Averages .............................................................................................................................. 33
Appendix (3) Key interviews ....................................................................................................................................... 33
Appendix (4) SmartWay Transport Partnership: Innovative Carrier Strategies ................................... 34
Additional Resources Found On Accompanying CD. .............................................................................................. 36

TABLE OF FIGURES

Figure 1A Fuel price history................................................................................................................................................ 5
Figure 2A: YRC Reimer’s rate history with MEC vs. FCA benchmark (2008 through 2010).................. 12
Figure 3A: Hercules rate history with MEC Vs. FCA benchmark (2008 through 2010)........................... 13
Figure 4A: MEC’s Carriers vs. Industry fuel surcharge rates ............................................................................... 15
Figure 5A: Day and Ross LTL rate history with MEC vs. FCA benchmark (2008 through 2010) ......... 16
Figure 6A: Day and Ross TL rate history with MEC vs. FCA benchmark (2008 through 2010) ........... 17
Figure 7A: Clarke LTL rate history with MEC vs. FCA benchmark (2008 through 2010) ....................... 18
Figure 8A: National Fast Freight LTL rate history with MEC vs. FCA benchmark (2008 through
2010) .......................................................................................................................................................................................... 19
Figure 9A: Comox Pacific LTL history with MEC vs. FCA ltl benchmark (2009 through 2010)............ 20
Figure 10A: Comox Pacific TL history with MEC vs. FCA TL benchmark (2009 through 2010) .......... 21
Figure 11A: Quick X’s TL history without discount with MEC vs. FCA tl benchmark (2009 through
2010) .......................................................................................................................................................................................... 22
Figure 12A: Measuring MEC’s carriers against East West carriers’ fuel surcharge rates ....................... 24
Figure 13A: R-Square cromparison by carriers’ relationship between their fuel surcharge
movements and movements in Canadian weekly average diesel fuel prices. .............................................. 25
Figure 14A: MEC’s Weighted Average Scores ............................................................................................................ 26

PART 2: FUEL SURCHARGE ANALYSIS


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INTRODUCTION

PURPOSE AND OBJECTIVE

The purpose of this report is to both develop a comparative analysis of less than truckload (LTL),
and truckload (TL) fuel surcharge rates within the industry and compare them to Mountain
Equipment CO-OP’s (MEC) current service providers, and to recommend fuel surcharge practises
that will reduce MEC’s transportation expenses.

By identifying MEC’s past fuel surcharge performance, MEC will be able to better understand where
they currently stand as well as what changes need to be made to get where they want to go. This
understanding will assist MEC’s logistics team in making better decisions as they conduct
negotiations with carriers.

This report will give the logistics team a clear understanding of fuel surcharges, and their correct
application. In addition the factors that make up the charges and the methodology that is used to
create fuel surcharges will be uncovered. This report will dissect the fuel surcharge and look at its
elements separately, giving the reader a greater variety of negotiating options. Finally, this report
will package this knowledge so that it may be used as a valuable decision making tool for the
logistics team at MEC.

HISTORY OF FUEL SURCHARGES

Fuel surcharges came into effect in Canada during the oil embargo of the 1970’s. Transportation
companies were looking for a method by which they could pass on additional cost caused by the
embargo. They found their answer in the first Canadian fuel surcharge. The surcharge was designed
as a temporary method to allow the transportation companies to adjust to the uncertain outcome of
the oil crisis. This initial fuel surcharge was overseen by the Motor Carrier Commission, who was in
charge of establishing non-binding fuel surcharge rates to be used by carriers. As prices began to
retreat and stabilize in the 1980’s
the carriers held on to the surcharge FIGURE 1A FUEL PRICE HISTORY
and continued to apply it whenever
fuel prices made upward
adjustments.

The current reasons for the wide
spread use of fuel surcharges can be
largely attributed to three factors:
rising diesel prices due to
speculation, the September 2001
World Trade Centre attacks, and the
subsequent military actions in the
Middle East. Many of the formulas
that are in use were based on fuel (US Energy Information Administration)
prices in or around 2002. Additionally, the earliest available fuel surcharge rate histories posted on
most transportation companies’ websites also reference 2002 fuel prices or begin in 2002. Fuel


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prices steadily rose between 2002 and late 2008, and with this rise there was a subsequent rise in
fuel surcharge rates. However, the upward trend was broken by the onset of the “Economic Crisis”
which caused fuel prices to fall and freight carriers to lower their fuel surcharge rates.

In the beginning of 2009, carriers began to look at innovative ways of reducing the then lowered
surcharge as a strategy to attract business. They also looked at how to use the rate as a bargaining
tool.

ESTABLISHING RATES

With an upward trend in fuel prices, questions about fuel surcharges and how to calculate them
fairly and accurately become important. From the perspective of carriers, long-term strategies to
reduce fuel consumption do not necessarily address the short-term immediate need to deal with
volatility in fuel prices. The solution that carriers have successfully employed is the fuel surcharge,
which is the topic of this study. Though this solution works favourably for the transportation
industry, problems begin to occur when customers seek disclosure, transparency, and
understanding in regards to how the charge is calculated and applied. Some carriers become
secretive and guarded about their practices, others are more forthcoming though not completely
willing to be specific about the factors that they use to create the rates that they charge. Ideally,
from a customer’s perspective, freight carriers would only charge the actual amount caused by a
change in fuel price, where if fuel prices were to drop or fuel efficiencies were to be found, the
charge would no longer be applied.

