Don’t be blinded by the fuel surcharge

by Bill Cameron

When I started our business in late 1999, ‘fuel surcharge’ was a term I had never heard used. During my previous time in the freight business, fuel prices had not fluctuated so much that the increase wasn’t covered by regular increases in the freight rate.

Since early 2000, however, the fuel surcharge is a term that has rarely gone away. It’s also probably the source of the most confusion in this industry, from owner/operators all the way up to shippers and receivers.

A lack of consistency in the way they are administered has everybody baffled, and in the case of the shipper/receiver, it’s often suspected to be a spineless method of increasing rates.

Many large carriers base their fuel surcharges on an index published online by the Freight Carriers Association, or other such groups. Two problems arise from this. First, these surcharges are based on average freight rates from several years ago. Why? Please don’t tell me that none of you have increased your base freight rate since 2006.

The second problem is that, again, we are dealing with averages. I’ve whined repeatedly at what I feel are the ridiculous and insulting freight rates being offered by the dry van sector.

There are a lot more vans in circulation than flatdecks, tanks, or specialized trailers, so they, by sheer numbers alone, pull the average down.

The suggested fuel surcharges online only distinguish between LTL, TL, and heavy TL. There is no distinction between trailer types. On the surface, using this method to calculate your surcharges seems to be a lazy and ineffective system. Your primary source of increased revenue, in this case, is the surcharge. As equipment and maintenance prices increase, you can still end up running cheaper if fuel prices decrease.

In our case, we have devised a formula that realistically reflects a fair fuel surcharge, based on our own freight rates. When submitting rates – either to a new customer, or revised rates to an existing customer – the rate list clearly states the local fuel price upon which the surcharge was based. Shippers may, if they wish, call the local fuel supplier for the current diesel price to verify what we are charging is realistic.

They may then – although none seem that ambitious – calculate their surcharge on the rate, and see that the increase is a net dollar figure that only covers our increased fuel costs for that trip. It’s a fair and transparent surcharge. This honesty has caused headaches for some of our competition in the past.

One US customer, using our trucks as well as several American trucks, asked me what price diesel would have to reach for the fuel surcharge to disappear. Apparently, I was the only one who could answer the question, so ours was the only company that didn’t have any problem collecting. A Canadian customer once phoned to ask for an explanation of how our surcharges were calculated.

Assuming I was on trial, I explained the entire process, even using the freight rates to a common destination, explaining typical fuel economy figures and showing that the surcharge covered our increased costs and little or nothing more.

He then asked what the online ‘national average’ was all about, so I explained. His final question explained this whole line of questioning: ‘So how come your surcharge is 10% and your competitor’s went from zero to 30% this month when he claims to be using the national average?’

Several years ago, a shipper we dealt with was bought out by a larger manufacturer. The new shipping supervisor from the parent company informed all carriers that individual fuel surcharges would not be allowed; he would provide weekly updates as to what the accepted surcharge would be. Our freight rates were only one year old. He used the national average, and unwittingly handed us a 10% raise. Genius.

The fuel surcharges also can feed the fallacy among some owner/operators that their revenue is lower at a small carrier. Those who have a firm grasp of the numbers, and good enough math skills to be a successful owner/operator, figure out the truth quite quickly. Others never quite understand.

I had one applicant ask what our fuel surcharge was. At the time it was 10%. He angrily lectured me about how my business was being run, stating he was currently paid a surcharge of 18%. When I asked him what his base rate was (a question he hadn’t even asked me yet), he responded with a rate that was about 40 cents per mile less than I paid. I told him he should do the math instead of lecturing me. The end result on the owner/operator’s paycheque was going to be 30 cents per mile more with us than at his current job, so the difference in the surcharge rate wasn’t as critical as he thought.

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  • Bill, great article on a very ‘difficult’ subject for many; shippers and providers included. In your last paragraph you allude to what I believe needs to happen across the board – moving the ‘base’ rate that most use for the FSC to something more post millennium. The base many still use is from 1998 at around $0.39 per litre. I don’t believe we’ll ever see that in anyone’s lifetime in these parts. Why not everyone get on board with adjusting their rates to reflect a new base that is more in keeping with this decade than one that is over 15 years old. Whatever the formula – the ‘base’ needs adjusting. Seems so simple yet not too many want to lead the way. Thanks again for sharing your perspective.

  • Have you ever heard of a trucking company deducting the fuel surcharge from the driver’s pay?