Are Fuel Surcharges Fair?
Business and industries today all seem to be introducing more taxes, tariffs, and surcharges. One of the more controversial and misunderstood of these tariffs, applicable to the transportation industry, fall under the category of “fuel surcharges”.
A fuel surcharge is a charge that is set on transportation, by the carrier, to accommodate the fluctuating price of fuel. It is determined by the carrier and aims to reflect a specific formula that considers the following:
- A base fuel price, upon which anytime the fuel is above this base price, the surcharge will be calculated and applied
- Base fuel mileage
- The source and interim of the current fuel price
As mentioned before, these surcharges exist to help accommodate fluctuations in fuel prices, and other short-term price fluctuations.
It may seem unfair that this is happening since we are seeing most fuel costs dropping today. After all, when the cost driver of a service or product falls, the product price itself should, too, fall. Unfortunately, this is not the case with fuel surcharges, leaving shippers and customers wondering why?
The main problem with fuel surcharges is that there is no transparency. The rates become embedded in factors such as the freight costs, shipping charges, and other fees – thus, becoming invisible, regardless of the increase or decrease in fuel costs or other variables.
A brief history of the fuel surcharges shows that lack of legislation, and allowing past carriers to create their own formula for charging the tariff, has now created an unregulated system that is up to the carrier to create.
Here’s how fuel charges are affecting shippers everywhere:
- Inconsistent calculations of surcharges: Thanks to the lack transparency, calculating these fuel surcharges has become very inconsistent. There is little accuracy in calculating MPG, and truck efficiency isn’t considered, so many end up paying more than what is applied.
- Shippers have asked for a single rate: this rate stands, even when the fuel prices drop. This doesn’t make sense for carriers or shippers.
- Fuel charges are a significant revenue source for the carrier (cost for the client), which makes it hard to eliminate. They once existed solely to help carriers operate in an increasing fuel price market.
What drives the price of fuel surcharges?
Factors, such as hedging – which is buying fuel at a set price today to be used tomorrow — is the primary reason why surcharges don’t fluctuate much since these surcharges are set against the original purchase price. Other factors include calculating an average fuel cost using general fuel prices from across the global markets.
This isn’t always accurate though since fuel prices – especially jet fuel – can vary from country to country and market to market. Carriers will also adjust their prices depending on where they are travelling to. Regardless of any of these factors or variables, fuel surcharges are netting a profit of billions every year.
What to do if you feel fuel surcharges are unfair?
Ensure that you are armed with information, so attempt to understand what factors are involved when it comes to surcharges. This includes understanding the surcharge formula, your various transportation expenses, and what you can do to control them.
These are strategies that a strong Freight Management firm/broker should provide to you as part of their overall service platform. Negotiating freight rates without taking into consideration applicable fuel surcharges could be missing up to 30% of most shippers cost base.
While you can’t change the marketplace overnight, and fuel surcharges are likely here to stay, you should work closely with your freight management firm to understand the specific surcharge criteria that apply to your lanes and marketplaces.
Working closely with a committed freight management firm will ensure your fuel surcharges are not just charged, but first negotiated and applied in a fair and responsible manner.