Operations

Fuel Surcharges: What Is Fair When Prices Go Up?

Posted on April 17, 2012 by - Also by this author

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Coastal Car Worldwide’s Evan Blanchette stresses the benefits of simplicity when assessing any add-on charges to client bills.
Coastal Car Worldwide’s Evan Blanchette stresses the benefits of simplicity when assessing any add-on charges to client bills.

Nothing spooks fleet-based businesses more than rising fuel prices, which often get passed on to customers and spur inflation. As of this publication date, the summer outlook on fuel prices was grim, with premium unleaded in California breaking through the $4.50 mark in mid March, well before the summer traveling season.

While this year’s fuel price spike coincides with a slow but steady recovery instead of in a deep recession, as in 2008, limousine operators are once again strategizing on how to best adjust fuel surcharges. Fuel surcharges were uncommon just five years ago, but are now fixtures on chauffeured transportation bills in a squeezed global oil market.  
LCT checked in with some operators nationwide to see how they were handling this latest round of increases. What we found were multiple approaches that seem to work well for each operator.

“It’s just another blow to our bottom line for all of us,” says Chris Hundley, owner and CEO of Limousine Connection of Los Angeles, which he founded in 1978. “We forecast and we budget for the year some unknown expenses. We expect it here and there but this to me is like being rear ended by someone without insurance. It immediately affects you and costs you money.”

Hundley was interviewed in February by the Associated Press and NBC Nightly News on how the high cost of fuel is pinching fleet-based businesses. Limousine Connection follows a policy of waiting 30 days to see if a fuel price surge will stick before raising its fuel surcharge. The company has been levying a 10% fuel surcharge on clients for the last two years — one of the highest in the chauffeured transportation industry, but in a state with among the highest gas prices in the U.S.

Charges versus rates
Limousine Connection began with a fuel surcharge of 3% in 2007. For Hundley, clients can more easily digest a steadily rising fuel surcharge than rate hikes during a recession and slow recovery. “I have not raised rates since 2006. I should be raising rates because of the cost of fuel. I know from clients and contracts that people will not accept a rate increase, but will accept a fuel surcharge. While it is high, it is subsidizing my lower rates.”

Everyone is a gas customer at some level, so everyone understands the reasoning behind a fuel surcharge, says Hundley, whose company charges a rate of $88 for a Town Car transfer to LAX. “My personal philosophy is that gas is the cost of doing business. I try to keep rates steady and consistent and don’t allow the fuel surcharge to go up and down frequently. I always have a 30 day window; if it spiked to $5 for 20 days then down to $4.80, I wouldn’t alter the surcharge. If I do raise it, it’s in 2% or 3% increments.”

For chauffeured service contracts, Hundley says the cost of fuel has to rise at least 10% from the date a client signs a contract for a fuel surcharge to kick in. “We could sign a contract without a charge depending on the size and volume of work, but if it rises 10% and stays for 30 days, they get the fuel surcharge. The fuel surcharge is [also] a bargaining tool in signing contracts,” he says.

Hundley, who has decided to replace his Town Car Executive L sedans with the Lincoln MKT Town Car, believes the MKT’s slightly better gas mileage will help offset higher fuel costs as well.

Seattle operator Eli Darland has devised a fuel surcharge formula inspired by the Fed Ex model.
Seattle operator Eli Darland has devised a fuel surcharge formula inspired by the Fed Ex model.

Chart-toppers
At Rare Form Limousine in Seattle, operator Eli Darland uses a variation of the Fed Ex fuel surcharge table. The Fed Ex table is an indexed chart based on national average prices for diesel fuel two months prior.

Darland localizes a version of the chart for his fuel surcharge calculations, which are based on local gas prices at select gas stations on the two Mondays before the first Monday of every month. “I start on the first Monday of the month and adjust the fuel surcharge for every reservation made from that day through the last Sunday of the month,” says Darland, whose March rate went from 6.5% to 7.5% based on his metrics formula. “[Clients] are buying the fuel surcharge rate at the time of the reservation. The rate stays with the reservation throughout the system” regardless of the actual date of the run, Darland says.

“What this does is it protects us from violent spikes and brings additional revenue,” says Darland, a 2012 LCT Operator of the Year. Rare Form introduced its surcharge in January 2009, following the fuel price spikes of 2008 that at first caused some of its chauffeured runs to be done at a loss. Washington’s fuel prices per gallon are about 30 cents to 40 cents higher than national averages, he says.

“It’s the one surcharge that people can understand on a daily, weekly basis,” Darland says. “Everyone has a car and goes to the pump, and they know if the price is high or low. If you have STC [Surface Transportation Charge] or a generic fuel charge, people cannot relate to that. I’ve had zero people question fuel surcharge in three years.”

Full disclosure
Another variation of the Fed-Ex approach is using a customized formula based on gas prices. For New Jersey operator Bill Atkins, surcharges kick in after $2.20 a gallon, a level not seen since the nadir of the recession in the first quarter of 2009. “Even if you were driving yourself to the airport or a location, you would have to pay more for the same trip because fuel prices keep rising,” says Atkins, owner and president of Red Bank Limo in Red Bank, N.J., and a 2010 LCT Operator of the Year.

Anything over the $2.20 per gallon base fuel cost at Red Bank Limo is divided into the base fare of a trip and added as a fuel charge. For example, a surcharge for a client going to Newark Liberty International Airport is 7% or $6.58. “That fee helps offset the extra expense as the fuel prices rise,” Atkins says. “A while ago, when prices came down, I waived the entire fee.”

A fuel surcharge should rise and fall depending on fuel prices, Atkins says. “I removed all my fuel surcharges when prices went down. You shouldn’t be making profit on it; you should use it to try to remain whole.”

A fuel surcharge helps operators balance out costs and profit margins. “Limousine companies should break out the additional costs incurred. When we collect the total, the fuel surcharge identifies what part of the cost is not us charging them, but rather collecting for additional costs incurred.”

For a 45-minute run from Red Bank’s core customer region to the Newark airport, the company charges a base rate of $94, a 7% fuel surcharge of $6.58, 7% sales tax of $6.58, a 20% gratuity, and $5.80 in fees/tolls, for a $131.76 all-in price. “The key is to always be honest. Let the customer know what the charges are without any surprise. It would be unethical if you don’t say it up front that the trip will cost $131. Most people will [understand] pass-through expenses.”

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