Consultant Insight: Fuel surcharges — should you really care?

Like their average annual rate increases, UPS ’ fuel surcharges for Ground and Domestic and International Air seem to increase at least once a year. Effective March 2, expect changes in fuel surcharges. This is perhaps not the most exciting news in the logistics market, or anywhere else for that matter, but any change in surcharges should be regarded as important for shippers in terms of costs, and thus for the provider to win and keep business. Ground UPS’ Ground fuel surcharge is based on the national U.S. average of highway diesel fuel price as reported by the U.S. Energy Information Administration (EIA) for the week two weeks prior to the adjustment, rounded to the nearest cent. Based on simple averages, we find that the national U.S. average of highway diesel fuel price declined 3.8% in 2019, compared to 2018. However, UPS is changing up its minimum and maximum ranges by dropping its lowest range, for fuel prices between $2.18-$2.30 for a 6.0% surcharge, to a new minimum range of $2.30-$2.42 for a 6.25% surcharge, and adding a maximum range of $3.74-$3.86 for a 9.25% surcharge. Other than the minimum and maximum range changes, Ground fuel surcharges remain mostly the same. UPS has done well in managing fuel costs for Ground by adopting alternative fuel vehicles and with Orion, its route-optimization tool. According to its latest fact sheet, UPS has about 125,000 package cars, vans, tractors and motorcycles, including more than 10,300 alternative fuel and advanced technology vehicles. Domestic Air UPS’ Air services have been a particularly bright spot for the company. Thanks to a rise in e-commerce volumes and its largest customer, Amazon, the Domestic Air services have seen double-digit percentage growth in volumes. The increase in demand for air services has also prompted UPS to add to its air fleet. UPS’ Domestic Air fuel surcharge is based on the U.S. Gulf Coast price for kerosene-type jet fuel as reported by EIA for the week that is two weeks prior to the adjustment, rounded to the nearest cent. Once again, based on a simple average, we find that the average U.S. Gulf Coast price for kerosene-type jet fuel declined by more than 7.0% in 2019, compared to 2018. As such, changes in Domestic Air surcharges are similar to Ground fuel surcharges, with a new minimum range of $1.46-$1.51 for a 5.75% surcharge, and a maximum range of $2.06-$2.11 for an 8.75% surcharge, which will go into effect beginning March 2. International Air There are also changes in UPS’ Air-Export and International Air-Import fuel surcharges. Also based on U.S. Gulf Coast price for kerosene-type jet fuel, international volumes and revenue have not been as robust as Domestic. This is basically in line with the overall market. Instead of increasing these surcharges, UPS has deleted several price ranges with a minimum surcharge of 8.75% and established a new minimum range of $1.52-$1.55 for a 10.0% surcharge. The new maximum range is $1.88-$1.91 for a $13.0% surcharge. So, if you haven’t nodded off yet while reading through the summary of UPS’ surcharge changes, why should you really care about them? The short answer relates to cost awareness and price sensitivity. Costs are rising for everyone and the ultimate pass-through of costs to the consumer is difficult. Pushback occurs if the costs are perceived as too high. As such, shippers expect transparency from their supply chain partners. While providers need to recoup costs, shippers dislike surprises on their invoices. It’s quite simple — and one would expect achieving transparency to be easy — but that has not been the case until recent years. The introduction of online freight marketplaces such as cargo.one and Freightos’ WebCargo is beginning to bring much-needed transparency to rates and surcharges, which benefits large and small shippers, as well as providers. However, shippers and providers must continue to communicate with each other, while shippers need to closely monitor their invoices for hidden surprises.

Consultant Insight: Fuel surcharges — should you really care?

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