One of the first steps to create a dynamic fuel surcharge model is to establish an accurate fuel price
reference. Transportation companies will often look to sources such as the Canadian Government’s
National Resources Canada website or the US Energy Information Administration website where
accurate fuel pricing information is available. Additionally, private sector resources such as Kent
Marketing Services and Provincial Transportation Associations provide accurate references. All of
the methods of calculating fuel surcharges in practice use this information directly or indirectly as
the variable in their rates.

There are two basic methods of establishing a fuel surcharge. The first is by following an indexed
matrix which is published and widely accessible where fuel surcharges are found by cross
referencing applicable values. The second method is to use a formula that takes into account the
specific variables that affect the carrier’s cost of doing business, which can be adjusted by inputting
a current fuel price.

FUEL SURCHARGES BY COUNTRY

CANADA
In Canada, the method often used to calculate a fuel surcharge is formula based. The Freight
Carriers Association of Canada (FCA) publishes weekly surcharge rates that are often used as a
reference in the carrier industry. This method has its advantages in that it sets a standardised rate
to be charged, it uses the average cost of fuel in Canada and it sets different rates to be charged
depending on the capacity or weight of the type of haul. The FCA also provides a reference for cross
border movements which take into account the difference in fuel prices between the US and


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Canada. This index is not exactly followed by carriers, as it is not dynamic and cannot reflect
regional issues such as the geography of Western Canada or local differences in fuel prices. The FCA
model also ignores fuel efficiencies experienced by the individual carriers as they operate in their
corridors. Because of this carriers create their own tailored formulas that meet their specific needs.

US
Most American and some Canadian transportation companies that operate in the US use the US
matrix system. This matrix takes the national average price of diesel fuel as posted by the US
Energy Administration as the indicator as to what fuel surcharge rate will be charged. The price per
gallon is first identified by the user and then the corresponding fuel surcharge is charged,
depending to the type of cargo. Companies create customized tables for both LTL and TL fuel
surcharge rates. Many of the tables that are displayed on-line do not include current price levels.
See Table 1A below for an example of a Ranger Express’s matrix.
TABLE 1A RANGER EXPRESS FUEL SURCHARGE TABLE

(Express, 2011)

FORMULA METHOD

The second and most widely used
method of calculating fuel surcharges is
the use of a formula. The products of the Fuel Surcharge = ((C - A) / A) x B
formulas are regularly expressed as a
Where:
percentage. The percentage is applied in
A = price per litre of fuel when you last set your freight
the same manner as a tax, as the dollar
rate (cents/litre)
amount charged is a percentage of the B = the percentage that fuel represents of your
freight charge before tax. An example of operating costs (percent)
a formula which is recommended to its C = the current price that you are paying for fuel
members by the British Columbia (cents/litre)
Trucking Association (BCTA) is shown.


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Example: BCTA Method

If you last set your freight rate with a fuel price of 105 cents per litre, fuel represents 25 percent of
your operating costs, and the current price of fuel is 135 cents per litre, the fuel surcharge will be:

((135-105)/105) x 25% = 7.14%

Note that you do not have to use cents per litre, but can also use dollars per litre, cents per gallon or
dollars per gallon.

The Freight Carriers Association of Canada (FCA)
uses the same basic formula as the BCTA. They
base their rates on the national average price of Example:
diesel fuel from May 1998 which at the time was
135 - 39.0 X 8.8% LTL = 21.7%
39cents per litre. They also differentiate types of
loads in their calculations depending on whether 39.0 20.7% TL = 53.4.%
the shipment is LTL, TL, and Heavy TL. The fuel
prices they index are quoted without tax being 23.2% Heavy TL = 57.1
applied. The fuel price in the example to the right
of 135 cents per litre is without tax.

An emerging trend in the TL trucking market is to
separate the actual fuel cost of the operation and include it as a line item on the invoice. This
method has companies disclosing their true fuel costs and allows customers to have access to fuel
receipts if they are requested. This disclosure promotes understanding and trust around the issue
of fuel surcharges and removes the charge from the bargaining table. Disclosure also leads to more
accurate environmental impact auditing for customers. An example of this formula is seen in the
box below.

Fuel Surcharge = (C – A) * B

A = price per litre of fuel when you last set your freight rate or base rate (cents/litre or gallon)
B = The actual amount of fuel consumed (litres or gallons)
C = the price that was paid for fuel (cents/litre or gallon)

B in this formula can be modified to be an established amount of fuel consumed as to allow for
ease of invoicing. This is done by dividing the distance traveled by the carrier on route by an
agreed upon fuel efficiency rating experienced by the company in MPG or l/km.


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INDUSTRY STANDARDS

All fuel surcharges incorporate a current cost of fuel, a base rate cost of fuel, and an operational
cost. For the most part, the single variable that companies agree upon when establishing rates is the
given cost of fuel. In the domestic carrier market, the closest thing to a standard practice when
creating fuel surcharge rates is the FCA formula. Cross border carriers often use matrices with
spreads for fuel charge movements.

