Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 24

Fuel Surcharges: Allocating the Increased Cost of Fuel

U.S. Railroads, including Burlington North­ern Santa Fe Corp (BNSF) and CSX Corp., began using fuel surcharges in 2001 to recapture some of the additional costs due to the sharp rise in fuel costs in late 1999, continuing into 2000. Fuel costs have continued to increase and the fuel surcharges have continued to increase as well, accounting for approxi­mately 12 percent of BNSF’s revenues in the third quarter of 2008. Companies that use the railroads for shipping agricultural, chemical, and other commodities have been critical of the allocation methods the railroads use to apply the surcharges. The railroads have used surcharges based on a percentage of charges for the shipment. Shippers have argued that an allocation based on miles traveled in the ship­ment or other usage-based measure would be preferable. To resolve the conflict, the Surface Transporta­tion Board (STB) in January 2007 prohibited the use of a surcharge based on shipping rates. Though it did not require the use of mileage, it required that railroads must use a method to allocate fuel surcharges that correlates with actual fuel costs. The STB is an economic regulatory agency that Congress charged with the fundamental missions of resolving railroad rate and service disputes and reviewing proposed railroad mergers. The STB is administratively affiliated with the Department of Transportation.

Required How  would  you propose that the increased cost of fuel be charged to shippers by the railroads? Do you think the STB ruling should solve the problem?

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Case Introduction

With the growing times and rising inflation, the prices of the fuel are on a rise and the worst affected or the most direct affect have been on the transportation industry. The industry charges a surcharge and these surcharges go up to 35% in case of air freight, railways and roadways. These surcharges are a very important source of revenues for the firm and include most of the delivery firms transporting products/services. The unfortunate part of the scenario is that the firms do not reduce the surcharges even when the prices of the fuel fall.