Fuel Surcharges Explained: Why They Exist and How Transmate Simplifies Them

[00:02.1] Well fuel prices move every week and for shippers and carriers that creates a challenge. How do you keep freight rates fair and predictable? In this video I explain what a fuel surcharge is, how it's calculated and how you can manage it efficiently.

[00:18.6] Inside Transmate. First of all, what is a fuel surcharge? Here you can see a small depiction of what the total freight rate is. So it consists out of a base rate and on top of that you see two or more surcharges, fuel surcharge and then various other surcharges.

[00:41.1] So you can see it actually as an adjustment mechanism on top of the base freight rates. And it was introduced when the fuel price became very volatile. That was somewhere in the beginnings of the 2000s. And its main purpose is to ensure fair compensation for carriers when fuel prices rise and fairness to shippers when they fall.

[01:02.1] This is a little bit the diesel prices for the last 20 years. So you see it going up and down in a volatile market. And of course because of this they want to have a mechanism to decouple the transport costs from the unpredictability.

[01:18.7] And that also helps of course to keep the contracts stable. So if you negotiate your rates once a year then they taking out the fuel price and that one is subject to the market while that base rate is of course still applicable throughout the year.

[01:37.6] So that the benefit is then that you don't need to renegotiate every week or every month. How is it being calculated? So typically you choose a fuel index, a tracker, it can be a national or a regional tracker that follows the fuel price or consumption index.

[01:56.3] And then what you're going to do is you're going to check the change with respect to the original index. So if you started somewhere in the past, that is your anchor point. And after that you track the changes, and the variability versus that point. And then you multiply with your fuel percentage, how much fuel is makes up of the total rate or other formulas apply.

[02:21.8] There's also different mechanisms in which there's a table that is being published and it shows the upper and the lower bounds of the fuel costs, which corresponds then to some percentage which is counted on top of your base rate.

[02:39.3] Many carriers, especially the larger ones, they will publish their own fuel models. So you see on the websites of dpd, dhl, ups, you see their fuel models and others they follow industry benchmarks or they stick to the fuel models if the shipper is asking it.

[02:59.4] And of course it depends a little bit on what fuel model it is. These can be updated on a weekly or a monthly basis. Also the volatility of the market will probably direct that. And you will see it in any transport mode.

[03:18.3] So you will see it in road, in ocean, in air and in parcel shipments. And because of that it comes also in many names. So on your freight invoice or on your freight rate cards you will see names such as diesel surcharge, bunker adjustment, factor, diesel supplements, BAF and energy surcharges, fuel fee, fuel levy, fuel adjustment, jet fuel, surcharge, you name it.

[03:46.8] So you see it's quite a complexity. It changes over time. You have various names, various carriers can have different fuel models. So how can we stay on top of this, how can we tackle this complexity in calculations while assigning carriers or in freight cost audits?

[04:07.7] Well here in transmate you can upload or you can link your fuel mill directly and if you have multiple rate cards or one rate card doesn't matter, you can link it to a model. So once it's attached and we're going to do calculation, it will pick about fuel model and it will calculate the base rate and on top of that the fuel prices with the applicable fuel index.

[04:34.5] And transmate, they can update the models on a weekly or a monthly basis. It can track the trackers which are underlying it so that your surcharge always reflects the latest prices in a shipment. How we can see that.

[04:50.5] So here for example we have a shipment in transmate, there is a rate card attached to it and that rate card says okay, you have a base rate and a fuel percentage and, and it's 12% on top and it will automatically calculate it and it will store that in the shipment, ready for audits, ready for benchmarking or compensations.

[05:15.2] So to wrap up, fuel models are essential to keep freight rates accurate and transparent. And with transmate you can centralize your rate cards and automatically apply up to date fuel surcharges and you simplify your freight cost management. Whether you manage standards, audit invoices or plan logistics.

[05:35.1] Transmate makes it easy to handle complex cost components like fuel. Try it today and take the guesswork out of your freight pricing.