Application

Most of the companies that were looked at applied the fuel surcharge as a percentage to the freight
cost, though a few intermodal TL carriers also have a per mile rate option for cargo. Intermodal
carriers also tend to use a flat fuel surcharge rate which is independent of the volume of the load.
When conducting research it was found that all of the industry interviewees felt that fuel
surcharges should not be applied to non-transportation or assessorial charges that do not require
the engine to be engaged. Exceptions would be services not normally required by MEC such as
pumps and cranes.

Communication

Fuel surcharges can be as unique as the carriers that charge them, with tailored variables, base fuel
rates, and LTL and TL differentials. The task of comparing or measuring various companies’ rates
can be confusing from a customer’s perspective. Carriers use this confusion to their advantage
creating an almost incomparable environment for customers as they try to identify who offers the
better overall deal. When conducting this study it was found that all of the carriers that were
questioned about their fuel surcharge were guarded when asked specifics about their formula,
stating that the information was “proprietary”. This shows that an unwillingness of the industry to
open disclosure of rates is still strong.

INDUSTRY FUEL SURCHARGE ANALYSIS

This section of the report looks at MEC’s relationship with seven of its major carriers who operate
in two main areas of road hauling in MEC’s supply chain. The first area that will be examined is
cross border carriers Hercules and YRC Reimer who move merchandise from MEC’s upstream
partners in the US. That will be followed by an examination of MEC’s domestic carriers Clarke,
Comox Pacific, Day and Ross, National Fast Freight, and Quick X.

DATA USED

Past Invoices

To compile the information needed for this analysis, a sample of 1017 invoices from 2008 to 2010
were taken and analysed. The data taken from each invoice was recorded in separate spread sheets
by company and included date, weight, freight charge, fuel surcharge as a percentage and dollar
amount, route, and if the load was LTL or TL.


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Fuel Price History
Sample of Clarkes Data
The two sources that were used to create an
accurate fuel price history of both Canada
and the US were the Canadian Governments
National Resources Canada website and the
US Energy Information Administration
website. This history is necessary as to
establish pricing trends, company reaction
times, and relationships between the
carriers and the index that they gauge their
surcharge level from.

THE FCA BENCHMARK

To conduct a comparison of MEC’s carriers, first a benchmark needed to be established by which to
measure their level of performance.

While conducting the research for this project it became apparent that many of the carriers in the
industry, as well as all of the trucking associations, pointed towards the Freight Carriers
Association of Canada (FCA) as their reference when establishing fuel surcharges. In fact, all of the
Canadian transport companies that were found to post more than one year of their fuel surcharge
rates history on-line, publish the same or very similar rates to the FCA. The broad recognition of
this rate source, plus their having data that covered the timeframe of the study, makes it an ideal
reference tool for benchmarking MEC’s carriers. The benchmark was created by summing the fuel
surcharge percentages over the same period of time as the timeframe of the fuel surcharge
information for each carrier. This was done for all LTL and TL fuel surcharge rates.

ANALYTICAL METHODOLOGY

R-Squared is a statistical term saying how good one term is at predicting another. This was used to
identify the relationship between the Canadian and US historical fuel price indices and the
movement of the fuel surcharge rates that were being charged to MEC within the time frame of the
study. To understand the significance of the results, one must be aware that a score of 1 would be a
perfect relationship, where a movement in the cost of fuel would result in a perfectly relative
movement in a carrier’s fuel surcharge. A score of .7 indicates that there is no conclusive
relationship between the factors. Scores also reflect each company’s reaction time to fuel price
movement. As so, they also act as good predictors of future movement behaviour by the companies.

All of the carrier’s LTL and TL rates were separated, summed and then divided by a corresponding
sum of the FCA’s rate over the same period of time. This produced a percentage of the FCA rate that
each carrier charged during the period. The US carriers were also benchmarked against the FCA
rates. Additionally, 8 carriers (5 North South and 3 East West) were selected to be compared by the
same criteria giving the study an external industry picture of comparable rates.

To give a more accurate picture of MEC’s level of performance, a weighted average was used based
on the amount of funds allocated to each carrier from 2008 through 2010.


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INTRODUCTION TO ANALYSIS

The analytical portion of this report is separated into two main parts. First, an industry analysis will
look at MEC’s cross border carriers and compare them to selected North and South carriers. In the
same section, a comparison of the East West carriers to MEC’s domestic carriers is included.
Findings will be reported at the end of each section. Second, an internal analysis will be presented,
with the intention of quantifying MEC’s carriers’ behavioural patterns as well as establishing an
overall position for MEC in regards to fuel surcharge history.

Consider the following when looking at the results of this section:

 Both areas of the analysis look at the information linearly. It is not separated by year; it
looks at the whole period in order to include both upward and downward trends in fuel
price history.
 The report also looks at TL and LTL rates separately.

Industry Analysis Considerations

The inclusion of eight carriers to establish external information about fuel surcharge rate levels will
only provide a very basic or limited picture of rate levels in the industry. As this is the case, only
direct comparison of the carriers is valid. Assumptions should not be made about the whole
industry based on the findings comparing these selected external carriers. To strengthen
measurement indicators, the FCA benchmark was selected as a third measure.

