The "Fuel Surcharge" ScamThe latest corporate trick to hide price hikes.
Posted Monday, Aug. 21, 2006, at 5:23 PM ET
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StumbleUponWhen higher costs squeeze them, most companies face two choices. They can raise their prices, risking the wrath of consumers and the loss of market share to cheaper competitors. Or they can sacrifice profits to keep prices steady and retain market share. But these days, some companies have found a third way: fuel surcharges.
At first blush, fuel surcharges seem like transparent, mathematically determined means for companies to recoup their expenses for the unexpectedly high price of gasoline. But as they spread into other industries, fuel surcharges more and more seem as if they're just an au courant way of raising prices, while duping customers into thinking they're not paying more.
The surcharges appear to have a reassuring precision. The companies lay out exactly how fuel surcharges are determined. UPS notes that its surcharge, based on an index of fuel prices, changes monthly and kicks in only when the price of "on-highway diesel" is more than $1.50. As of early August, the surcharge was 4.75 percent on ground packages and 16 percent on air and international deliveries. FedEx's fuel surcharges, which kick in when diesel is $1.50 and jet fuel is 82 cents per gallon, are the same. DHL has fuel surcharges of 4.8 percent on ground service and 18 percent on air and international services. All rely on data provided by the Energy Information Agency, which shows that the price of gasoline, at $2.92 a gallon, is up 31 percent from a year ago, while diesel, at $3.03 a gallon, is up 44 percent from a year ago. It sounds pretty unobjectionable. UPS's most recent results, which show the company struggling with higher energy prices, make it seem as if surcharges aren't even recouping the higher costs.
But the more you delve into the fuel surcharges, the less sense they make. In theory, the basic price a delivery company charges covers operating costs—labor, supplies, insurance, energy, etc.—plus a profit. The fuel surcharge, we're told, is needed to pay for the marginal increase in costs due only to the higher cost of gasoline or diesel. If you weren't shipping the package, the company wouldn't need to buy the gas.
If you pay $21 to ship a document overnight with FedEx, the surcharge comes out to about $1—or about the extra cost associated with buying a gallon of diesel this year compared to last year. The implication is that it takes FedEx a gallon of diesel to process your package through its immense, technologically advanced logistics network.
No way.
Remember, these companies do huge volumes of business. Their trucks, planes, and vans are in motion every day of the week, regardless of whether you are sending one, two, or 10 packages. Let's say you send three packages from your New York office to three offices in Washington on the same block. You'll get hit with the fuel surcharge on each package. You pay the surcharge whether you live two blocks from a UPS station or 15 miles from one. And if you take steps to save the delivery company money on fuel—sending it from a storefront, where it gets picked up on rounds every day instead of forcing them to come to your house—you don't seem to get any benefit.
Something else is fishy about these fees. FedEx and UPS essentially argue that their current rate schedule works only if the price of diesel is $1.50 or less. Otherwise, they have to start tacking on fuel surcharges. Hello? The EIA notes that the price of diesel hasn't been below $1.50 since December 2003. In most other industries, when the cost of a key input rises (or falls) to a new level and stays there for awhile, the base price of the end product adjusts. The base prices of personal computers and flat-screen televisions get lower every year; Dell doesn't keep the same retail price and slap a rebate on every product to reflect lower manufacturing and assembly costs in China and Taiwan. A simple look at the futures markets or trends in global fuel consumption should convince UPS, DHL, and FedEx that we all need to adjust our business models to account for a higher price of gas. Fundamentally, they're imposing the surcharges instead of raising prices and are hoping customers are too dim to notice. (But the first signs of rebellion have appeared. Read about how shippers are fighting back against fuel charges by railroad companies.)
More recently, fuel surcharges have been spilling over into other services where they're even more absurd. Today, I sorted through a month's worth of bills from the service providers who visit my slice of suburban heaven each month. The company that fertilizes my lawn charges a $2.50 fuel surcharge every time it visits, but the tick-control sprayer (this is Connecticut, where fear of Lyme disease runs rampant) doesn't. Both are based in the same town. The landscaper, whose Ecuadorean employees arrive each week in a gas-guzzling pickup trick and then spiff up our lawn with gas-guzzling mowers and blowers, imposes no fuel surcharge. Neither does the pool guy or Peapod. But the garbage carter does—$3 per month. Does it really require that much extra gas for the truck to travel the extra 200 feet from our neighbor's house twice a week?
