Jet fuel surcharges adding to air shippers' holiday costs

 Not the only thing heading skyward (Photo: Shutterstock)

Not the only thing heading skyward (Photo: Shutterstock)

The cost of jet fuel burn is burning a hole in the pockets of air express shippers.

In mid-September, DHL Express, a unit of Deutsche Post AG (NYSE:DPSGY) and operator of the world’s largest air express network, said it would hike its November jet fuel surcharge on international time-definite services to and from the U.S. by 300 basis points to 10.25 percent, effective Nov. 1. The surcharge for October was 7.25 percent. In September, it was 7 percent. DHL Express, headquartered in Bonn, Germany, serves the U.S. only with international deliveries. It ceased domestic U.S. operations in January 2009.

In a statement, a DHL Express spokesman said the adjustments were a result of higher fuel costs the company was incurring in its operations. However, Jerry Hempstead, who spent decades in top U.S. sales positions at DHL and the former Airborne Express, a U.S. air express company acquired by DHL in 2002, do more than just offset DHL Express’ higher fuel bills. The company acted not only because it saw its rivals ratcheting up surcharges, but because “it was free money” to DHL Express, Hempstead said.

The timing of the increase means the new surcharges are likely to remain in effect through the peak holiday shipping season when air freight services are in huge demand. DHL Express adjusts its surcharges monthly, and the levels have a two-month lag time. The increases that took effect at the beginning of the month were based on prices that prevailed on Sept. 1.

DHL Express is playing surcharge catch-up with its two main rivals: Memphis-based FedEx Corp. (NYSE:FDX) and Atlanta-based UPS Inc. (NYSE:UPS). For example, on September 10 when spot jet fuel prices were at $2.12 a gallon, FedEx’s U.S. air import surcharge was 11.75 percent and its air export surcharge was 10 percent. At that price, UPS’ U.S. air import surcharges were 12.50 percent and export surcharges stood at 10.25 percent. Those surcharges rose steadily over the next month as jet fuel prices peaked. Fuel prices have since headed down substantially as oil prices have pulled back.

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FedEx and UPS peg their surcharges to the weekly U.S. Gulf Coast spot price for a gallon of kerosene-type jet fuel. Their specific surcharge amounts are based on a range of spot prices per gallon. For example, FedEx imposes one surcharge if spot prices for a given week fluctuate between $2.11 and $2.15 a gallon, and another charge if prices range between $2.16 and $2.19 a gallon.

Unlike DHL Express, FedEx and UPS adjust their rates weekly, and both have much shorter lag times as a result.

Jet fuel spot prices hit a 2018 high of $2.345 a gallon on Oct. 9 before entering a sharp decline during the subsequent five weeks. The most current price quoted on the U.S. Energy Information Administration website was $1.95 a gallon on Nov. 13. That is the first time since mid-April that prices had fallen below $2 a gallon, according to EIA data.

Fuel surcharges have evolved into a lighting rod of controversy over the decades. In trucking, diesel fuel surcharges were introduced in 1973 to help truckers cope with suddenly soaring fuel costs in the wake of the Arab oil embargo. However, what was conceived as a pure cost pass-through from motor carrier to shipper has become, in the views of more than one shipper, an arbitrage scheme on the part of carriers to maximize revenue and profit.

Fuel surcharges have become such an integral part of a carrier’s revenue stream that trucking executives view declining surcharge levels as a financial headwind because it means that less revenue is being captured.