Industry Analysis Sections:

 Cross Border Analysis
 Cross Border Comparison Key Findings
 Domestic Analysis
 Domestic Comparison Key Findings

Internal analysis considerations

This section will give MEC its most accurate picture of overall performance. The carriers that were
selected for this study account for a large percentage of MEC’s total logistics budget. To refine the
results to indicate only information about road carriers, all Canada Post information was
removed from data sources. Removing this data allows the study to focus on the selected carriers
and provide more accurate findings. This part of the study only looks at MEC’s carriers. They are
compared using analytical methodology.

Internal Analysis Sections

 Internal analysis
 Relationship and predictability of MEC’s carriers
 Weighted findings


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CROSS-BORDER ANALYSIS

YRC REIMER

YRC Reimer (YRC) is responsible for MEC’s largest cross
border road carrier expense with almost $1.3 million dollars
being allocated to them from 2008 to 2010. In this period YRC
accounted for just over 9.5 % of total road carriage costs, with
nearly all of that being cross border traffic.

Through analysis it was found that the most accurate index to Carrier Type: Cross Border
account for movements in fuel surcharges was the Canadian
average diesel fuel price rates. YRC had an R-squared of .94, Account size: $ 1.3 Million
indicating a strong symmetry of movements between their fuel Relationship strength and
surcharge and the Canadian average diesel fuel price rates predictability of Fuel Surcharge
during the period. Movement: 0.94

133 of YRC Reimer’s invoices were looked at and it was found YRC Reimer vs. LTL FCA
that MEC’s primary type of shipment with YRC Reimer is LTL. Benchmark: 1.46
Therefore, only the LTL fuel surcharge rates will be used for
comparison. The result of comparing the fuel surcharge
charged to MEC by YRC Reimer against the FCA benchmark
rates from 2008 through 2010 is that YRC charged 1.46 times
more than the benchmark rate.
FIGURE 2A: YRC REIMER’S RATE HISTORY WITH MEC VS. FCA BENCHMARK (2008 THROUGH 2010)

0.45
0.40
0.35
0.30
0.25
0.20 YRC LTL Rate
0.15
FCA ltl Rate
0.10
0.05
0.00

During this period it is evident that YRC Reimer’s rates are consistently higher than the FCA
benchmark.


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HERCULES

During the period of study, Hercules was paid just over $280
thousand dollars for freight services for cross border Carrier Type: Cross Border
operations. This amount equals roughly 1% of all
Account size: $ 280 Thousand
transportation costs, not including Canada Post. This carrier is
responsible for inbound to DC shipments from upstream Relationship strength and
partners. predictability of Fuel Surcharge
Movement: 0.99
Through analysis, it was found that the strongest relationship
Hercules vs. LTL FCA Benchmark:
between fuel price movements and corresponding movement
1.38
in fuel surcharges exist with the US Energy Information
Administration`s weekly average fuel prices with an R-
squared result of over .99. This was the highest score of any of
MEC’s carriers and indicates that Hercules is very responsive
to changes in fuel prices with an almost non-existent lag time
when adjusting fuel surcharges on a weekly basis.

When looking at the companies carrying history from 2008 through 2010, a total of 124 invoices
were analyzed. It was found that all of the invoices were for LTL shipments and as such the carrier
was measured against the FCA LTL benchmark. Hercules charged 1.38 times more than the
benchmark for the same period of time.
FIGURE 3A: HERCULES RATE HISTORY WITH MEC VS. FCA BENCHMARK (2008 THROUGH 2010)

40%

35%

30%

25%

20%
HERCULES LTL Rate
15%
FCA LTL Rate
10%

5%

0%
01/01/2008
01/03/2008
01/05/2008
01/07/2008
01/09/2008
01/11/2008
01/01/2009
01/03/2009
01/05/2009
01/07/2009
01/09/2009
01/11/2009
01/01/2010
01/03/2010
01/05/2010
01/07/2010
01/09/2010
01/11/2010

Hercules fuel surcharge rates were consistently higher than the FCA Benchmark.


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INDUSTRY CROSS-BORDER CARRIERS

The companies that were selected for cross border comparison had to be C-TPAT/FAST1 accredited,
had to move freight between the US and Canada, and had to disclose their fuel surcharge rate
history or provide a matrix based on average weekly fuel prices. The following carriers were
selected: AFB Freight Systems, Con-Way, Midland Transport, Ranger Group and Road Runner
Transportation Services.

AFB Freight systems

AFB provides a fuel surcharge rate history between May 25, 2009
and December 27, 2010 for both LTL and TL loads. The following
results are looking at LTL rates only. (Fuel Surcharges, 2011) NAME: AFB FREIGHT SYSTEMS

Carrier Type: Cross Border
 R square against the US Energy Information
Administration Index was = .999 Relationship strength and
 2009-2010 LTL FUEL SURCHARGE rates divided by FCA predictability of Fuel Surcharge
Benchmark = 1.482 Movement: 0.99

Vs. LTL FCA Benchmark: 1.48
Con-Way
_____________________________________
Con-Way provides a fuel surcharge rate history between May 25,
2009 and December 27, 2010 for both LTL and TL loads. The NAME: CON-WAY
following results are looking at LTL rates only. (Con-way, 2011) Carrier Type: Cross Border

 R square against the US Energy Information Relationship strength and
Administration Index was = .966 predictability of Fuel Surcharge
 2009-2010 LTL FUEL SURCHARGE rates divided by FCA Movement: 0.97
Benchmark = 1.473 Vs. LTL FCA Benchmark: 1.47

