When fuel prices move sharply, a carrier's recent linehaul-plus-fuel-surcharge rates can look artificially different from an industry index built from an older and longer period.
The steep decline in fuel prices during the prior year affected trucking in several ways. One specific problem appeared in freight network optimization, where rate indexes are used to compare a carrier's rates with market rates.
Normally, differences between the time periods represented by the carrier data and the market index are manageable. When fuel prices change significantly over a short period, however, those timing differences can distort the comparison.
Fuel Prices Change the Fuel Surcharge
Changes in fuel prices produce corresponding changes in the fuel surcharge billed by carriers. Because the market uses many fuel-surcharge methodologies, KSM Transport Advisors compared rates using linehaul plus fuel surcharge, or LH+FSC.
Including the surcharge makes the total rate directly sensitive to changes in fuel prices.
Some carriers had recently seen a pronounced change in the metric comparing their own rates with market rates. The apparent variance had grown substantially, but part of the increase was caused by a rapidly declining fuel surcharge rather than by a change in underlying linehaul pricing.
Mismatched Time Periods Create the Distortion
The carrier's rate data often reflects a recent period, while an industry rate index may cover an older and longer period. When the fuel surcharge changes slowly, that mismatch has little effect. When it changes quickly, the periods no longer represent comparable fuel costs.
The article used Department of Energy national average diesel prices to illustrate the problem. Fuel averaged $2.519 per gallon in October 2015 and $2.143 in January 2016.
As diesel prices fell, fuel surcharges fell. Because LH+FSC includes the surcharge, the total rate also fell even if the linehaul component did not change.
Comparing an industry rate from the fourth quarter of 2015 with a carrier's rate from January 2016 therefore created, to some degree, an apples-to-oranges comparison. The industry period retained more of the earlier, higher surcharge while the carrier's current period reflected the lower surcharge.
The larger the gap between the two time periods, the more pronounced the distortion could become.
The Issue Is Not a Failure of Rate Indexes
The article did not criticize rate indexes. Major indexes fill an essential need because freight network optimization depends on reliable market data, and client results demonstrated the value of the index information being used.
The issue arose from a specialized circumstance involving the fuel-surcharge component. It did not indicate a broader problem with rate indexes.
Balancing Timeliness, Seasonality, and Data Density
KSM Transport Advisors used its chosen index period because it normally offered the best balance among time matching, seasonality, and data density. Fuel prices usually changed gradually enough that the time lag did not create a material problem.
Future fuel-price movements remained uncertain, so the firm was evaluating options for making client-to-market comparisons clearer during periods of rapidly changing fuel surcharges.
Freight network analysis always requires decisions about data sources, comparison periods, and methodology. Recognizing this timing problem was part of continuously improving the accuracy of the analysis.