How is fuel surcharge calculated and how does fuel surcharge work in Australia?

How is fuel surcharge calculated and how does fuel surcharge work in Australia?

This article reviews how fuel surcharges and fuel levies are calculated and applied by transport companies in Australia.

What is a fuel surcharge or fuel levy? According to Freight Metrics, a fuel surcharge or fuel levy ‘is a fee used to accommodate fuel cost fluctuations in freight rates as a very transparent method’. The transport industry in Australia is subjected to frequent changes in fuel prices which result in fluctuating costs and make it necessary for transport operators to apply a variable fuel surcharge or fuel levy.  This fuel levy may rise, fall or be removed, depending on the movements in fuel prices.

How to Calculate a Percentage Fuel Surcharge

Regional and seasonal variations in fuel costs are managed by transport operators with the application of a fuel surcharge or ‘levy’, which is intended to protect transport companies from the volatility of fuel prices. The fuel surcharge is charged as a percentage of the base vehicle operating cost to provide transparency when the transport operator’s fuel costs change.

A typical formula widely used in the road transport industry to calculate the fuel surcharge is outlined below:

(Current Fuel Price – Base Fuel Price) / Base Fuel Price = %

For example:

Current Fuel Price = $133.60

Base Fuel Price = $121.90

($133.60 – $121.90) / $121.90 = 0.095 or 9.5%

Then, multiply this percentage by the fuel weighting as advised by the supplier – 9.5% * 17% = .016 or 1.6%.

In this case, the fuel surcharge (for a typical one-month period) is 1.6%, the amount that is added to a published rate.

Why do fuel levies matter to Australian shippers?

Fuel surcharges are largely misunderstood by users of transport services and for good reason – primarily a lack of an industry standard approach.  All transport operators apply fuel surcharges to offset the cost of operating heavy equipment and hedge their pricing and revenue risk in a low-profit-margin industry, where ever-present fuel cost risk can make the difference between making and losing money.

Despite the potential data capture challenges, it is important to understand how transport operators define, calculate and apply fuel surcharges, the ratio of short–haul versus long-haul kilometres travelled and how incorrectly calculated fuel costs and fuel surcharges can increase your freight rates by up to 20 percent.

Since each individual transport operator applies fuel levies based on its unique formula—using its own base fuel price, any one of a variety of fuel price benchmarks and an ‘average’ fuel cost weighting — fuel surcharge costs can vary dramatically from one freight carrier to the next:

  • By applying its own base fuel price, a transport operator effectively seeks to measure their future fuel prices by basing the surcharge at the fuel price that existed at the date that their rate card was submitted to the customer. But many transport operators publish a rate card with a base fuel price that existed at a date in the distant past (often several years previous). Transport operators rationale for applying one base fuel price for all customers is that it simplifies their administrative burden, yet this practice effectively ensures that a fuel surcharge will be levied on all rates, irrespective of their effective date.         
  • The approach is particularly puzzling, as a freight rate is made up of a combination of fixed costs (depreciation, interest, registration, insurance, etc.) and variable or running costs (repairs and maintenance, tyres, fuel, etc.) and all of these costs (except fuel) are deemed to be current at the rate card’s effective date. Why treat fuel differently? In short, what started as a cost recovery mechanism has become a very effective revenue-raiser for most transport operators.
  • While some transport companies apply an industry recognised source for benchmark fuel prices, others apply different fuel price benchmarks with little direct relevance to the actual price of diesel in Australia.
  • Transport companies also apply a fuel cost weighting—a percentage of their fuel costs—to their entire transport task, which is often not relevant to each individual customer’s freight profile.  Most transport operators do not differentiate between short-haul and long-haul services when providing fuel cost estimates as a percent of the customers’ total freight costs. Instead, they provide a single or ‘average’ fuel cost percentage to measure cost movements from month to month.
  • This approach to calculating fuel surcharges creates confusion and inaccuracies, as heavy vehicle fuel consumption ranges widely, from approximately 25 to 40 litres per 100 kilometres travelled, depending on vehicle carrying capacity, freight density and distance travelledIn addition, fuel costs vary as a percentage of the total cost of operating a heavy vehicle (typically, 15-20 percent of short-haul operators’ costs but up to 50 percent of a long-haul operators’ costs).

Overcoming Fuel Surcharge Confusion

As a shipper, the following simple steps can help you to determine if your transport operator is applying fuel surcharges simply to recover costs or to earn additional revenue:

  1. For greater transparency and especially prior to entering into a formal contract, ask your transport operator to disclose how their fuel costs and fuel surcharges are calculated. 
  2. Ask your transport operator to provide a “fuel levy inclusive” rate card and reset the base fuel price at the current benchmark fuel cost.
  3. Confirm the percentage of long-haul work (>500km radius) versus short haul (<500km radius) work in your current transport task.
  4. Based on the above, be prepared to renegotiate the fuel cost percentage with your current transport operator.  
  5. Test the market regularly by obtaining quotes from other transport operators to confirm how their fuel surcharges are applied.  This last point is crucial, as in our experience, a formal competitive bid process is frequently the best (and in many cases the only) way to successfully renegotiate fuel surcharges and freight costs in general with your existing suppliers.

If you are confused or concerned about high fuel surcharges, it might be worth recalling when your transport operator last increased your freight rates. If you can’t remember, it may be a sign that your monthly fuel  surcharge is likely to be more than compensating your transport operator. 

It may also be a sign of a wider issue with your overall transport costs. Please feel free to contact us if you require assistance with any of the above.

Supply chain and logistics management consultants are available at New World Business Solutions to provide you with expert assistance. Contact us today:

Phone: 02 9401 9152
Email: info@newworld.com.au

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