Gas prices are down, so what’s with the fuel surcharges?

Written by Al Harris

Tuesday, 11 November 2008 11:52

Fuel surcharges stick to invoices like bugs to the windshield.

As gas prices soared in the past year, contractors, livery cabs and other businesses tacked on fuel surcharges to offset the rising price of precious petrol. But now that the price of gasoline is at three-year low in the Richmond area, businesses are slow to remove such charges.

In part, that’s because some businesses are still using them to recoup fuel costs incurred when crude prices rose to almost $140 a barrel. James Limousine of Richmond added a 3 percent fuel surcharge in May and plans to keep it in place at least until the end of the year “to continue to offset the increasing cost we could not fully recover during the summer months,” said Randy Allen, co-owner and vice president of sales and marketing.

Allen says the company’s year-to-date fuel costs are up 30 percent from last year. Even with the surcharge, the company will be over budget for fuel costs. The company will wait until the end of the year to see how prices stabilize before making a decision to lower or eliminate the surcharge.

The company will keep other cost-cutting measures in place, such as minimizing idling time, maintaining proper tire inflation and optimizing vehicle dispatch.

“The cost of fuel is our third-largest expense,” Allen said. “Anything you do to lower that expense is always helpful for the bottom line.”

Despite high gas prices, James Limousine boosted its revenue 40 percent so far this year and plans to move to an expanded location at the end of this month.

Meanwhile Dominion Service Company, a residential and commercial heating and air repair company, put a fuel charge in place a few years ago. The company increased the charge about 30 percent this year.

Chase Tunnell, president of Dominion Service, said the company plans to reduce its fuel charges in the near future, given the decline in gas prices. As with James Limousine, Dominion Service’s increased surcharge did not equalize the expense of pricey fuel.

When gas prices peaked this summer, Tunnell said, the company’s monthly fuel cost increased 40 percent, from an average of $12,000 a month to $20,000 a month.

Tunnell said it wouldn’t be fair to his customers to keep the surcharge increase in place now that the price of filling up has fallen.

“The reason we do it as a fuel charge instead of adding it on to our labor rates [is] it makes it a lot easier to reduce what we charge for it as far as what the fuel expense is,” Tunnell said.

Not every company felt compelled to add a fuel surcharge this year. Scott Burgess, owner of Southern Lawn Care, said he didn’t add any fuel surcharges to his customers’ bills this year. “If you do something like that because of fuel costs, you have to go back and lower those prices when the costs go back down,” Burgess said.

Instead, Burgess will wait until December to crunch the numbers and decide whether pricing changes need to be made.

“I bit the bullet, took a little bit less income, and will make any adjustments at the end of the year if I need to,” he said.

Many freight and delivery companies adjust their fuel surcharge each month based on an index that uses the average price of diesel fuel to calculate the percentage charged. Delivering a package through UPS or FedEx costs less than it did three months ago. The November surcharges for ground shipping at both companies have fallen about 3 percent since September to 8.25 percent.

For some companies, adding a fuel surcharge is a way to ping the customer with a higher bill even if fuel is only a small percentage of overhead.

Business columnist Daniel Gross decries fuel surcharges as a scam. In the case of such big delivery companies as UPS and FedEx, which handle millions of packages a day, Gross points out that even when multiple packages are delivered to the same building, causing the delivery vehicle to stop just once, the charge is applied to each parcel. In such cases, superfluous fuel charges add up to extra profits.

Gross says companies should change their overall price structure to factor in the long-term outlook for fuel prices instead of compensating with confusing and misleading fees.

And last week, airlines began folding their fuel surcharge into the overall fare price, according to USA Today. The surcharge has gone away, but the price is pretty much the same. Rick Seaney of Farecompare.com wrote on his blog that the airlines did so in response to a potential public relations problem: justifying the surcharge in the face of tumbling oil prices.

By factoring the surcharge into the fare, the airlines have added honesty to their advertised fares. Businesses that depend on ground transportation might follow suit and eliminate fuel surcharges if it looks like there might be a backlash from customers.

Al Harris covers retail, commercial real estate and transportation (and frankly whatever other business news is happening in Richmond). Please send story ideas about gas surcharges or any other topic to This e-mail address is being protected from spambots. You need JavaScript enabled to view it .