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Fuel costs spike early with no simple solution

By David Hubbard

With the price of diesel fuel escalating faster and earlier this year than most bus and coach operators anticipating and hinting at an all-time high by summer, I had to wonder what everyone is doing to be ready this time. I could not call every company, but the few I did talk with have arrived at pricing methods that are satisfactory to their customers, suggesting there is not one easy sure-fire approach.

For example, what works best for Bill Gentry, owner and president of Gentry Trailways, Knoxville, TN, is to keep any accounting having to do with a fuel surcharge as simple as possible. He says the stipulation in his charter agreements covering sudden increases in fuel costs is nothing new.

“We have always quoted charters on the current price,” says Gentry. “But we have it in writing that if the cost of fuel should go up significantly at the time of the trip we do have the ability to bill the customer for the difference.”

If the contract went out with fuel priced at $3.79 per gallon, but increased to $4.27 per gallon, Gentry simply totals up the fuel receipts for that movement and multiplies the number of gallons by the difference.
“While we make it known to our customers we have the ability to make such an adjustment, I have yet to implement this clause,” he says. “I have always been able to anticipate fuel increases for the time of a trip.”
Nonetheless, Gentry says the way it is looking right now he is going to have to start sending out the bills.
“With where fuel costs seem to be heading, we won’t be able to eat the difference,” he says. “We will probably be spending more time doing the post-trip paperwork.”

Terry Fischer, founder and president of Transportation Charter Services (TCS), Orange, CA, drills down a little further into price increases and billing issues.

“It starts with our customers viewing the cost to charter a motorcoach as a fixed expense, right along with the hotels and restaurants,” says Fischer. “Anytime we have to add a surcharge it becomes a variable cost. They will accept it, but they want to know what the charge will be, the worst case scenario. Where we can’t be too open-ended, it can get a little scary.”

Fischer says he negotiates many contracts as much as two years in advance, in which a maximum fuel surcharge affects about 50 percent of TCS customers. For the smaller accounts and ad-hoc work for the very near future, he says the costs are included in the initial quote.

Fischer prefers to decipher fuel surcharges in terms of a percentage-based profit-loss statement, which he says 13 percent of every dollar goes toward fuel.

For example, if the cost is $3.80 and spikes to $4.20 a gallon, TCS will add a 2 percent surcharge over the $3.80 and an additional 1 percent for every 10-cent per gallon increase beyond $4.20 up to a maximum of 5 percent.

“The way I see it, even if the cost of fuel goes up 20-cents a gallon that does not mean my price increases by 12 to 15 percent,” says Fischer. “Fuel actually represents about 13 percent of my total costs for every dollar generated. When I whittle all this down the surcharge is actually 2 percent. I always calculate it on my actual increases and try to work it as a pass through.”

Fischer says his customers accept his math.

Like everyone else in the business, while Gentry and Fischer may feel protected on an issue with little consistency among operators across the board, they cannot help but feel a little nervous this time of year.
“We may have estimated fuel hitting $4.40 by this summer, but we are already there,” says Fischer. “Where will it end? We can only cover ourselves to a certain point before it cuts into the bottom line.”

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Posted by on Apr 1 2012. Filed under Features. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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