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Remarks from the Fray:
OK, while I agree that on the surface fuel surcharges might look like a scam, in reality I am trying to save my customers money. Prior to 2003, diesel and gas prices were relatively stable throughout each year. There were no 25 cent fluctuations each week as we may have now. I felt comfortable giving my customers a haul rate in January that would benefit both them and me for the whole year. Now, with the instability in supply, fuel prices are changing so much that there has to be a way to keep costs as steady as pre 2003.
By charging a moderate fuel surcharge based on 2003 prices, I can adjust my haul rates monthly. If the fuel price drops, so does the surcharge. If the price rises, so does the surcharge. If I had given my customers a price in January for all of 2006 based on the fuel prices then I would be losing money now.
Fuel surcharges, when used judiciously, can be beneficial for everyone.
--mozander
(To reply, click here.)
Dan is not saying that prices hikes are unwarranted, he's saying that they are raising prices while pretending they're not. If minimum wage gets raised and McDonalds tries to maintain the same margin, they don't hold their value meal prices constant and then add a "Minimum Wage Surcharge" at the end. He's asking for a little honesty, if you're raising prices, just raise prices, don't try to hide the price hikes under surcharges.
--Meaux
(To reply, click here.)
As Gross says, the surcharge is basically a variable additional to the base price. Whether or not the company is adding that charge based solely on the gas cost doesn't matter. They could be adding it for pure profit and hoping the consumer doesn't notice, as Gross posits, but in the end it's part of the price the consumer pays. They can pay or not pay. It could be made part of the price, as Gross wants, but in effect it already is, so who cares? Do we really need an article on how consumers might be completely retarded and not realize that (base price + additional charge = total price)?
--mntr
(To reply, click here.)
After 10 years in the transportation industry, I have seen all sorts of increases in business costs. Fuel has gone up dramatically, insurance premiums shot through the roof, all added to normal inflation (higher salaries, for example) over the years. The only thing that did not come up was the freight rates.
After deregulation of the transportation industry, there was an overcapacity and too much competition. In a sense, we shot ourselves in the foot. Shippers could refuse any charge, any increase, and demand anything for free, because if their carrier refused to comply, there were 25 other ones eager to take the spot.
With the rise of JIT, shippers became more and more demanding. Pools of trailers, 3am deliveries, 6 hours to unload, team drivers, storage, etc. All these had to be supplied pretty much for nothing, because everybody refused to pay for it, and it was deemed to be "the cost of doing business". By the way, all these post 9/11 security programs? All extra costs for the carriers. If you are a cross-border carrier, you can expect to pay your drivers to wait at the border, to certify each employee in each of the ever-changing programs, etc.
When market forces caught up, carriers dropped like flies because they could not recoup their costs, drivers became scarce because there was no extra money to pay them decent wages, and all of a sudden there was a shortage of capacity. And still the shippers refused increases, deeming them "unjustified".
So the carriers did what they could: they "justified" their cost. They realized that traffic managers were just as irrational as many of the people buying cars, who could be "baited" by low base price, and would ignore the fine prints. Truly, who has really bought a car for $12,000 lately? Add $500 for power steering, $1000 for automatic transmission, $750 for freight, etc. Your cell phone? Cellular providers will lure you in with a Free Phone (subject to upgrade charge, network charge, etc...)
Yes, I agree it may not be the most transparent way of doing things. Most carriers would rather have a higher base rate and dispense with the Fuel Surcharge. But if having a low base rate with a fuel surcharge is the only way to be paid what should be the real price of the service, then what is wrong with that?
--Yzziefrog
(To reply, click here.)
FSC schedules are based on complex calculations that take the old average fuel efficiency of a truck [...] and scale that number to increments in the cost of a gallon of diesel fuel. [...] A company like FedEx with some 15,000 trucks on the road, will spend over $4 MILLION A DAY on fuel. And with fuel double the price it was 5 years ago, that has a HUGE impact on operating costs. Trucking companies that can not capture a sufficient FSC go out of business - and there were literally thousands that did between 2001-2003. We're lucky we're only paying a modest FSC when the real impact for us could be major inflation - considering that everything you use, touch or consume every day gets trucked.
--truckinggal
(To reply, click here.)
(8/22)