The Ceiling and the Floor: Costing a Fixed-Price Diesel Deal for Thirty Vans
Photo: Jaggery , CC BY-SA 2.0, via Wikimedia Commons
Ask a fleet manager what fuel hedging means and you will usually get one of two answers: a shrug, or a story about a broker who was very keen on the phone. Neither is much help when the finance director asks whether the business should fix the price of diesel for the next twelve months. The honest answer sits between the two. A hedge is a piece of insurance with a visible premium and an invisible benefit, and for a thirty-van operation the sums are small enough to work out on a spreadsheet and large enough to change a year's profit.
What a fixed price actually buys
It does not buy cheaper fuel. The physical litre still arrives from the same tanker into the same tank. What changes is who carries the risk of the price moving between the day the contract is signed and the day the fuel is burned.
That distinction matters more than any technical detail. If wholesale diesel falls, the fleet on a fixed price watches forecourt boards drop while its own invoice stays exactly where it was. That is not a flaw in the product; it is the product. The question is whether the certainty is worth more to the business than the difference.
Four structures are commonly offered to fleets of this size:
| Structure | What it does | Typical friction cost | Suitability |
|---|---|---|---|
| Supplier fixed price | Locks pence per litre for a set volume and term | 1-2p per litre embedded in the quote | Fleets wanting simplicity |
| Cap | Sets a maximum price; you still benefit if prices fall | Premium of roughly 2-4p per litre | Fleets wanting protection and upside |
| Swap | Exchanges floating for fixed, in both directions | Spread plus a credit line | Larger, properly advised fleets |
| Exchange-traded futures | Margined daily against the market | Commission plus variation margin | Rarely appropriate below several hundred vehicles |
The base case: about 91,000 litres a year
Take thirty vans at 22,000 miles each. That is 660,000 miles. At a realistic 33 mpg blended across mixed work, the fleet burns roughly 20,000 gallons, or 91,000 litres. At 145p a litre the annual fuel bill sits near £132,000.
Now fix that volume at 145p for twelve months. If the floating average over the term lands at 135p, the fleet has overpaid by around £9,100. If it lands at 160p, the fleet has saved about £13,650. Break-even sits precisely at 145p, which tells you almost nothing, because hedging is not a forecast. It is a decision about which error the business can absorb.
The friction that quotes leave out
Four costs sit around the headline price and none of them appear in the email.
- Structuring. Arrangement fees on a supplier fixed price or a bank swap typically run between 0.5p and 1.5p per litre. On 91,000 litres that is £450 to £1,350.
- Credit. An over-the-counter swap requires a credit line or cash collateral, commonly in the region of 10-15% of notional value. On a £132,000 notional, that is £13,000 to £20,000 committed. At a 6% cost of capital, that is £800 to £1,200 a year in opportunity cost.
- Administration. Monthly settlement, volume reconciliation, audit trail and board reporting. Realistically half a day a month, or about £1,500 a year at a loaded day rate.
- Volume tolerance. Most contracts allow a band of roughly plus or minus 10-15%. Step outside it and the difference is settled financially rather than in litres.
Added together, that is £2,750 to £4,050, or about 2-3p per litre at this fleet's volume. A fixed price at 145p therefore needs the floating average to come in above roughly 147.5p to 148p before it has earned a penny. The market has to be wrong by about 2% in your favour, and stay wrong, for the hedge to pay for itself. That break-even is the number the presentation usually omits.
The risk that actually bites
Price is the visible risk. Volume is the one that causes damage. Sign for 91,000 litres and then lose a contract, delay three replacements, or move two urban routes onto electric vans, and the fleet is paying for fuel it will never burn. Settling 10,000 unused litres against a 10p adverse move costs £1,000, and it arrives in the same quarter as the lost revenue.
The working rule is to hedge the volume you are confident of rather than the volume you hope for. For a fleet this size, 50-70% of a conservative forecast is a sensible ceiling. Hedging 100% is a wager on the sales pipeline.
Cash flow and the margin call
Exchange-traded futures are margined daily. Falling prices trigger cash calls even as the fuel bill falls, which is precisely the moment a small operator can least afford them. Supplier fixed prices avoid daily margin, but they embed the supplier's own hedging cost in the pence-per-litre figure and expose the buyer to that supplier's credit. It is worth asking what happens to the contract if the supplier is taken over or restructured.
When locking in is defensible
- Revenue is contracted at fixed rates over the same period: parcel rounds, tender-backed service contracts, fixed-price maintenance.
- Mileage forecasts are stable within about 10%, which telematics history will tell you.
- Fuel is a material share of operating cost, above roughly 20%, so a 20p swing moves the profit line.
- The balance sheet can absorb a collateral commitment without touching the overdraft.
- The replacement plan does not retire the hedged vans mid-term.
A 20p swing on 91,000 litres is £18,200, roughly a year's lease on one van or a technician's salary. That is the size of the uncertainty being managed, and it is large enough to justify the friction.
When it is speculation in a lanyard
Volumes are genuinely unknown because of seasonal agency work. The fleet is electrifying inside the hedge horizon. There is no cash buffer for collateral. Or the decision is being taken because somebody expects prices to rise. That last case is a view on the market, not a purchasing policy, and it belongs in a trading book rather than a transport office.
A workable structure
Ladder the position. Fix 40-60% of forecast volume in three tranches across the year and leave the remainder floating, reviewing quarterly. Choose a cap where the budget can carry a 2-3p premium and the board wants to keep the benefit of a fall. Use a collar only if everyone in the room understands that the floor being sold is a real obligation, payable in cash, on a date.
The verdict
For thirty vans with contracted revenue and predictable mileage, a partial fixed price is defensible housekeeping. It converts a volatile cost into a known one for roughly 2-3p per litre, which is a reasonable price for a budget that holds. For a fleet with lumpy volumes or a firm electrification plan, it stacks a second uncertainty onto the first. Fix the price when the certainty is worth more than the premium, and never because you believe you know where diesel is going.
