Waynes World - October 2005

OCEAN CARRIERS IMPOSE FUEL SURCHARGE BUT
DON'T PASS IT TO DRIVERS, AND...

HOW TO IMPLEMENT A
FAIR FUEL SURCHARGE
By Wayne Schooling

A friend of mine, Terry Morgan, recently alerted me to an interesting bit of information. Following the lead of the Transpacific Stabilization Agreement (TSA) members who instituted a $40 per container inland fuel surcharge effective August 15, 2005, ocean container lines in the Westbound Transpacific Stabilization Agreement (WTSA) will impose an inland fuel surcharge effective October 1, 2005. Like TSA, WTSA members operate under antitrust protections granted in the Shipping Act of 1984 which permits foreign owned steamship cartels to meet, discuss costs, prices and procedures, and set rates for both ocean and inland domestic intermodal truck transportation.

Unfortunately, as in the case with the TSA fuel surcharge levy, the domestic intermodal truckers that move these containers and buy the fuel necessary for inland transport will not be getting the cost reimbursement generated by the WTSA per container fuel surcharge. What the intermodal truckers receive in the way of fuel surcharges and payments (which are not contractually guaranteed) is a very small percentage of the local container truck rates, leaving the bulk of the announced new per container surcharge to the ocean carriers that do not otherwise purchase the fuel.

So how does one protect his or her business? Well, the first thing you need to do is figure out what the price of fuel is doing to you and then use the following instructions to implement a fair fuel surcharge.

Back in May 2003, when I first wrote about fuel surcharges, fuel was around an average of 1.78 per gallon. Since the beginning of 2005, the U.S. Dept of Energy reports that the per gallon diesel fuel price has risen more than 33% (from $1.96 to $2.92) on 8/29/05. The West Coast average (CA) was $3.05 per gallon! Everyone complains about the high fuel prices but it astounds me that nobody does anything about it. So, if you have ever wondered how you could set up a fuel surcharge but have never incorporated one into your operation, here’s how to do it. Remember, small business owner-operators and motor carriers DO NOT need to get government approval or file any type of application with the DOT to implement a fuel surcharge. Last time (May 2003) I got into detailed math and percentages. This time, I'm going to keep it simple and base the surcharge on the difference between the standard industry benchmark price ($1.10) and the average price paid.

Base your fuel surcharge on the U.S. National Average Diesel Fuel Index. The Fuel Index is published by the Energy Information Administration of the U.S. Department of Energy and it is updated every Monday. You can get this information from the internet at http://tonto.eia.doe.gov/oog/info/wohdp/diesel.asp or by calling (202) 586-6966.

These diesel fuel prices are based on the average price of fuel in each region for the week indicated. As you will see, there is still a big difference in West Coast fuel, so be sure to use the applicable rates. They are broke down into the following areas: East Coast, New England, Central Atlantic, Lower Atlantic, Midwest, Gulf Coast, Rocky Mountain, West Coast and California (by far the worst price). Because the national average is calculated each Monday afternoon, it would be a good idea to make your weekly adjustments on Tuesday or Wednesday.

Let’s assume your truck gets an average of 5 miles per gallon, and that a fuel surcharge (per gallon) is the difference between the average fuel price in your region and $1.10, the standard industry benchmark price. Most companies begin imposing a fuel surcharge when the price goes above $1.10 per gallon. They assume that their basic rates cover their costs when fuel is $1.10 and lower. When the price goes higher than $1.10, they impose a fuel surcharge to recoup those costs.

Here is a formula you can use to calculate your increased fuel costs and the amount of surcharge you should charge and collect. First, gather all the numbers: the total miles you’ll drive (say 1,000 miles), your truck’s average miles per gallon (say 5 mpg), the average price of fuel for the date and the region where you picked up the load (say $3.05 per gallon). Now do the math.

1) Figure your increased fuel costs per gallon used: take the average price of fuel for the day and subtract the benchmark price: $3.05 - $1.10 = $1.95 (which is the increased cost of fuel per gallon).

2) Figure the gallons of fuel you used: a 1,000 mile trip divided by 5 mpg = 200 gallons.

3) Multiply the total fuel surcharge: gallons used (200) multiplied by the fuel surcharge per gallon ($1.95) equals your increased fuel costs and the total fuel surcharge you should charge and collect for that trip ($390).

Lastly, notify your customers with either a mailed letter or a faxed memo. You can use the following letter as a sample:

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. But due to the critical nature of the current situation, we can no longer absorb the increased cost.

Therefore, effective xxxxx, 2005, we must implement a temporary fuel surcharge 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 the difference between the standard industry benchmark ($1.10 per gallon) and the current average price. 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.