Assessing Fuel Surcharge for Owner Operators

There are Several Sides to the Fuel Surcharge Issue for professional owner operators

It can add hundreds of dollars per week at peak fuel prices – Do you understand if you are getting the right amount???

OVERVIEW

Past ICC regulations allowed shippers to be charged a surcharge when diesel fuel costs exceeded a certain level. That sunsetted with that agency’s demise and new laws are in the making. Regardless, competitive pressures are resulting in shippers paying surcharge today. Most brokers and fleets with independent contractors pass the surcharge revenue straight through to the operator.

To get surcharge from shippers, four things have to take place. First, surcharge must be calculated accurately by the carrier / broker. Next it must be explained and agreed to by the shipper. Third, it must be properly billed to the shipper. And finally the shipper should pay it. There can be problems with each step due to a variety of reasons.

We find many cases, especially with smaller fleets and some brokers, where surcharge is not even calculated because it is not understood. Billing issues come about from not asking for surcharge, being told to not even try to bill it, being told it is already in the rate and being told that their “system” can’t handle it. Even when it is billed, some shippers do not pay it.

As an operator, you need to know how to assess surcharge so that you can do whatever else you need to do to offset higher fuel prices. Calculating surcharge is actually a pretty simple process.

CALCULATING SURCHARGE

We first take the average pump price (i.e. national prices) when the load was hauled and compare it to the baseline from which surcharge is calculated. The baseline that many in the industry use is around $1.15 to $1.20 per gallon, depending on the company, region, etc. Note: This price per gallon also happens to coincide with the base target price set for crude oil by OPEC.

To calculate it you divide the pump price by your fuel mileage in miles per gallon (MPG) to come up with a cost per mile (CPM). If we use a baseline fuel cost of $1.20 per gallon and you are using 5 MPG as your fuel mileage calculator, your BASELINE is $0.24 per mile.

You then take the fuel cost per gallon average when the load was hauled and do the same calculation. Surcharge is the difference between this CPM and the baseline CPM.

Another simple way to calculate it with the same result is to just subtract the baseline cost ($1.20 per gallon) from the national average price, then divide it by the fuel mileage in miles per gallon and get the cost per mile (CPM). You will come up with some numbers that will show something similar to the following table. Check current national fuel prices click here

– $1.25 per gallon fuel at 5 MPG is $0.25 CPM = $0.01 CPM surcharge
– $1.30 per gallon fuel at 5 MPG is $0.26 CPM = $0.02 CPM surcharge
– $1.35 per gallon fuel at 5 MPG is $0.27 CPM = $0.03 CPM surcharge
– $1.40 per gallon fuel at 5 MPG is $0.28 CPM = $0.04 CPM surcharge
– $1.45 per gallon fuel at 5 MPG is $0.29 CPM = $0.05 CPM surcharge
– $1.50 per gallon fuel at 5 MPG is $0.30 CPM = $0.06 CPM surcharge
– $1.60 per gallon fuel at 5 MPG is $0.32 CPM = $0.08 CPM surcharge
– $1.70 per gallon fuel at 5 MPG is $0.34 CPM = $0.10 CPM surcharge
– $1.80 per gallon fuel at 5 MPG is $0.36 CPM = $0.12 CPM surcharge
– $1.90 per gallon fuel at 5 MPG is $0.38 CPM = $0.14 CPM surcharge
– $2.00 per gallon fuel at 5 MPG is $0.40 CPM = $0.16 CPM surcharge
– $2.10 per gallon fuel at 5 MPG is $0.42 CPM = $0.18 CPM surcharge
– $2.20 per gallon fuel at 5 MPG is $0.44 CPM = $0.20 CPM surcharge
– And so on.

GOOD RULE OF THUMB – “$0.05 PER GALLON IS $0.01 PER MILE.”

Some more attentive shippers are using 6 MPG and even 7 MPG in their calculation. For 6 MPG, this sets the BASELINE at $0.20 per mile ($1.20 per gallon divided by 6 MPG) and it saves the shipper a penny or so at higher fuel prices (i.e. $1.50 per gallon fuel divided by 6 MPG is $0.25 CPM or a surcharge of $0.05 per mile – $0.01 less). You may end up somewhere in between.

This then gets billed to the shipper and you get passed through what is paid.

In general, you will receive less than that when you cost it against total miles, as deadhead is not usually paid unless it is negotiated into the rates. Also most calculate it using national average prices, which vary by region, location, etc.

If you are leased to a fleet or have an agreement through another major entity, you not only take advantage of their ability to better negotiate surcharge, but also you can take advantage of their fuel purchase programs.

OTHER THINGS TO LOOK AT

The pain we feel today in our financials is because of how we conducted business up to mid-1999. We got use to $12 to $15 per barrel crude which gave us $1 per gallon diesel fuel pump price, which is $0.20 CPM (at 5 MPG).

Even with surcharge starting to kick in at $0.24 per mile (with our 5 MPG calculation), those who aren’t able to get it have taken a $0.10 per mile hit in profitability at $1.50 fuel as compared to those exceptionally low price levels. This is why surcharge is so important.

If you are unable to get any or just a fraction of surcharge, there are several other ways successful operators offset fuel costs through equipment operations. They are cranking up the miles (utilization), shopping for price (deals) and improving fuel mileage as listed on the “Operational Costs” page (slowing down, etc.).

When we look at miles, successful fleets and operators who realize just 100 more miles per week (20 miles per day), put over $0.01 per mile to the bottom line. This is covered on our “Fixed Cost Page.”

For a contractor, that same 100 miles per week still puts almost $0.01 per mile more to the bottom line, but without all of the overhead a fleet has.

We can use the rule that $0.01 per mile = $0.05 per gallon, BUT miles do even more when offsetting fuel costs. It doubles the effect when looking at actual dollar income.

Therefore, 100 more mile per week offsets about $0.10 per gallon in fuel price in actual dollars.

USE THESE RULES OF THUMB IN YOUR OPERATIONS

* Rule of Thumb 1: $0.05 per gallon = $0.01 per mile
NOTE: Good rule for both shopping fuel price and calculating fuel surcharge.

* Rule of Thumb 2: 5 MPH changes fuel mileage 0.5 MPG or $0.02 per mile. This offsets about $0.10 per gallon.

* Rule of Thumb 3: 10 hours idling per day costs about $0.02 per mile. This also offsets about $0.10 per gallon.
NOTE: Slow down 10 MPH and minimize idling and you can offset up to $0.25 per gallon.

* Rule of Thumb 4: 100 miles per week affects bottom line profitability about $0.01 per mile, but with a cash bonus (next rule).

* Rule of Thumb 5: Just 50 miles per week offsets about $0.05 per gallon pump price in actual “dollar income.” This is because you get the effects of Rules 1 & 4 multiplied by 50 more miles.

SUMMARIZING: Using these rules, one can offset up to $0.50 per gallon change in pump price through operations – without surcharge.

AS YOU PUT AS YOU PUT YOUR BUSINESS PLAN TOGETHER, REMEMBER

Plan and operate your business profitably at around $1.20 per gallon fuel cost
Successful operators address a combination of the operational rules
Surcharges should support upward swings (nickel per gallon = penny per mile)
Contact your legislator (energy policy, taxes, industry programs, pressure friends to support our needs)

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Printed with permission
Transportation Business Associates
Business Services for the Transportation Industry
Copyright (c) 1996-2003 Transportation Business Associates
P. O. Box 17531
Denver, Colorado 80217-0531