By Richard Koch | Associate Director, Logistics Operations | Chainalytics Australia
Most Australian ground transport operators/carriers levy fuel surcharges on shippers’ freight charges.
These controversial surcharges are largely misunderstood, with good reason: Most carriers do not differentiate between short- and long-haul service when providing fuel cost estimates as a percent of customers’ total freight costs. Instead, they provide a single fuel cost percent to measure cost movements from period to period.
The approach creates confusion and inaccuracies since:
- 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.
- Fuel costs vary in the total cost of operating a heavy vehicle (typically, 15-20 percent of short-haul operators’ costs but about 50 percent of long-haul operators’).
Fuel Surcharge Inconsistency Costs You Money
Despite the data-capture challenges, it’s important to understand the ratio of short- versus long-haul kilometres travelled; how carriers define, calculate and apply fuel levies; and why poorly calculated surcharges can increase your freight rates by up to 20 percent.
In essence, carriers 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.
But since each individual carrier applies fuel levies based on its unique formula—using its own base fuel price, a variety of fuel price benchmarks and fuel cost weighting—your fuel surcharge costs are inconsistent from one operator to the next:
- By applying its own base fuel price (surcharge), a carrier in theory seeks to measure their future fuel prices by setting the surcharge at the price of fuel that applied at the date they submitted their rate card to the customer. But many transport operators publish a rate card with a base fuel price that existed at some time in the distant past (often several years ago). Carriers rationalize that applying one base fuel price for all customers simplifies their administrative burden; but 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 operators apply the APAC-based Singapore benchmark price of diesel (Gasoil)—the most closely aligned benchmark to Australian diesel fuel prices— to calculate fuel surcharges, others apply different fuel price benchmarks with little direct bearing on the price of diesel in Australia.
- Carriers also apply fuel cost weighting—a percentage of their fuel costs—to the entire transport task, irrespective of the nature of the freight task.
How to Overcome Fuel Surcharge Confusion
A few simple steps can help you as a shipper to determine if the transport operator is “doing the right thing” in applying fuel surcharges:
- 1. Test the market by obtaining quotes from other carriers to find out how other operators apply their fuel levies. You will be surprised at what you discover.
- 2. Review and renegotiate the current fuel price and source with your current provider(s) using the Australian Institute of Petroleum website.
- 3. Ask your transport operator to provide a “fuel levy inclusive” rate card and reset the base fuel price at current pricing.
- 4. Confirm the percentage of long-haul work (>500km radius) versus short haul (<500km radius) work in your current transport task. Based on this, be prepared to renegotiate the fuel cost percentage with your current provider(s).
How to Calculate an Accurate Fuel Surcharge
- 1. Subtract the base fuel price from the current fuel price, for example: (133.6 – 121.9), where 121.9 is the base fuel price and 133.6 is the current price.
- 2. Divide the difference by the base fuel price – (133.6 – 121.9)/121.9 = .095 or 9.5%
- 3. 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 percent, the amount that is added to a published rate.
If you’re concerned about overpaying, it might pay to ask yourself when your transport provider last increased your rates. If you can’t remember, your monthly fuel levy is likely more than compensating your provider. And, if my experience is any guide, it may be a sign of a wider issue with your transport costs.
Richard Koch is Associate Director for Chainalytics’ Logistics practise, where he supports the firm’s continued growth in the Asia-Pacific region. Richard has over 25 years of supply chain consulting experience, including facility design and engineering, outsourcing and third-party logistics and supply chain network optimisation. He is also highly experienced with software evaluation and selection as well as operations management, with particular emphasis on freight and transport optimisation.