We’ve all seen the cost of fuel at Australian bowsers in the last 12 months. If you’re shipping goods anywhere in Australia, then the freight fuel surcharge is something you need to be aware of.
Fuel prices can have a significant impact on your freight costs. This is due to the fuel surcharge (also known as the fuel levy), that gets added as a percentage to your net freight charge.
Let’s explore what the fuel surcharge is, why it’s in place, how it’s calculated, and most importantly, how you can ensure that the increasing cost of fuel doesn’t wreak havoc on your bottom line.
What is the Domestic Freight Fuel Surcharge?
The fuel surcharge is added by your carrier to your freight invoice, as a percentage of your base rate freight costs.
Its purpose is to account for the fluctuations in fuel prices, and the levy is adjusted based on the cost of fuel. This has a direct impact on the cost of moving freight across Australia.
The fuel surcharge you pay for your freight is adjusted daily, weekly or monthly depending turbulence of the fuel market.
Why is Fuel Calculated as a Surcharge in Shipping?
Fuel prices are in constant fluctuation. In an industry that uses significant amounts of fuel to move goods across Australia, a fuel levy is the fairest way to account for these fluctuations, ensuring that carriers are able to remain in business.
The fuel levy is designed to create transparency for customers based on the cost of fuel at the time of transport, and protect carriers from the volatility of fuel prices.
What factors are currently influencing the increased fuel surcharge?
Traditionally, the fuel surcharge has been anywhere between 5% to 20% over and above the freight cost.
At the moment, we are seeing the surcharge hit anywhere from 25%, up to about 45%.
This is a huge increase that’s having a direct impact on the cost of domestic freight in Australia.
Oil supply and management has an impact on the global cost of fuel.
Currently, since the Russian invasion of the Ukraine, there’s been a broad range of sanctions against Russia. Russia is a major exporter of fuel, and the sanctions have caused fuel prices to surge in the last 12 months.
How is the Fuel Surcharge Calculated in Australia?
Every carrier is slightly different in the way they calculate the fuel surcharge, and you should make sure you obtain, in writing, confirmation of how they calculate the fuel levy before you enter into a freight agreement.
A widely used fuel levy formula is –
(Current Fuel Price – Base Fuel Price) / Base Fuel Price = %
Then multiply by (fuel cost as a percentage of all running costs.
= Current fuel price
How does the calculation work?
The Australian Institute of Petroleum (API) has a diesel price index, that’s updated on a daily basis.
When the index price goes up, there will be an increase obviously in the fuel levy. When it goes down, by contrast, there will be a reduction in the fuel levy.
Every carrier has a base fuel price where they start from when calculating the fuel levy. This base price generally relates to when the carrier first implemented the fuel levy. For example, it might be $1.20 per litre.
Then every week or month, carrier will refer back to the AIP index and look at the change from this base price.
They then use the formula above to calculate the levy.
For example:
Current Fuel Price: 208.3
Base Fuel Price: 120.0
Fuel cost as a percentage of all running costs: 28%
(208.3-120.0)/120.0 = 0.8 or 80% x .28 = 30%
If the index price changes in the next week, or next month, you would redo that calculation to obtain a new fuel levy percentage.
What can you do to manage increases in the Fuel Surcharge?
When the price of fuel can have such a huge impact on the cost of freight to your business, it’s important to find ways to manage its impact.
Gain visibility over the fuel surcharge
Knowing what the freight fuel levy is costing your business is the first step to managing it effectively.
Talk to your carriers or freight partner and make sure you’re accessing business intelligence around the fuel surcharge, so you can have conversations and make good decisions.
For some of Freight People’s customers, we’re currently looking at what freight would have cost if the fuel rate hadn’t changed for the last 12 months versus what has actually happened, to get to the reality of the impact in dollar value.
Reconsider the fixed freight cost arrangement
Many businesses have a fixed freight cost arrangement with their customers.
Perhaps you have a free in store (FIS) arrangement where you’ve agreed to absorb the freight cost for your customers.
It’s time to implement a review of these arrangements to ensure they’re still profitable for you. Your margin could be considerable eroded by the cost of fuel, and if you don’t review your FIS margin, you may be making considerably less (or nothing at all) on the products you’re delivering to your customers.
Review your regional freight arrangements
If you charge freight to your customer based on a regional area (e.g. Melbourne Metro, Regional, Victoria, New South Wales, Perth, etc), it’s time to review the commercial viability of these agreements.
Some businesses don’t review these for five years or more, and as a result, they’re wildly out of date – especially when the cost base has changed significantly thanks to the cost of fuel. Given the increases in the past 12 months, this would create a significantly negative impact your margin.
Making sure your cost to customer is up to date
We’re in a unique environment at the moment where businesses are able to better pass costs on to customers, because they are very aware of increasing costs globally, particularly when it comes to the price of fuel.
If you’re charging freight to your customers, make sure your pricing is up to date.
The fixed price you’re charging might not actually be covering the cost of your freight.
How Freight People can help you manage the Freight Fuel Levy
There are a variety of levers you can pull if your freight costs are being heavily impacted by the increasing fuel levy.
If you’ve got a great freight partner (like Freight People), they can help you make better freight choices that reduce the impact of the fuel levy on your bottom line.
With leading freight technology that allows you to manage multiple carriers through a single portal, and delivers comprehensive reporting giving you the power to make smart business decisions, our experienced team have more than 30 years’ experience in freight.
Having someone on your team who can explain the impact of the fuel levy to your business and then support you to implement solutions, will allow you to make the right choices when it comes to managing the fuel levy.