Midland Transport _____________________________________

Midland provides a fuel surcharge rate history between May 25, NAME: MIDLAND TRANSPORT
2009 and December 27, 2010 for both LTL and TL loads. The Carrier Type: Cross Border
following results are looking at LTL rates only. (Midland, 2011)
Relationship strength and
 R square against the US Energy Information predictability of Fuel Surcharge
Administration Index was = .999 Movement: 0.99
 2009-2010 LTL FUEL SURCHARGE rates divided by FCA Vs. LTL FCA Benchmark: 1.48
Benchmark = 1.482
_______________________________________
Ranger Group INC.
NAME: RANGER GROUP
Ranger provides a fuel surcharge rate history between May 25, Carrier Type: Cross Border
2009 and December 27, 2010 for both LTL and TL loads. The
following results are looking at LTL rates only. (Express, 2011) Relationship strength and
predictability of Fuel Surcharge
Movement: 0.59

1 US/Canadian cross border customs security programs.


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 R square against the US Energy Information Administration
Index was = .585
 2009-2010 LTL FUEL SURCHARGE rates divided by FCA
Benchmark = 1.304 NAME: ROAD RUNNER

Carrier Type: Cross Border
Road Runner Transportation Services
Road Runner provides a fuel surcharge rate history between May predictability of Fuel Surcharge
25, 2009 and December 27, 2010 for both LTL and TL loads. The Movement: 0.99
following results are looking at LTL rates only. (Roadrunner, 2011)
 R square against the US Energy Information Administration
Index was = .999
 2009-2010 LTL FUEL SURCHARGE rates divided by FCA Benchmark = 1.482

CROSS BORDER COMPARISON KEY FINDINGS
It was found that the MEC Logistics Department paid close to normal fuel surcharges for cross
border LTL shipments. When looking at Figure 4A it is apparent that with the exclusion of Ranger,
MEC`s fuel surcharge performance is better than the posted performance of the other carriers
studied, when measured against the FCA LTL benchmark.

It was found that when comparing Hercules to YRC Reimer, that Hercules is quicker to react by
changing fuel surcharge rates to compensate for changes in weekly fuel prices.

Looking at MEC carriers, it was found that over the period of the study Hercules outperformed YRC
Reimer with fuel surcharges that were closer to those posted by the FCA, being lower than YRC
Reimer’s rates.

It was found that ABF, Midland, and Roadrunner share the same fuel surcharge structure as well as
rates. The relationship between movements in fuel prices and movements in fuel surcharge is very
strong and proportional for these carriers at 0.99.

FIGURE 4A: MEC’S CARRIERS VS. INDUSTRY FUEL SURCHARGE RATES

The bars
Cross Border Carriers Vs MEC shown in light
green indicate
1.50
carriers that
Times the FCA Rate

1.45 were used by
1.40 MEC. Dark
1.35 green bars are
comparable
1.30
carriers.
1.25
1.20
Road YRC
Midland Ranger AFB CONWAY Hercules
Runner Reimer
LTL 1.482 1.304 1.482 1.473 1.482 1.380 1.461


16

DOMESTIC ANALYSIS

DAY AND ROSS
During the period of the study Day and Ross transported goods
mainly within Canada. They were used to transfer inventory
between retail locations, to ship out bound from the DC, and to
a lesser extent to import goods from the US. The carrier was
used extensively in central and Eastern Canada. Day and Ross
was the recipient of over 17% of MEC’s logistics spending with Carrier Type: Domestic
a total of $2.3 million dollars.
Account size: $2.3 Million
This study looked at a total of 280 invoices that were charged Relationship strength and
to MEC by Day and Ross. Of the invoices that were studied, 178 predictability of Fuel Surcharge
were LTL and 102 were TL. Consequently, Day and Ross were Movement: LTL 0.93, TL 0.976
measured against both the LTL and TL FCA indices separately.
DAY & ROSS vs. the FCA
Day and Ross LTL Benchmark: LTL 0.93, TL 0.82

When looking at the relationship of movement and response
time to changing fuel prices, it was found that Day and Ross
scored a R square of .926 when adjusting fuel surcharge rates.

When comparing Day and Ross to the FCA LTL benchmark, it
was found that MEC was charged 0.958 times the benchmark rate. Day and Ross came under the
benchmark.
FIGURE 5A: DAY AND ROSS LTL RATE HISTORY WITH MEC VS. FCA BENCHMARK (2008 THROUGH 2010)

30%

25%

20%

15%
Day & Ross LTL Rate
10%
FCA LTL RATE
5%

0%
07/01/2008
07/03/2008
07/05/2008
07/07/2008
07/09/2008
07/11/2008
07/01/2009
07/03/2009
07/05/2009
07/07/2009
07/09/2009
07/11/2009
07/01/2010
07/03/2010
07/05/2010
07/07/2010
07/09/2010
07/11/2010

Day and Ross’s LTL fuel surcharge rates closely followed the FCA benchmark rates.


