In this episode we talk about fuel.

If I could be “Captain Obvious” for a moment by telling you something you already know, I’d remind you that fuel is one of the top expenses anyone in the trucking business has to deal with.  Obviously driver costs (for fleet owners), insurances and truck payments are in the top five as well, but fuel is simply a necessity.  To make matters worse, it can be confusing with all of the discounts and programs fuel companies put in place.  So I want to give you just a quick view of how the fuel discount program works at Chieftain.

First, remember that volume drives the discount.  Fuel is a commodity and the companies like Pilot, Flying J, TA, Loves, etc. all want one main thing, gallons!  They measure the gallons that move through their network because it is a commodity they focus on making a few pennies per gallon times an enormous number of gallons.  Every negotiation and discussion with the fuel companies I’ve EVER had result in a discussion about how many gallons we could put in their network.  So the more gallons we have as a company the more leverage we have over pricing.

The next step in the negotiation process is to understand how the cost of the fuel works for the various trucking stop chains.  Simply put, all of the chains by their fuel from a fuel depot known as a “rack”.  The rack is the place where pipelines deliver the commodity to bulk delivery points whether it’s Exxon, Marathon, BP or whatever, they all terminate at a point where tankers come in and get loaded for deliveries to various truck stops.  The distance from the rack to the truck stop determines how many pennies per gallon will be added to the cost for transportation and the combined total of rack price and transportation becomes the “cost”.  This “cost” number is published multiple times per day (6 to be exact) and is distributed in an electronic feed to those interested in receiving it.  It is from this point that negotiations begin, with everyone knowing the actual cost of the product.

The types of fuel programs most prevalent are the “cost plus”, “retail minus” and “better of” pricing models.  The basically function just like it sounds – a “cost plus” program charges the trucking company a markup from cost for every gallon it buys regardless of what the sign says on the truck stop when you pull in.  Likewise, a “retail minus” program charges a discount of so many pennies from the retail sign on the truck stop when you pull in.  These programs make it easier to tell what you are paying but they are also subject to extreme fluctuation and individual truck stop preferences because they set the retail price so getting a discount from an artificial price isn’t really very aggressive.  Most small companies who have low monthly fuel volumes usually end up in these programs.  Then there is the “better of” programs in which you could have a “ better of cost plus $.04 or retail minus $.10” which depends primarily on the underlying cost but in times where the commodity spikes in price for a short term (like it can occasionally do in October when fuel is being consumed very quickly for farming operations) the retail minus feature can “protect you” from wild swings in cost caused by demand fluctuations.

Now, my understanding and research reveals that a lot of the truck stop chains don’t make as much profit on fuel as they do on other things they offer like food, coffee, maintenance services, etc.  This doesn’t mean they lose money on fuel, to be certain, but they are motivated to buy huge volumes of fuel from the refiners and make their money on the variation in the market prices for the fuel.  So, again, volume is their main focus and second, they want you stopping in to get coffee, food and other products or services that are at higher margins.  To incent us to buy gallons through their truck stops, because of our fleet size,