Structural Breaks and Fuel Surcharge Policy: Evidence from the U.S. Less-than-Truckload Motor Carrier Industry

The U.S. LTL (less-than-truckload) industry, in which goods of unrelated business customers are shipped together, has received less attention than its significance deserves. An important feature of trucking since the 1980 deregulation has been multi-part pricing. In the LTL sector for instance, freight bills typically include three components: (a) a base charge for essential capital and labor inputs, (b) a premium for accessory services, and (c) a surcharge for fuel-related costs. Earlier LTL studies have focused either on the cost side or the determinants of LTL market rates. Few have addressed multi-part price formation. Yet this formation is crucial because, in both competitive and monopolistically competitive environments, one firm’s surcharge policy affects another. A well-designed surcharge policy can, if applied properly, be an important source of carrier revenue, and in fact has become a significant profit center at many firms. To complement the current institutional and econometric literature, the authors focus on the structure of LTL fuel surcharge policies, drawing on panel data of major U.S. LTL carriers between 2015 and 2018. The very recent character of this dataset permits a highly contemporaneous view of how surcharge rates are formed and what its inter-firm dynamics look like. The objective of the authors work is to determine how LTL carriers develop and utilize fuel surcharge policies to recover fuel expenses. The authors use the monthly observations from July 2015 to January 2018 of five major LTL firms: FedEx Freight, Yellow Roadway Corporation Worldwide, Old Dominion Freight Lines (ODFL), UPS Freight, and ArcBest Freight, accounting for just over 50% of LTL industry revenue. Along with standard linear and nonlinear unit-root test methodologies, the authors construct a spillover index of inter-firm linkages among fuel surcharge practices. Preliminary results, using the five-firm average as benchmark, indicate ABF consistently sets its surcharges above industry average. A structural break at every firm is observed in 4th quarter 2015, after which the interfirm surcharge gap has been narrowing and converging toward the sectoral average. For example, ODFL required about a year after the end of 2015 to catch up with its competitors’ surcharges. Our hypothesis that major LTL fuel surcharges have been converging toward the industry average since 2015 is confirmed, suggesting competition has intensified in recent years.

Language

  • English

Media Info

  • Media Type: Digital/other
  • Pagination: pp 419-426
  • Monograph Title: Proceedings of the International Forum on Shipping, Ports and Airports (IFSPA) 2019: Beyond Breakthroughs, Above Excellence

Subject/Index Terms

Filing Info

  • Accession Number: 01744585
  • Record Type: Publication
  • ISBN: 9789887408406
  • Files: TRIS
  • Created Date: May 11 2020 2:45PM