17

Day and Ross Continued…

Day and Ross TL

time to changing fuel prices it was found that Day and Ross
scored an R square of .9764 when adjusting fuel surcharge Carrier Type: Domestic
rates. This relationship is slightly stronger than the LTL
relationship.
Movement: LTL 0.93, TL 0.976
When comparing Day and Ross to the FCA TL benchmark it
was found that MEC was charged 0.821 times the benchmark DAY & ROSS vs. the FCA
rate. Again, Day and Ross came under the benchmark. Benchmark: LTL 0.93, TL 0.82

FIGURE 6A: DAY AND ROSS TL RATE HISTORY WITH MEC VS. FCA BENCHMARK (2008 THROUGH 2010)

70%

60%

50%

40%

30% Day & Ross TL Rate
FCA TL Rate
20%

10%

0%
04/01/2008
04/03/2008
04/05/2008
04/07/2008

04/09/2008
04/11/2008
04/01/2009
04/03/2009
04/05/2009
04/07/2009

04/09/2009
04/11/2009
04/01/2010
04/03/2010
04/05/2010
04/07/2010
04/09/2010

Day and Ross’s LTL fuel surcharge rates closely followed the FCA benchmark rates.


18

CLARKE
During the period of the study, Clarke was used primarily for
inbound intermodal to DC Canadian freight. Clarke was the
recipient of just under 3 percent of MEC’s logistics expense
Carrier Type: Intermodal
with $390 thousand dollars spent on their service.
Domestic
This study looked at 117 invoices from within the study Account size: $ 390 Thousand
period, all of which were based on a flat rate which didn’t
change for TL shipments (all but 6 invoices were for cargo less Relationship strength and
than 10,000 lbs.). predictability of Fuel Surcharge
Movement: 0.93
When looking at the relationship of movement and response Clarke vs. LTL FCA Benchmark:
time to changing fuel prices, it was found that Clarke scored 1.56
an R square of .930 when adjusting fuel surcharge rates.

When comparing Clarke to the FCA LTL benchmark it was
found that MEC was charged 1.559 times the benchmark rate.
Clarke came in above the benchmark.

FIGURE 7A: CLARKE LTL RATE HISTORY WITH MEC VS. FCA BENCHMARK (2008 THROUGH 2010)

40%

35%

30%

25%

20%
Clarke FSC
15%
FCA LTL Benchmark
10%

5%

0%

Clarke’s fuel surcharge rates were the farthest above the FCA benchmark for any of MEC’s studied
carriers.


19

NATIONAL FAST FREIGHT
During the period of the study, National Fast Freight was used
primarily for inbound intermodal to DC freight from venders
across Canada. This company was the recipient of just over 4
percent of MEC’s logistics expense with $575 thousand dollars
spent on their service.

This study looked at 154 invoices from within the study period, Carrier Type: Intermodal
all of which were based on a flat rate which didn’t change for TL Domestic
shipments (all but 17 invoices were for cargo less than 10,000
lbs.).
When looking at the relationship of movement and response predictability of Fuel Surcharge
time to changing fuel prices it was found that National Fast Movement: 0.860
Freight scored an R square of .860 when adjusting fuel surcharge
National Fast Freight vs. LTL FCA
rates.
Benchmark: 1.15
When comparing National Fast Freight to the FCA LTL
benchmark it was found that MEC was charged 1.15 times the
benchmark rate. National Fast Freight came in above the
benchmark.
FIGURE 8A: NATIONAL FAST FREIGHT LTL RATE HISTORY WITH MEC VS. FCA BENCHMARK (2008 THROUGH
2010)

30%

25%

20%

15%
NFF FSC Rate
10% FCA Benchmark

5%

0%
04/01/2008
04/03/2008

04/05/2008

04/07/2008

04/09/2008

04/11/2008

04/01/2009
04/03/2009

04/05/2009

04/07/2009

04/09/2009

04/11/2009

04/01/2010
04/03/2010

04/05/2010

04/07/2010

04/09/2010

04/11/2010

National Fast Freight charged moderately higher rates than the FCA benchmark though their rates
did intersect at a few points.


20

COMOX PACIFIC EXPRESS
Comox Pacific is used by MEC outbound to its Victoria retail
store. This carrier started with MEC in March of 2009, and as so
it has a reduced time period. During the period of the study
close to $148 thousand dollars were allocated to Comox Pacific’s
services.
Carrier Type: Domestic (Victoria)
This study looked at a total of 90 invoices that were charged to
MEC by this company. Of these invoices, 35 were LTL and 55
were TL. Consequently, Comox Pacific was measured against Relationship strength and
both the LTL and TL FCA indices separately. predictability of Fuel Surcharge
Comox Pacific LTL
Comox Pacific vs. the FCA
When looking at the relationship of movement and response Benchmark: LTL 1.27, TL 0.64
time to changing fuel prices it was found that Comox Pacific
scored an R square of .914when adjusting fuel surcharge rates.

When comparing Comox Pacific to the FCA LTL benchmark it
was found that MEC was charged 1.27 times the benchmark rate.
Comox Pacific came above the benchmark.

FIGURE 9A: COMOX PACIFIC LTL HISTORY WITH MEC VS. FCA LTL BENCHMARK (2009 THROUGH 2010)

25%

20%

15%

10% Comox Pacific FSC
FCA LTL Benchmark

5%

0%
05/05/2009
05/06/2009
05/07/2009
05/08/2009
05/09/2009
05/10/2009
05/11/2009
05/12/2009
05/01/2010
05/02/2010
05/03/2010
05/04/2010
05/05/2010
05/06/2010
05/07/2010
05/08/2010
05/09/2010
05/10/2010
05/11/2010

Comox Pacific’s LTL history is shorter that most carriers beginning in 2009. They consistently
charged higher that CFA benchmark rates.


