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 by transport companies in Australia and examines how they work. Firstly, let’s explore the meaning and definition of a fuel surcharge or fuel levy used in Australia. Freight Metrics explain that 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 is subjected to frequent changes in fuel prices which result in fluctuating costs and make it necessary for transport companies to use a variable fuel surcharge or fuel levy which 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 by applying a fuel surcharge or fuel levy, to protect transport companies from the volatility of fuel prices. The fuel surcharge or fuel levy is charged as a percentage of the base trucking cost to provide transparency when the carrier’s fuel costs change.

Use the following formula as a fuel levy calculator to calculate the fuel surcharge:

(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.

So that’s how to calculate fuel adjustment charges and you can also use Freight Metrics’ Fuel Levy Calculator.

If you are concerned about overpaying, it might pay to ask yourself when your transport operator last increased your rates. If you can’t remember, your monthly fuel levy is likely to be more than compensating your provider and it may be a sign of a wider issue with your transport costs.

Why do fuel levies matter to Australian shippers?

Fuel surcharges and fuel levies are largely misunderstood. Most transport companies 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 fuel cost percent to measure cost movements from period to period. This approach to calculating fuel surcharges creates confusion and inaccuracies for several reasons. Firstly, heavy vehicle fuel consumption ranges widely, from approximately 25 to 40 litres per 100 kilometres of travelled, depending on vehicle carrying capacity, freight density and distance travelled. Secondly, 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 long-haul operators’).

Overcoming Fuel Surcharge Confusion

As the shipper, the following simple steps can help you to determine if the freight carrier is applying fuel surcharges correctly:

  1. Test the market by obtaining quotes from other transport companies to find out how other operators apply their fuel levies.
  2. Review and renegotiate the current fuel price and source with your current provider(s) using the Australian Institute of Petroleum (AIP) website. Use the AIP site to monitor fuel prices in Australia, especially Queensland (Qld), New South Wales (NSW), Victoria (Vic) and Australia-wide if relevant for your shipments.
  3. Ask your transport operator to provide a “fuel levy inclusive” rate card and reset the base fuel price at the current cost according to the AIP website.
  4. Confirm the percentage of long-haul work (>500km radius) versus short haul (<500km radius) work in your current transport task.
  5. Based on the above, be prepared to renegotiate the fuel cost percentage with your current freight carriers.

Fuel Surcharge Inconsistency Costs You Money

Transport companies apply fuel levies to adjust their freight charges, offset the cost of operating heavy equipment and hedge their pricing and revenue risk in their 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 companies define, calculate and apply fuel levies, the ratio of short–haul versus long-haul kilometres travelled and why poorly calculated fuel cost 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 (surcharge), a freight carrier effectively seeks to measure their future fuel prices by setting the surcharge at the price of fuel that applied 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 companies’ 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 especially puzzling, since 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 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-raising mechanism.
  • While some transport companies apply the APAC-based Singapore benchmark price of diesel (Gasoil) — the most closely aligned benchmark to Australian diesel fuel prices — to calculate fuel cost and fuel surcharges, others apply different fuel price benchmarks with little direct relevance to the 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.

For greater transparency, especially prior to entering contracts with transport operators, ask your freight carriers to disclose how they calculated fuel costs and fuel surcharges. 

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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