A fuel surcharge is a way of adjusting the amount paid to move freight by taking into account significant variation in fuel prices, compared to historical levels.It is a method for sharing or transferring risk.
Because fuel is a large part of the cost of truckload transportation, most carriers and shippers participate in a fuel program of some kind.
The majority of fuel programs use a five, six, or seven cent multiplier. Simply put, for every five, six, or seven cent change in fuel prices, the fuel surcharge goes up or down a penny.
HOW FUEL SURCHARGES WORK
Fuel surcharges are made up of three main components: index, peg, and escalator. Each of these components influences how surcharges are applied and the extent to which the carrier and/or shipper bears the cost.
Trucks average between 5 and 7 mpg (depending on how the truck is driven), so fuel is a large part of the cost of truckload transportation. Fuel surcharges kick in when the price of fuel goes up for an extended period.
Truckload carriers typically make very little after taxes, so even a small increase in fuel can make the difference between making money and losing money. Fuel surcharges provide carriers with compensation for increases in fuel costs. Line haul plus fuel surcharge must meet the market rate. Anything lower may cause carriers to refuse freight in the long run.
KEY NOTE: Miles per gallon(MPG), a measurement of fuel economy in automobiles. Miles per gallon (mpg) is commonly used in the United States, the United Kingdom, and Canada (alongside L/100 km).
COMPUTING FUEL SURCHARGES.
Fuel surcharges are typically computed in one of two ways:
1. Cents per Mile:
In this method, the fuel surcharge increases or decreases by a penny each time fuel goes up or down by X cents per gallon. This is the most common method used by shippers.
2. Percent of Rate:
This method increases the rate by X% for every Y cents per gallon increase in fuel. Unfortunately, this method of fuel surcharge is not very effective for truckload carriers because a carrier’s mpg doesn’t change with the price a carrier charges in a lane, but the fuel surcharge does.
Reference: C.H. Robinson; MIT Centre for Transportation and Logistics