21

Comox Pacific continued…
Comox Pacific TL

time to changing fuel prices it was found that Comox Pacific
scored a R square of .746 when adjusting fuel surcharge rates. Carrier Type: Domestic (Victoria)
This relationship is quite weak where movements in fuel prices
are not reflected in timely adjustments to fuel surcharge rates. Account size: $ 148 Thousand


Comox Pacific vs. the FCA
When comparing Comox Pacific to the FCA TL benchmark it was Benchmark: LTL 1.27, TL 0.64
found that MEC was charged 0.644 times the benchmark rate.
Comox Pacific comes in under the benchmark.

FIGURE 10A: COMOX PACIFIC TL HISTORY WITH MEC VS. FCA TL BENCHMARK (2009 THROUGH 2010)

40%

35%

30%

25%

20%

15% Comox Pacific FSC
FCA TL Benchmark
10%

5%

0%
05/05/2009
05/06/2009
05/07/2009
05/08/2009
05/09/2009
05/10/2009
05/11/2009
05/12/2009
05/01/2010
05/02/2010
05/03/2010
05/04/2010
05/05/2010
05/06/2010
05/07/2010
05/08/2010
05/09/2010
05/10/2010
05/11/2010

Comox Pacific consistently charged lower than FCA TL benchmark rates as seen in Figure 10A
above.


22

QUICK X
Quick X was used by MEC as a TL carrier in most cases with
very little freight being sent LTL with them. This company
stands out because of the 25% fuel surcharge discount that it
offers on 53 foot intermodal shipments compared to their
regular road fuel surcharge rates. Quick X was the recipient Carrier Type: Intermodal Domestic
of just over 23 percent of MEC’s logistics expense with close
to 3.2 million dollars spent on their service.
This study looked at 111 invoices from within the study predictability of Fuel Surcharge
period. There were 4 LTL: 47 with the 25% discount of the Movement: 0.85 (*with discount
fuel surcharge, and 60 at their regular fuel surcharge rate. removed.)
With the discount used for intermodal shipments, the
National Fast Freight vs. TL FCA
relationship between fuel price movement and the
Benchmark: 0.80 without discount,
movement in fuel surcharge rates is not conclusive with an R
.71 with discount.
square score of .351. When discounts are removed from the
data, Quick X scores an R square of .846.

When comparing Quick X to the FCA TL benchmark it was
found that MEC was charged 0.713 times the benchmark rate including the intermodal discount,
and they were charged .800 when the discounts are removed from the data. Quick X comes in under
FIGURE 11A: QUICK X’S TL HISTORY WITHOUT DISCOUNT WITH MEC VS. FCA TL BENCHMARK (2009 THROUGH
2010)

45%
40%
35%
30%
25%
20%
QUICK X TL Rate
15%
FCA TL Benchmark
10%
5%
0%
08/06/2009
08/07/2009
08/08/2009
08/09/2009
08/10/2009
08/11/2009
08/12/2009
08/01/2010
08/02/2010
08/03/2010
08/04/2010
08/05/2010
08/06/2010
08/07/2010
08/08/2010
08/09/2010
08/10/2010
08/11/2010
08/12/2010

the benchmark in both cases.

Quick X’s TL rate history falls below the FCA benchmark as shown in figure 11A. This figure does
not include the discount applied to intermodal shipments with this carrier. When the discount rate
is included the Quick X trend line is very jagged.


23

INDUSTRY DOMESTIC CARRIERS

This report looked at comparable domestic carriers as to establish MEC’s position in regards to
industry fuel surcharge rates. It was found that only three carriers met the requirements needed to
be compared to MEC’s carriers. Additional companies contacted were unwilling to share
information, or were unresponsive to requests for their rate history. Because of this, websites were
the only resource available to gather historical information for these companies. Only Maritime
Ontario, Manitoulin, and CCT Trucking post history as far back as 2008 and 2009, so they were
selected to represent the industry. As with the cross border carriers it was necessary that the
carriers be C-TPAT/FAST approved and in this case carry East West.

Maritime Ontario

Maritime Ontario meets the requirements mentioned above. They post their rate history on their
website going back to 2008. Their posted fuel surcharge rates for LTL and TL are identical to the
rates posted by the FCA for both types of shipment. As so, they reinforce the FCA standard as the
benchmark. Their relationship between movements of the fuel surcharge and movements in the
cost of fuel was perfect, with an R square of 1.00. (Maritime-Ontario, 2011)

Manitoulin Transport

Manitoulin Transport meets the requirements mentioned above. They post their rate history on
their website going back to 2008. Their posted fuel surcharge rates for LTL and TL are identical to
the rates posted by the FCA for both types of shipment. As so, they reinforce the FCA standard as
the benchmark. Their relationship between movements of the fuel surcharge and movements in the
cost of fuel was perfect with an R square of 1.00. (Manatoulin, 2011)

CCT Canada Trucking

CCT meets the requirements mentioned above. They post their rate history on their website going
back to late 2009. Their posted fuel surcharge rates for LTL and TL are slightly higher than the rates
posted by the FCA for both types of shipment. The LTL over the period was 1.106 times the
benchmark and the TL was 1.047 times the benchmark. The relationship between movements in
the fuel surcharge and the cost of fuel was an R square of .909 for LTL and .913 for TL. (CCT, 2011)


