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Parcel carrier fuel surcharges poised to reach extreme levels

Some could cross 30% in coming weeks as soaring fuel prices take toll

Parcel fuel surcharges about to go bonkers (Photo: Jim Allen/FreightWaves)

Parcel shippers have been struggling with rising carrier fuel surcharges for months. The struggle has now entered a new dimension.

On Monday, the Energy Information Administration (EIA) reported a 74.5-cents-a-gallon increase in the average nationwide price of diesel fuel to $4.845 a gallon, the largest week-over-week increase in the diesel index since EIA began keeping records in 1994. The jump, in turn, will trigger significant increases in fuel surcharges imposed by FedEx Corp.’s ground unit (NYSE: FDX) and UPS Inc.’s (NYSE: UPS) domestic ground parcel business.

Based on the carriers’ calculations, FedEx Ground customers will pay a surcharge of 15.25% on all shipments, effective this Monday. Effective March 21, UPS customers will pay a 14.5% surcharge on each ground delivery. Changes in FedEx surcharges take effect one week after the most recent EIA price, which is published every Monday. UPS’ adjustments have a two-week lag from the latest EIA price data.

Both carriers adjust their surcharge levels by 25 basis points and use pricing bands to determine what to charge. FedEx’s band moves in 9-cents-a-gallon increments, while UPS’ bands are based on 12-cents-a-gallon moves in the diesel price. For example, FedEx will set one surcharge rate if the diesel price is at least $4.54 a gallon but no more than $4.63 a gallon, and another if prices range from at least $4.63 a gallon but no more than $4.72 a gallon. UPS applies the same formula, but uses 12-cent per gallon increments.

For air shippers of both carriers, the jet fuel surcharge hit will be more painful. As of Monday, the EIA’s reading on jet fuel prices stood at $3.71 a gallon, up 13 cents from the prior Friday’s price. FedEx Express, the company’s air and international unit, imposes a 16% surcharge on domestic shipments if prices fall between $2.96 and $3.01 gallon. Based on this past Monday’s price, FedEx Express’ U.S. customers could face surcharges of nearly 20% starting this Monday. 

The unit’s international shippers will be whacked even harder. Unlike domestic express surcharges, international surcharges move in 4-cents-a-gallon increments. When jet fuel prices reach a range of  $2.91 and $2.95 a gallon, FedEx Express imposes a 16.25% surcharge on air exports and a 19.25% levy on air imports. With current prices 80 cents a gallon higher than the front end of the band, shippers could be facing surcharges well above 20% depending on the shipments’ direction.

UPS shippers face the same hammer. On March 21, UPS’ domestic jet fuel surcharges will hit 20%, export levies will exceed 24% and import charges will surpass 30%. UPS’ domestic fuel surcharges move in 5-cents-a-gallon increments, while its international fuel levies are adjusted in 3-cents-a-gallon increments. 

Fuel surcharges are imposed both on the carriers’ base rates and on most of their add-on, or accessorial, charges.

Josh Dunham, CEO of Reveel Group, a parcel consultancy, said the sharp and sudden spikes will put more pressure on shippers to decide whether to absorb some or all of the increase, and how much can be passed on to the end customer without threatening the shippers’ competitive positions. Reveel’s customer base that ships with UPS has seen its fuel spending double to more than 10% currently to 5.42% in the first quarter of 2021, Dunham said.

Mark Solomon

Formerly the Executive Editor at DC Velocity, Mark Solomon joined FreightWaves as Managing Editor of Freight Markets. Solomon began his journalistic career in 1982 at Traffic World magazine, ran his own public relations firm (Media Based Solutions) from 1994 to 2008, and has been at DC Velocity since then. Over the course of his career, Solomon has covered nearly the whole gamut of the transportation and logistics industry, including trucking, railroads, maritime, 3PLs, and regulatory issues. Solomon witnessed and narrated the rise of Amazon and XPO Logistics and the shift of the U.S. Postal Service from a mail-focused service to parcel, as well as the exponential, e-commerce-driven growth of warehouse square footage and omnichannel fulfillment.