One of the biggest obstacles that fleet managers and owners have to overcome is fuel consumption and fuel expenses.
As fuel prices constantly fluctuate due to external factors, it’s fundamental to acknowledge these changes on time and take adequate measures.
This is where fuel surcharge comes in – a commonly used solution that helps fleet companies protect themselves from unexpected rises in fuel prices.
In the following sections, we take a deep dive into the topic of fuel surcharge, explaining what this term means, why it’s important, how it works, and more.
What is a Fuel Surcharge?
Let’s start from the basics – what is a fuel charge in trucking?
In simple terms, a fuel surcharge is an additional fee added to the cost of goods or services to cover the increased cost of fuel.
It is also commonly used in industries different from trucking, such as shipping, freight, and public transportation, to adjust for fuel price fluctuations. Since fuel prices can be highly volatile and difficult to predict, fuel surcharges provide a way for businesses to protect themselves from sudden spikes in fuel costs.
The surcharge is usually calculated as a percentage of the total cost or a flat fee, and it is passed on to customers in addition to the base price of goods or services.
It’s important to note that fuel surcharges are not a new concept.
They have been in use for several decades, especially in sectors where transportation costs make up a significant portion of overall operating expenses (like in the case of fleet businesses).
Given the rising costs of oil and the unpredictability of fuel prices, fuel surcharges have become an essential part of many businesses’ pricing strategies.
Why are Fuel Surcharges Important?
Fuel surcharges are not just a way to pass on the costs of rising fuel prices – they also serve several critical functions for fleet businesses:
- Mitigate the risk of rising fuel costs – Fleet businesses are highly sensitive to fuel price increases. A sudden spike in fuel prices can lead to higher operating costs that may cut into profits. A fuel surcharge allows businesses to adjust their pricing in response to changes in fuel costs, ensuring that they do not absorb these increases.
- Maintain stable pricing for customers – By using fuel surcharges, fleet businesses can keep their base prices stable while adjusting for fluctuations in fuel prices. This avoids the need to renegotiate long-term contracts or constantly adjust pricing, which can be disruptive to customer relationships.
- Manage pricing volatility – Fuel prices can vary significantly within short periods, sometimes as often as weekly. A fuel surcharge allows fleet businesses to pass on the cost of fuel without having to continuously update their service prices.
These key points naturally make fuel surcharges a preferred option for dealing with fuel price spikes.
But how does a fuel surcharge actually work?
How Do Fuel Surcharges Work?
Fuel surcharges for fleet businesses are typically tied to the cost of fuel – usually diesel, as it is the most common fuel used by fleet vehicles.
These surcharges are applied based on the current price of fuel and are typically calculated using a set formula.
Let’s break down how fuel surcharges work in more detail.
In fleet businesses, fuel surcharges can be calculated using different methods. The key elements that affect these calculations include:
- The base fuel price
- Fuel efficiency of fleet vehicles,
- The distance traveled
Let’s explore how these factors come together to determine the surcharge.
Calculation Methods
There are two main methods fleet businesses use to calculate fuel surcharges – base fuel price plus market adjustments and per-mile rate.
Base Fuel Price + Market Adjustments
In this method, a base fuel price is established by the fleet business, often based on historical averages or the price of fuel when the contract is signed.
When fuel prices increase above this base level, a surcharge is applied to adjust for the difference.
The surcharge is often a percentage of the total cost and increases with each increment in the fuel price above the base price.
Here’s an example that can help you understand this method even better.
A fleet business might set a base fuel price of $3.00 per gallon. For every $0.10 increase in fuel prices above this base, the surcharge might increase by 5%.
Per-Mile Rate Linked to Diesel Prices
Fleet businesses that operate vehicles based on mileage often calculate fuel surcharges on a per-mile basis.
This method links the surcharge to changes in diesel fuel prices, adjusting the surcharge for each mile driven. A fixed surcharge per mile can be applied, which increases or decreases based on changes in diesel fuel prices.
For example, if diesel fuel prices rise by $1.00 per gallon, the surcharge may increase by $0.10 per mile.
Adjustment Frequency
Fuel surcharges for fleet businesses can be adjusted on a weekly or monthly basis depending on the frequency with which fuel prices fluctuate.
Many businesses rely on price reports, such as those from the U.S. Energy Information Administration (EIA), to determine when to update their surcharges.
These updates ensure that the surcharge remains in line with the current market rate of fuel, and they help businesses keep their pricing consistent with external changes in fuel prices.