24

DOMESTIC COMPARISON KEY FINDINGS
By conducting research and comparing the individual data of each carrier the following findings
were identified:

 The East West carriers that record their past rate history online closely follow, or are
identical to the FCA published rates.
 The fuel surcharge rate used by Quick X was lower than both Day and Ross’s and the FCA
benchmark. This is significant because they are the largest carrier by volume in the study.
 The relationship between fuel surcharge adjustments and movements in fuel prices was
strongest for Day & Ross in the TL market, and for YRC Reimer in the LTL market. The
relationship was found to be lowest for Comox Pacific in the TL market and lowest for
National Fast Freight in the LTL market.
 When comparing domestic LTL rates it was found that Clarke uses a US style matrix based
on the US Energy Information Administration’s weekly average diesel prices to establish
their fuel surcharge rates for Canada.

Figure 12A compares the fuel surcharge rates paid by MEC to domestic carriers that provided their
history for this study. The red line indicates the FCA benchmark. The carriers to the right of Quick X
are the carriers that represent the industry as East West carriers. Fuel surcharge rates are clearly
comparable.

FIGURE 12A: MEASURING MEC’S CARRIERS AGAINST EAST WEST CARRIERS’ FUEL SURCHARGE RATES

1.8

1.6

1.4

1.2

1
LTL
0.8
TL
0.6

0.4

0.2

0
Clarke Comox Day and National Quick X CCT Maritime Manitoulin
Pacific Ross Fast freight Ontario

MEC’s fuel surcharge performance is spit by the FCA benchmark and the domestic carriers’ rates.


25

INTERNAL ANALYSIS

This section of the report focuses solely on the information that was gathered from MEC’s invoices.
It compares the characteristics that were separated in the analysis of each of MEC’s carriers as to
determine how they compare to each other, and how they compare to the FCA benchmark. This
section looks at two major findings. First, the overall R square findings are presented. Second, the
weighted average of all of the fuel surcharge rate information is presented.

RELATIONSHIP AND PREDICTABILITY OF MEC’S CARRIERS

The following figure shows the relationship between the movements in fuel prices and the relative
timely movement of fuel surcharges for each of the carriers by both LTL and TL movement types.
Figure 13 A is a comparison of all of the R squares of MEC’s carriers. A higher bar indicates that the
company is more likely to raise or lower fuel surcharges based on fuel price movements.

In periods of rapid upward movements in fuel prices it would be more probable that the lower bar
carriers wouldn’t adjust rates as quickly. Additionally, companies with higher bars are also more
likely to use a formula. This information will allow MEC to anticipate fuel surcharge movements in
the short run, and on a company by company basis. MEC will be able to make decisions about
timing of shipments as to take advantage of quicker or slower reaction time.

FIGURE 13A: R-SQUARE COMPARISON BY CARRIERS’ RELATIONSHIP BETWEEN THEIR FUEL SURCHARGE
MOVEMENTS AND MOVEMENTS IN CANADIAN WEEKLY AVERAGE DIESEL FUEL PRICES.

1.20

1.00

0.80
0.70
0.60 LTL
TL

0.40

0.20

0.00
Clarke Comox Pacific Day & Ross Hercules Nat ff QuickX YRC Reim

(The red dashed line at 0.70 indicates the minimum value for accurate prediction)


26

WEIGHTED FINDINGS

To more accurately rate MEC’s performance over the period of the study, all of the LTL and TL FCA
scores of the carriers were combined and weighted by using the total percentage of freight costs
allocated to each carrier (see appendix (1)). When calculating the weighted averages, Canada Post
data was removed.

The weighted average of fuel surcharge rates paid compared to the FCA formula creates an
indicator that MEC can use to measure its performance in the future. It also gives MEC a clear
picture of which companies influence their average the most and in turn where to focus
negotiations (see appendix (2)).

It was found that the weighted average amount of fuel surcharges paid by MEC for LTL shipments
was 1.25 times the FCA benchmark rate. Additionally, it was found that the weighted average of the
TL shipments was 0.73 times the FCA benchmark.

To find the overall weighted average the data needed to be broken down further. First, the
percentage of invoices found to be LTL or TL that were identified while taking the surcharge rate
sample history for each carrier was assumed to be accurate. Next, the total expense for each carrier
was divided by percentages found in the sample invoices, and the total sum of LTL and TL expenses
for the carriers in the study were summed. Finally, the LTL and TL totals were summed to
determine the total expense for each shipment type. The TL and LTL total sums were divided by the
total expense to identify their influence. When using the weights of LTL (49.5) to TL (50.5) MEC’s
overall weighted score versus the FCA benchmark is 0.99. This score indicates that MEC’s global
performance when looking at the seven carriers in the study from 2008 through 2010 is .01
below the combined average of LTL and TL fuel surcharge rates published by the Freight
Carriers Association of Canada.
FIGURE 14A: MEC’S WEIGHTED AVERAGE SCORES

1.8

1.6

1.4
1.25
1.2
LTL
1
TL
0.8
.73
0.6

0.4

0.2

0
Clarke Comox Day & Ross Hercules Nat ff QuickX YRC Reim
Pacific


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