Record oil prices force transport rethink

By Nick Carey - Analysis

CHICAGO (Reuters) - Record oil prices are forcing many transportation companies to rethink how they buy and use fuel as it becomes an ever-larger part of their cost base.

"Not too many years ago, if you'd asked an executive at a transport company what their fuel management strategy was, the answer would have been 'I don't know,'" said Rich Cilento, chief executive of FuelQuest, which operates a system for transport companies to manage fuel purchases, logistics and inventory.

"Now fuel has such an influence on a business, analysts and shareholders demand a sophisticated fuel strategy," he said.

FuelQuest's customers -- including package delivery company United Parcel Service Inc (UPS.N: Quote, Profile, Research, Stock Buzz), railroad Burlington Northern Santa Fe Corp (BNI.N: Quote, Profile, Research, Stock Buzz) (BNSF), wholesale store operator Costco Wholesale Corp (COST.O: Quote, Profile, Research, Stock Buzz), trucking company YRC Worldwide Inc (YRCW.O: Quote, Profile, Research, Stock Buzz) and Saudi Arabian Airlines SAUD.UL -- use it to source more than 13 billion gallons of fuel annually.

"Transport companies are creating fuel management teams, centralizing procurement and buying wholesale," Cilento said.

This reflects the fact that it has been quite a year for oil. The price per barrel hit a record $111 on Thursday following a rally that added more than 25 percent to the price tag in a little more than a month. Prices have risen about 90 percent since mid-March 2007, a stinging slap in the wallet for consumers, shippers and their customers alike.

Most transport companies manage to pass on some or most of their fuel costs to customers through surcharges. These kick in after a time lag, so publicly-traded transport companies tend to see earnings hurt when prices rise rapidly, with a lift for profits after prices recede.

Among the hardest hit by the rising oil prices are truck companies. Some executives say that once diesel hits $3 per gallon it becomes their single biggest cost. Prices are now close to $4 and truck operators are hurting.