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Tuesday, January 3, 2012

Shippers May Raise Fuel Surcharges

But rising fuel prices have taken a toll on their business.

With diesel prices near their highest levels since 2008, the impact has started to appear in the first-quarter results of companies like Union Pacific railroad and the Arkansas Best Corporation, which has a trucking subsidiary. Some shippers said they expected to raise fuel surcharges.

The timing, some economists say, could not be worse. Consumers are already paying steeper prices at the gas pump and may see prices climb in stores if diesel prices remain high. American manufacturers, meanwhile, are struggling to get back on their feet.

“The manufacturing sector is hit disproportionately hard by higher diesel prices,” said Donald A. Norman, economist for the Manufacturers Alliance/MAPI, a public policy and economics research organization in Arlington, Va. “Simply to move all this stuff around, it is really hard to affect any cost savings. You have little in the way of alternatives.”

Brandon Gale, the president of Retail Shipping Associates, said it was only a matter of time before the high fuel prices affected consumers. “It is a very straight-line relationship,” he said. “When you see fuel at the pump going up, it is going to go up at the package, too.”

Crude oil prices started going up early this year as turmoil spread through the oil-producing regions of the Middle East and North Africa. Increased global demand for fuel has added to the pressure on prices.

On Monday, the average price for a gallon of highway diesel was $4.09, according to the Energy Information Administration, which posts fuel prices every week based on a survey of outlets around the country. The current averages are in the highest range since 2008, when prices peaked at $4.76 on July 14, and more than a dollar higher than in 2010.

The Energy Information Administration price functions as a reference point for trucking companies negotiating fuel surcharges with shippers. Railroads can use a less expensive type of diesel that does not reflect the highway taxes.

While some railroad companies say their businesses can benefit from higher diesel prices because shippers may migrate to trains from trucks, they are still paying millions of dollars more for fuel.

Last week, Union Pacific said in its report on the first quarter that it paid average diesel fuel prices of $2.88 a gallon, up 33 percent from the same period in 2010. The higher costs — the company said it paid about $200 million more for fuel in the quarter than the same period in 2010 — sliced 8 cents off the company’s $1.29 in earnings per share. Even so, the earnings were the company’s highest for any first quarter in its history.

The company has already imposed fuel surcharges to recoup some of its higher costs. And while it did not say directly whether it would raise its surcharges, Tom Lange, a company spokesman, said, “It is how we are addressing it.”

Another railroad company, the CSX Corporation, said in its first-quarter results report this month that higher fuel costs added $119 million to expenses in the year, bringing fuel costs to $402 million.

Norfolk Southern reports its quarterly results on Wednesday.

Railroad companies can benefit in some ways from higher oil prices. When oil prices rise, so do the prices of other commodities, a signal of brisk demand for what is a large component of train freight.

“You can’t look at rising oil prices in a vacuum,” said H. Peter Nesvold, a managing director for research at Jefferies & Company. “It actually helps the volumes at the rails.”

In addition, some cargo usually moves to trains when diesel prices are high because they are more fuel efficient than trucks, industry officials said.

“Fuel costs are an important factor for us; it costs us more money to do what we do,” said John T. Gray, a senior vice president for the Association of American Railroads. “Fortunately, it costs our competitors typically more money than it costs us.”

He added, “If what we saw in 2008 happens now, there will probably be some customers that will seek out rail service that have not in the past.”


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