Are you trying to do something the same way while expecting different results? Maybe there’s a better way to handle how you’re compensated for the cost of fuel?  Here’s a different approach that, if presented in the correct light to your customers, will not only assure you of covering your fuel costs but actually saves your hauling customers money. A win-win for everyone.

A little history about the origins of the “fuel surcharge:” The actual beginning of the fuel surcharge goes back to the late Seventies and a time before deregulation. The Interstate Commerce Commission established the fuel surcharge to help regulated trucking companies pay for the sudden increase in fuel costs. The first surcharge was a percentage of the line haul and was assessed across all segments of the industry.  The initial percentage was 18% of line haul, and the idea was to reimburse the fuel purchaser for the increased cost of fuel (which wasn’t addressed in the tariff rates set by the ICC). The fuel surcharge percentage was reevaluated at the end of each month and, based on the price of fuel on that date, was adjusted up or down on the fifteenth of the following month.  The general formula and method has been used ever since. The idea behind the fuel surcharge was that the ups and downs of the cost of fuel would eventually even themselves out.

Next, the history of the cost of a gallon of diesel. In the Fifties and into the early Sixties, the cost of a gallon of diesel was between a nickel to a dime a gallon. By 1994 it had increased to around $1.10 a gallon, an increase in forty years of a little over a dollar a gallon or about $500 for five hundred gallons of diesel. From April, 1994 to April, 2007 the cost of diesel increased from $1.10 per gallon to $2.85 per gallon, so a five hundred gallon purchase increased from $550 to $1425, or $875 added in thirteen years. From April of 2007 to April of 2008 the cost per gallon of diesel increased from $2.85 to $4.14, so a five hundred gallon purchase increased from $1425 to $2070, or $645 in just a single year.

The problem now is if you adjust your fuel surcharge even weekly, based on last week’s fuel price and the fact that the price is not expected to decrease in the foreseeable future, there won’t be any equalization. The fuel surcharge will not reflect the actual cost of fuel. It will be a week or more behind the current fuel cost and many dollars short.

As small motor carriers can adjust more quickly than larger trucking companies, here’s an idea which will provide you a competitive edge with shippers. Also keep in mind, with the large number of trucking companies closing and their shippers having to look for new haulers, there has never been a better time to change how rates and fuel cost are handled.

Instead of a fuel surcharge, establish a Fuel Cost Adjustment Policy (FuelCAP™). The idea here is to create a much more equitable system for both you and your shipper so your rates include the actual cost of fuel. To explain: The current fuel surcharge method is always looking back at what fuel cost in the past, and then attempting to adjust it so it equals some lower amount per gallon; i.e., $1.10 per gallon or $1.50 per gallon. Obviously, these are very unrealistic numbers in today’s trucking operations. Also, this method in a volatile fuel price environment leaves the trucker behind the fuel cost eight-ball.  A better way is to calculate a Fuel Cost Adjustment Policy (FuelCAP™), thereby separating your fuel cost from the rest of your hauling rate. Determine your break-even point with all your other expenses, add in your capitalization point to figure your base hauling rate, then add the actual amount the fuel costs on the load, based on the truck’s real fuel consumption. Think of this in terms of the same way a mechanic charges to repair your truck: time plus parts. You’ll charge a hauling rate plus fuel, and never get caught behind the fuel cost eight ball again.

Something to think about.

Good roads and good loads, everyone.

Timothy D. Brady
©2009