What are fuel surcharges and how do they impact your bottom line?

In recent months, we have witnessed an increase in gas prices that peaked during March and remain far higher than a mere six months ago. This is having a big impact on all car service providers from black cars to taxis and ride-sharing companies.

More recently, Uber and Lyft announced they’re adding surcharge fees to rides and growing discussions are taking place across the transportation industry.

For drivers, there’s increasing frustration that the surcharges are still inadequate and fail to sufficiently cover the impact of increased gas prices.

 

At HQ, we provide some of the largest companies in the US with ground travel enterprise software that enables them to manage their ground transportation.  From booking to billing and payment, we oversee all invoices and rides from suppliers so the right amount is paid for every ride.

This efficient and meticulous billing process has saved our clients an average of 15% on their yearly ground transportation costs.

During recent weeks,  many of our clients are facing re-negotiations with suppliers around fuel surcharges. From our perspective, fuel surcharges are central to addressing unexpected price increases and fluctuations.  At the same time, this should not be used as an opportunity to increase margins on the overall ride price.

 

In this blog post, we’ll explore what exactly are fuel surcharges and our recommendations for how to best negotiate with your suppliers to find a fair and reasonable solution for all.

What are Fuel Surcharges?

Traditionally, companies usually negotiate in advance with their preferred car ride providers on base rates for rides. As is the case, the final amount billed is usually 20-30% higher than the actual base rate and includes within it various additional fees.

These fees can include everything from service and admin charges, toll charges, sales tax, congestion fees, workers’ compensation surcharges to wait time charges, stop charges, and, more recently, fuel surcharges.

In the past when fuel prices were lower and we witnessed less fluctuation, fuel surcharges were of less importance to both car suppliers and companies. However, this year fuel surcharges have taken center stage in response to the rising price of fuel.

What is the definition of a Fuel Surcharge exactly?

Essentially, a fuel surcharge is an agreement the car service supplier and the company sets in order to balance the fluctuations in the cost of fuel.  This is an amount that can be billed in addition to the other charges to cover the fuel cost increase. This fee can be a flat rate fee or a sliding scale that notes what fuel price triggers the surcharge, and how the fuel surcharge amount will be adjusted based on the price of fuel.

What’s the difference between “Flat Rate” & “Percent-of-Ride” Fuel Surcharges Fee?

When discussing how much of a fuel surcharge fee should be added to the base rate, it’s important to discuss whether to add a Flat Rate or a Percent-of-Ride price.

From our HQ data for March 2022 on fuel surcharges, we identified a lack of consistency regarding fuel surcharges fees added to rides as the agreement often varies between supplier and company.  Nevertheless, there is a clear distinction between the Flat Rate agreement – ranging from $2-$6 per ride – and the Percent-of-Ride agreement of between 4-6%. Both types of agreements have similar values when the rides are under $80, however, they become very expensive as price prices reach the $120+ price range.

To make things more illustrative and clear:

 

If we take a sample set of 1,000 rides that are within the $50-$300 ride price and apply a 2$ flat rate fuel surcharge, the total cost would be $2,000 in fees.  If this flat rate fuel surcharge was doubled to $4, the total cost would be double at $4,000. In the case of a 4% Percent-of-Ride agreement, the fuel surcharge comes to $5,600 which is $1,600 higher than the flat rate.  When we’re talking large ride volumes and higher ride prices, things become immediately more expensive.

 

How to make a Flat-Rate agreement work?

 

• Establish a Sliding Scale Surcharge  The higher the ride value. The higher the rate. 

 

Consider establishing a sliding scale surcharge that adjusts monthly based on the actual price of fuel.  As a result, you will pay a higher fuel surcharge as fuel costs increase yet the fuel surcharge will reduce or go away completely as the price of fuel returns to more normal levels.

 

• Define the “trigger point”

 

The “trigger point” for the fuel surcharge should align with the currency of your supplier pricing.  For example, if you just entered into a new rate agreement with your suppliers this should have assumed not only the current price of gas but also some anticipated increase during the term of your agreement.  In this example, your fuel surcharge may not kick in until gas prices reach $5.00 or similar. If your pricing was established when fuel prices were much lower your fuel surcharge may need to kick in at a lower level.

 

• Establish a metric for monitoring

 

Measure fuel price changes as well as to communicate the same to your suppliers each month. There are various metrics that can be used including this valuable source:  https://www.eia.gov/petroleum/gasdiesel/ As part of our ongoing monitoring and analysis, we will keep up to date on changes as pricings continue to evolve. If you have any questions or would like to discuss how to ensure you are not overpaying for Fuel Surcharges, please feel free to reach out: jeff@hqtravel.com