3 Key Factors Influencing Fuel Surcharges
Now that we’ve covered the basics of fuel surcharge, it’s time to move on to the factors that have an impact on how much a fleet business will charge.
Here are the key elements that play a role in determining these fees.
Base Fuel Price
The base fuel price is the initial price point set by the fleet business for fuel at the start of a contract or service agreement.
This price serves as a reference, and when fuel prices rise above this base price, the surcharge is applied.
The base price may be set based on historical data or current market rates, but it provides a stable benchmark for surcharge calculations.
Fuel Economy of Vehicles
On the other hand, the fuel economy of the vehicles in the fleet plays a significant role in determining fuel surcharges.
The miles per gallon (MPG) of a fleet’s vehicles impacts fuel consumption and, in turn, the surcharge.
Fleets with more fuel-efficient vehicles will generally face lower fuel costs, resulting in lower surcharges, while fleets with less fuel-efficient vehicles may incur higher surcharges due to higher fuel consumption.
For instance, a fleet that operates fuel-efficient trucks may have a lower surcharge than one that uses older, less fuel-efficient vehicles.
Distance Traveled
The distance traveled is another crucial factor.
The further a vehicle travels, the more fuel it consumes, and thus, the higher the surcharge. This is particularly relevant for fleets that handle long-haul deliveries or transportation services.
For example, a long-distance shipment from one coast to the other will incur a higher surcharge compared to a short local delivery, simply because more fuel is required for longer trips.
Examples of Calculating Fuel Surcharges
To make things clearer, here are some practical examples of how fleet businesses might calculate fuel surcharges:
Scenario 1 – A Fleet Delivering Nationwide
A nationwide delivery fleet charges a fuel surcharge based on the diesel price at $3.50 per gallon.
For every $0.10 increase in fuel prices, they apply a 5% surcharge.
If diesel prices rise to $3.80 per gallon, the surcharge will increase by 15% to account for the $0.30 rise in fuel prices.
Scenario 2 – A Regional Freight Carrier
A regional freight carrier calculates a per-mile surcharge based on diesel fuel prices.
The current price of diesel is $4.00 per gallon, and the surcharge is $0.15 per mile for every $0.50 increase in diesel prices.
If the price of diesel increases to $4.50 per gallon, the surcharge per mile would increase to $0.30.
3 Benefits of Implementing Fuel Surcharges
So what are the advantages of working with fuel surcharges?
Although there are multiple pros of using this approach, below we take a look at three core benefits.
Protecting profit margins against volatile fuel prices
Fuel prices are highly volatile and can fluctuate rapidly.
For fleet businesses, this volatility can severely impact profit margins.
Fuel surcharges provide a safety net by passing the additional cost of fuel to customers, helping fleet businesses protect their margins.
Enhancing pricing transparency with clients
Fuel surcharges improve pricing transparency by clearly showing customers how fuel price fluctuations affect transportation costs.
This creates a more open relationship with clients, as they can see exactly how changes in fuel prices impact the final cost.
Improving financial forecasting and budgeting
Fuel surcharges help fleet businesses better forecast their expenses and budget for fluctuations in fuel costs.
By adjusting the surcharge according to market rates, fleet operators can more accurately predict their fuel expenses, leading to improved cash flow and better financial planning.
Challenges and Considerations
While fuel surcharges offer several benefits, they also come with challenges for fleet businesses:
- Customer resistance – Customers may be reluctant to accept fuel surcharges, especially if they are not clearly communicated or perceived as excessive.
- Complexity in calculations – Calculating fuel surcharges can be complex, as it involves multiple factors such as base fuel price, vehicle efficiency, and distance traveled.
- Need for regular updates – Fuel surcharges must be updated regularly to remain aligned with changing fuel prices, which requires additional administrative effort.
- Lack of federal regulations – There are no federal regulations governing how fuel surcharges should be applied, meaning each fleet business must create its own method for calculating and implementing surcharges. This lack of standardization can create confusion for customers and companies alike.
If you’re planning to explore fuel surcharges as an option for your fleet business, don’t forget to acknowledge and address these potential obstacles.
Wrap up
Overall, fuel surcharges are a crucial tool for fleet businesses in managing the impact of fluctuating fuel prices on operational costs.
By understanding the factors that influence fuel surcharges and how they are calculated, fleet managers can implement an effective pricing strategy that ensures they remain profitable and competitive.
