Operations

Fuel Surcharges: What Is Fair When Prices Go Up?

Martin Romjue
Posted on April 17, 2012
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.

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.”

Des Moines, Iowa operators Melissa and Scott Woodruff use a combination of a standard percentage and incremental $1 flat fees as fuel surcharges.
Des Moines, Iowa operators Melissa and Scott Woodruff use a combination of a standard percentage and incremental $1 flat fees as fuel surcharges.

Percentages and flat fees

Scott Woodruff, co-owner of Majestic Limousine in Des Moines, Iowa, uses a two-tiered approach to fuel surcharges. When the cost of a gallon of fuel goes above $2.50, the company levies a 8% surcharge. It then adds an additional $1 whenever the price of gas passes a $1 increment, i.e. at $3 per gallon, $4 per gallon, etc. So if the price of fuel is $4.07 per gallon, for example, the client would pay a 8% surcharge plus $2.

At the time he talked to LCT, super unleaded with ethanol was costing about $3.50 per gallon in the Des Moines area. If E-85, more readily available in the Midwest than in other U.S. regions, costs $1 per gallon less than regular fuel, Majestic switches to using it.

“I’m a firm believer that you take the good with the bad,” Woodruff says. “When the price is low, you take it off. The fuel surcharges are the easiest sell there is. You see it and one hardly ever says anything.”

The more difficult approach is using the STC charge, which people can’t directly relate to, he says. Like Atkins, Woodruff quotes only all-in rates, which include the line-items of fuel surcharge, tax, tip, and airport parking fee. “My belief is surcharges came about because we needed a way to convince customers on how to sell them on [higher fuel prices]. It’s easier to break out than just raise rates from $65 to $75 for a ride to the airport.”

Lump sums
At Coastal Car Worldwide in South Florida, experience has shown that customers, and especially group travel and meetings clients, prefer simplicity, so the fewer add-ons, the better. The company opts for a structure of: Base rate, 20% gratuity, and 14% STC. [STC is an all-inclusive charge that covers fuel, taxes, licensing, and city, county, and PUC fees].  

“We have done away with nickel and dime additional costs,” says Evan Blanchette, manager of global alliances for Coastal Car Worldwide, based in Ft. Lauderdale, Fla. “We find that it does nothing but put a bad taste in a customer’s mouth. Our experience shows clients like the bill as simple and detailed as possible.” 

Blanchette advises that customers primarily look for the amount of “bloat from confirmation to final bill,” Blanchette says. “We work with corporate travel agencies that book for companies. They want a price as close to the quoted rate as possible for group events and individuals.”

To simplify billing, the company did away with its off-hour fees for midnight to 4 a.m. runs about two years ago because of a negative backlash from clients. “You don’t want to rub people the wrong way with things like that,” Blanchette says. On surcharges, it’s better to be flexible.  “Everyone does want all-in, but the add-ons, STCs, and fuel surcharges are excellent tools to help negotiate to your all-in rates.”

However, Blanchette warns against levying what is referred to as an administrative fee, which he considers to be a “red flag.” “Why should I pay you for the honor of taking my reservation or handling my trip?”

For the long-term, operators should find fleet vehicles that lower overhead and increase fuel efficiency, says Sacramento, Calif.-based operator Christopher Quinn.
For the long-term, operators should find fleet vehicles that lower overhead and increase fuel efficiency, says Sacramento, Calif.-based operator Christopher Quinn.

Long-term solution
Christopher Quinn of Corporate Transportation Solutions (CTS) in Sacramento, Calif., levies a 10% surcharge on client runs, which he thinks is as high as he can comfortably go. “I’m not sure we can do anything else there,” says Quinn, a 2009 LCT Operator of the Year. “Once you get all the add-ins, you can’t take it up anymore.”

To keep fuel consumption as efficient as possible, CTS will be more disciplined about having chauffeurs turn off vehicle engines when not in use and not taking fleet vehicles home.

Quinn sees some flexibility in replacing Town Cars with fleet vehicles that get better gas mileage. His company started testing a Chrysler 300 Limited sedan on March 5, which costs about $10,000 less than a Town Car and gets one-third better gas mileage. Quinn reports that a 300 can get 31 mpg versus 21.2 mpg that he records on his Lincoln Town Car Executive L sedans.

“If I can get 31 mpg, I increase my fuel efficiency by a third,” Quinn says. “In any business, if your costs to operate go up, you have to get it from somewhere. I can increase my fuel efficiency and [lower] the costs to operate. . . If capital costs on vehicles go down [it offsets] fuel prices going up.”

Related Topics: fuel costs, fuel efficiency, fuel prices, fuel surcharges

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