Convention tells us there are two tried and tested ways to save on fuel:
- Use less of it. Buy more fuel-efficient vehicles; train your drivers to drive more efficiently and make sure that your vehicles and tyres are well-maintained.
- Get the best price. Is this scenario familiar? You go to market, perhaps via a tender, get the best price on offer, establish a contract with a fuel company for two or three years, and you’re set – everything is sweet for the length of the contract.
But is it?
Food for Thought
How do you know that the fuel price you are charged is in line with oil price movements, fluctuations in foreign exchange rates, changes in shipping costs and all the other variables that affect fuel pricing?
How do you know that the fuel company is not sneaking unjustified margin that can be hidden behind all these variables, or that they haven’t made mistake?
In my time in the bus industry, I have seen mistakes and unjustified movements in fuel pricing that would have cost hundreds of thousands – if not millions – of dollars over time if they had not been picked up and corrected.
Here is a scenario to consider:
You have a fleet of 500 buses running 60,000km a year each using around 40 litres of diesel per 100km. This would mean that you need around 12 million litres of diesel. If you went to market, you would get a good fuel price if you contract with a fuel company.
However, if one cent was applied to your price outside of market forces this would mean that you’re paying $120,000 per year more for your fuel.
It is very difficult to pick these price changes up given the complexity of fuel pricing – and don’t forget, fuel companies are experts in their business.
What’s a Bus Operator to Do?
There is a way to be certain you maintain the good pricing advantage that you negotiated at the start, and that it only moves in line with market movements in oil price and currency movements.
There is a formula called the Fuel Price Escalator that uses the price of oil and your local currency as inputs to calculate what the fuel price should be at any given point. Ask your fuel supplier to include this in any contract that you have with them. Make sure you monitor this to ensure you are being charged correct pricing without unjustified charges.
Monitoring can be difficult for a bus operator, as the oil price used in diesel fuel pricing is not what’s reported on the nightly news bulletins (at least not in Australia). Getting access to the daily oil pricing can also be expensive.
Nevertheless, there are consultancies who provide price-monitoring services for a fee. This fee is modest given what you pay for fuel every year and the difference pricing errors make to your business. They will generally review all your fuel invoices to ensure they line up with your agreement with the fuel company and that any movements are in line with the agreed Fuel Price Escalator.
In my next article, I’ll write about how you can use technology to ensure that your vehicles are running at their most efficient to save cost on fuel and maintenance.
If you would like to discuss how you can apply the fuel price controls in your fuel contracts, please contact me.