| FIGURING
OUT THE PRICE OF FUEL
AND ITS IMPACT ON YOUR BUSINESS, AND...
HOW TO IMPLEMENT
A FAIR FUEL SURCHARGE
By Wayne Schooling
Q:
Even though the price of fuel has gone down a little, I would still
like to charge my customers a fuel surcharge. I know you covered this
topic once before, but could you review it again once more?
A: Of course I can review the topic for you. I'm
sure many readers out there would like to see this (still) timely
article again.
THE PRICE
OF FUEL AND ITS IMPACT
A recent study estimates that
the current fuel price spike has added 6.64 cents per mile to the
operating costs of truckload carriers who average more than 500 miles
per haul. The impact is slightly more (6.77 cents) for those who run
less than 500 miles on an average. Refrigerated carriers bore the
heaviest burden at 7.45 cents per mile. But these are only averages.
Individual truckers can figure out the fuel crisis on their own operation
with the following formula:
Step 1: Divide your 2002 fuel cost by total miles driven in 2002 to
determine your average cost per mile. Example: If you drove 105,000
miles and spent $26,000 on fuel, your equation would be:
26000 ÷ 105000 = 24.76 cents per mile
Step 2: Next, calculate your current cost factor by taking your cost
per gallon now, divided by your cost per gallon in 2002. Example:
If the average price you paid for fuel in 2002 was $1.08 and now its
$1.43, your equation would be:
1.43 ÷ 1.08 = 1.32 cost factor
Step 3: Multiply your cost factor (from Step 2) times your cost per
mile (from Step 1) to get your new cost per mile. Example:
1.32 x 24.76 = 32.68
Step 4: Subtract your 2002 cost per mile (Step 1) from your current
cost per mile (Step 3) to find the amount your cost per mile has increased
because of rising fuel prices.
32.68 - 24.76 = 7.92 cents per mile
Now get your data together and crunch the numbers to see what your
totals are.
IMPLEMENTING
A FUEL SURCHARGE
If you are wondering how to
set up a fuel surcharge, here’s how to do it. Base your fuel surcharge
on the U.S. National Average Diesel Fuel Index. The Fuel Index is
published by the Energy Information Admin. of the U.S. Department
of Energy and every Monday it is updated. You can get the information
by calling (202) 586-6966 or by going to their (long) website address
at www.eia.doe.gov/oil_gas/petroleum/info_glance/distillate.html.
On the website, you'll find a table with the prices of fuel in different
regions of the U.S. It will give you all the U.S. retail averages
of on-highway diesel in cents per gallon (including taxes). Be sure
to use the rates from your area for the most accurate calculations.
You can set up an index of your own based on these averages. Most
companies start the surcharge chart at $1.10 (and 1%). A good method
is to build your index on 10 cent increments. With the national average
around $1.55 you should build an index that sets that amount in the
middle, allowing for increases and/or decreases.
Since the national average is calculated each Monday afternoon, it
would be a good idea to make your weekly adjustments on Tuesday or
Wednesday. Small business owner-operators do not need government approval
or to file an application with the DOT in order to implement a fuel
surcharge. Following is a sample chart, you can use or make to give
to your customers.
When the U.S. National
Average
Diesel Fuel Index Price is:
$1.10 - $1.19 my surcharge will be 1%
$1.20 - $1.29 my surcharge will be 2%
$1.30 - $1.39 my surcharge will be 3%
$1.40 - $1.49 my surcharge will be 4%
$1.50 - $1.59 my surcharge will be 5%
$1.60 - $1.69 my surcharge will be 6%
$1.70 - $1.79 my surcharge will be 7%
$1.80 - $1.89 my surcharge will be 8%
$1.90 - $1.99 my surcharge will be 9%
$2.00 - $2.09 my surcharge will be 10%
If the current price of fuel is $1.55, your surcharge would begin
at 5%. If the price dropped to $1.47 the following week, the surcharge
would then be 4%. As the fuel crisis gets worse, your surcharge gets
higher. As the problem tapers off (if it ever does), your surcharge
will slowly go down until you can discontinue it altogether. Be sure
to notify your customers with either a letter or a faxed memo that
goes something like this:
Dear XYZ Customer,
As you are no doubt aware, fuel prices remain at historic levels.
ABC Trucking has acted in good faith to resist seeking price relief
as long as we possibly could. Due to the critical nature of the current
situation, we can no longer continue to absorb the extra cost.
Therefore, effective xxxxx, 2003, we must implement a temporary fuel
surcharge of xx percent on all shipments. The fuel surcharge will
remain independent from our base rates and will be shown as a separate
entry on our freight bill. The fuel surcharge amount will be a percentage
of the net line haul charges.
Our pricing is based on the U.S. National Average Diesel Fuel Index.
We will review this data on a weekly basis.
We deeply appreciate your understanding and partnership with us in
helping to share the burden of these fuel cost increases.
Respectfully,
John Jones - ABC Trucking
I hope all this has made sense to you. If not, read it again. If you're
still confused, feel free to call me at (562) 630-7637 or e-mail me
at wayne@ntassoc.com and we
can talk more about it. I hope this review was helpful. Until next
month, "Drive Safe - Drive Smart!"
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