NATION Rising fuel costs take a toll on companies' bottom lines

For big gasoline users, even a one-cent per gallon increase can cost millions.
CHICAGO TRIBUNE
CHICAGO -- Jerry Siegel, president of Chicago-based Midway Moving & amp; Storage Inc., has a painful method of coping with higher fuel costs -- his company eats the costs. Maintaining market share in the competitive local moving business doesn't allow for high-priced gasoline and diesel fuel to be pushed off on consumers easily, Siegel said.
"We are just going to hold our own prices as steady as we can," he said. "It cuts right into the bottom line, but people can't afford to pay any more for moving services."
Siegel said his fleet of 150 trucks burns 10,000 gallons of fuel a month. So far this year, such costs have risen 30 percent, he said, declining to divulge dollar amounts.
The higher costs haven't forced him to make other budget cuts -- yet, he said.
"If prices keep rising the way they are, at some point that might change," Siegel said.
Siegel did not say how high gasoline prices would have to go for him to begin more drastic changes in his business.
As crude oil prices remain persistently high, other businesses are passing along some of the increases to customers.
Crude oil closed Thursday at $37.14, up almost $1 from Wednesday's close of $36.15 on the New York Mercantile Exchange. Prices on March 19 peaked at more than $38 a barrel, the highest closing price on the NYMEX since the Persian Gulf crisis of 1990-91.
Affecting railroad
Omaha, Neb.-based Union Pacific Railroad Co., which is the nation's largest user of diesel fuel, just ahead of the U.S. Navy, said even tiny gasoline price hikes have a huge financial impact.
"Every 1-cent increase in crude oil is a $13 million increase in our fuel costs," said Robert Turner, a Union Pacific spokesman.
The railroad uses 1.3 billion gallons of diesel fuel a year to carry everything from coal to cars to canned goods from Mexico and the West Coast to Chicago, its easternmost terminus.
In most cases, the railroad includes fuel-escalation clauses in its customer contracts, a practice the company began about four years ago. But last year the railroad recovered only about 40 percent of its higher fuel costs that way.
"It obviously squeezes our profitability, because we are not able to recover it all," Turner said. "It's a tax on the economy and our customers because it makes it difficult for manufacturers and for other segments of the economy to be successful."
Union Pacific employs a hedging strategy for a small percentage of its fuel. It is likely to see 3 percent to 4 percent earnings deterioration this year as result of higher fuel costs, said James Valentine, a railroad industry analyst with Morgan Stanley.
Turner said Union Pacific doesn't comment on analysts' reports.
Higher crude oil prices this year are likely to have little effect on profits at other railroads, including Burlington Northern Santa Fe Railway Co., said Valentine.
The railroads hedged between 56 percent and 67 percent of their fuel needs this year, Valentine said, and fuel surcharges cover most of the rest of the fuel cost increase.
Freight companies
Likewise, the major U.S. air freight companies, United Parcel Service Inc. and FedEx Corp., have been able to stave off the ill effects of higher oil prices more easily than railroads.
In part that is because fuel costs represent about 3 percent and 6 percent of their revenues, respectively, compared with about 10 percent of revenues for railroads, Valentine said.
"UPS and FedEx are largely unaffected from variations in fuel prices over the long term," Valentine said, noting that both companies have had success at passing higher fuel costs on to customers through surcharges.