Fuel cost has been a big topic of discussion in the shipping industry this year. As many ecommerce brands know, fuel rates and fuel surcharges can be expensive and contribute to a large portion of your overall shipping costs.
While fuel surcharges may not be completely avoidable, understanding how they work can help you navigate this potentially costly aspect of your transportation cost. Each carrier calculates fuel rates and fuel surcharges differently, so it’s a big factor when choosing a carrier and shipping service.
Here is everything you need to know about fuel surcharges, how they work, and how to make sure you’re not paying more than you should.
What are Fuel Surcharges?
Surcharges are additional fees that shipping carriers add on top of their base rates. Fuel surcharges are calculated from the carrier’s base fuel rate and applied to some shipping services but not others.
The carriers that apply fuel surcharges are mostly the bigger companies like UPS, FedEx, and DHL. Some regional carriers might also have fuel surcharges, but not all.
What many ecommerce brands may not know is that these fuel charges are calculated differently at each carrier and applied to shipping services differently as well.
How are Fuel Surcharges Calculated?
Most fuel surcharges are calculated as a percentage of the base fuel rate. Although in some instances it is a flat fee, like with DHL for example.
How do you know what fuel surcharges you are charged for? That requires a bit of explaining and some simple math.
Carriers calculate their surcharges through an index-based system. There are three variables to a fuel surcharge index.
- “At Least” and “But Less Than” — these two values make up the range of the cost of fuel (gallon per mile) that will trip the surcharge percentage into effect. If the cost of fuel goes above or below these rates, the chart will be extended.
- Surcharge – listed as a percentage this is the determining factor to calculate the surcharge cost. This percentage is what changes when a carrier announces a new “fuel surcharge increase.” In recent years this has happened during peak season and other times of year to offset a rising cost of fuel or increased volume. For international shipments there is a separate surcharge percentage for both import and export. For freight rates, LTL and FTL often have different surcharge percentages.
- When the base fuel rate is within the “At Least” and “But Less Than” range, the surcharge percentage in line will be applied.
When the base fuel rate is within the “At Least” and “But Less Than” range, the surcharge percentage in line will be applied. Below is an example fuel index.
To calculate the surcharge cost, based on the chart above, take the percentage listed in line with the current base rate of fuel. For example, if the base rate of fuel is $2.82, the fuel surcharge rate is 10.25%, and the actual cost of the fuel surcharge will be $0.29. That means $0.29 will be applied per shipment.
Where each carrier is different is in two places: the base fuel rate and the surcharge percentage. While most carriers try to remain in competition with the others (fuel surcharges don’t vary too widely between them), there are occasions when they do have stark differences.
DHL, for example, calculates its base fuel rate monthly, whereas FedEx and UPS calculate theirs on a weekly or biweekly basis.
How are Fuel Surcharges Applied?
As mentioned above, fuel surcharges can be applied to some shipping services but not others. Where things can really add up is when fuel surcharges are added to multiple services, for example remote area delivery as well as peak surcharges.
Fuel surcharges may be applied for an extended period (for example, as part of a carrier’s annual rate increase in Q1), for an unknown amount of time (for example, when fuel rates skyrocket without notice), or for a short, predetermined time (for example, during the few weeks of peak season high volume).
Here are a few of the many services that each carrier will add a fuel surcharge to (this is not a comprehensive list):
- Saturday Services
- Residential Delivery Surcharge (RESI)
- Additional Handling Surcharge
- Oversize Charge
- Signature Surcharge
- Non-Stackable Surcharge
- Remote Area Surcharge
- Residential Surcharge
- Saturday Services
- Signature Required Services
- Additional Handling
- Large Package
- Over Maximum Limits
- Oversize Pallet Handling Surcharge
- Peak Surcharges
- Non-Stackable Pallet
- Remote Area
- Saturday Services
- Overweight / Oversize
- Elevated Risk
Can I Minimize Fuel Surcharges?
Unfortunately, fuel surcharges are often non-negotiable. If you can minimize the services where fuel surcharges are applied, you’ll be able to lower your shipping rates. This isn’t always easy to do.
Here are two main ways ecommerce brands can lower their overall fuel costs within their shipping invoice:
- Negotiate a lower base fuel rate before a contract is signed. What many sellers may not realize is that the base fuel rate is actually negotiable, but only before you enter a contract with the carrier. It’s not an easy thing to negotiate, but it can be done.
- Work with an experienced 3PL to get better shipping discounts. A reputable 3PL will have deep relationships with each carrier and a team of transportation experts who work with carrier representatives on a weekly basis. Carriers change their rates often, having a dedicated support team to this can make a huge difference. A 3PL will also know how to break down your final invoice costs. While they may be absorbed into the 3PLs services as well, they should be transparent about where each cost comes from. They can help you choose shipping services that won’t incur as many surcharges.
If you are looking for a fulfillment provider to help you navigate your freight and shipping fees, reach out to DCL Logistics for a quote. We provide extensive services ecommerce companies looking to grow and scale.