How Fuel Surcharges Affect Parcel Shippers

Fuel Surcharges Affect Parcel Carriers

Oil prices continue to climb to their highest levels in years. West Texas Intermediate (WTI) crude prices (the industry standard) have hovered above $60 per barrel for most of 2018. In April, they hit $71 per barrel, higher than the U.S. economy has seen since 2014.

When oil prices rise, they send ripple effects through the global economy. Transportation gets more expensive as does the production of many goods. As consumers spend more on gasoline—an expense for almost every American household—there’s less available for everything else.

Parcel shippers are starting to see an impact of these high oil prices on their businesses, too. Jet and truck fuel prices are rising fast: American Airlines told the Wall Street Journal in April that jet fuel had risen by 12% in two weeks that month.

Parcel carriers offset rising fuel costs with rising fuel surcharges. These fees are pegged to WTI crude prices, so as oil rises, FedEx and UPS pass those costs to shippers.

Increased Delivery Costs Feed Fuel Surcharges

Simply put, the more expensive fuel gets, the more expensive delivery gets.

It’s not just parcel carriers who recognize this equation. In an earnings call in mid-May, Reuters reported that Walmart said rising fuel costs meant transportation was taking up more of the company’s budget. The company’s margins fell last quarter; share prices followed.

Walmart also pointed to other factors exacerbating transportation costs including a shortage of truck drivers.

But labor costs don’t fluctuate the way oil prices do. Parcel carriers and retailers alike can plan and prepare for changing labor costs or big capital investments like building new warehouses or buying new trucks. Oil prices can change overnight, eating suddenly into carriers’ margins. It makes sense for carriers to peg fuel surcharges to oil prices, so they can pass costs to shippers accordingly.

But carriers can also use rising costs to their advantage to increase revenue. Fuel surcharges rise and fall, but publicly traded carriers need to maintain their margins too.

How UPS and FedEx Pass Costs Onto Shippers

Through fuel costs, carriers feel the impact of rising oil prices almost immediately. Consumers take longer to adjust. High crude prices typically do lead to a reduction in consumer spending, but it’s gradual. It doesn’t mean they’re buying fewer products online.

To offset the bottom-line impact of rising fuel prices, UPS and FedEx impose fuel surcharges on deliveries.

The industry’s two leading carriers approach fuel surcharges differently, and understanding the differences can lead to big savings.

FedEx Fuel Surcharge Approach

FedEx’s fuel surcharge ranges from 4.75 percent to 8.5 percent of the total cost of the shipment, with different fees for Express and Ground shipping.

For ground, prices start at 4.75 percent when a gallon of diesel fuel is under $2.74 and rise to 7.75 percent when fuel reaches $3.82.

Express is based on the price of jet fuel. Surcharges range from 6.25 percent when a gallon is $1.99 to 9 percent when a gallon reaches $2.47.

At the end of May, FedEx’s jet fuel surcharge was 7.25 percent and its ground fuel surcharge was 6.25 percent.

FedEx customers should note that this fee is calculated after accessorial surcharges have been added, maximizing the expense for shippers.

UPS Fuel Surcharge Approach

On the other hand, UPS charges a variety of different fuel surcharges for different services. For ground, they range from 5.25 percent of the total cost of the shipment when fuel is under $2.54 per gallon to 8 percent of the cost of the shipment when ground fuel reaches $3.86.

The most expensive surcharges appear in freight service reight schedules: Worldwide Express, Worldwide Express Freight, Worldwide Express Plus, Worldwide Express Saver and Worldwide Expedited. At its cheapest when jet fuel is $1.78 per gallon, the fuel surcharge is 15 percent of the total cost of shipping. At its most expensive when jet fuel is $2.26 per gallon, it’s 19 percent.

At the end of May, UPS’s jet fuel surcharge was 18.5 percent and its ground fuel surcharge was 6.25 percent.

UPS customers should note that surcharges also kick in whenever a package carries an accessorial surcharge for Saturday delivery or its large size.

How Do You Know If You’re Getting the Best Deal?

It’s difficult to compare FedEx and UPS’s fuel surcharges directly since the rates apply to different types of shipments.

Executives need to review these pricing models for themselves based on their company’s data, to understand how rising fuel prices will affect their shipping costs. Shipping single parcels to residential customers will carry fuel surcharges from FedEx but not UPS; bulk freight shipments might be much cheaper with FedEx’s rates than UPS’s.

Are you getting a fair deal on fuel surcharges? To find out, review your current shipping invoices to understand how much you spend on these fees. Then, model some alternative scenarios. Would a different service from your current carrier save you money? What about a competing carrier?

This kind of analysis can be time-consuming and intensive, and many companies don’t have the resources to undertake a top-to-bottom review of their shipping spend.

That’s what Reveel is for. Our consultants can help you understand exactly what you pay your parcel carrier. The shipping industry is typically opaque, but Reveel’s expert knowledge of the industry can show you whether your rates are in line with your competitors.

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