Consultant Insight: UPS lowers air fuel surcharges amid weakening airfreight demand

UPS' updated fuel surcharges for U.S. imports and exports, which took effect Sept. 5, reflect a decline in jet fuel prices and a slowdown in global air cargo demand. The minimum and maximum fuel prices were revised from $3.35 and $3.95 to $2.87 and $3.39, respectively. The minimum and maximum fuel surcharge range was also revised down from 21.0% and 29.0% to 18.75% and 25.5%, respectively. [caption id="attachment_69752" align="alignright" width="298"] Cathy Roberson, Cargo Facts Consulting senior consultant and Air Cargo World columnist[/caption] UPS' fuel surcharge is index-based, adjusted weekly and centered on the U.S. Gulf Coast (USGC) price for kerosene-type jet fuel, as most recently released by the U.S. Energy Information Administration (EIA). Jet fuel prices peaked in June at $4.12 per gallon . Since then, prices have fallen to a monthly average of $3.33 per gallon in August . The monthly average remains 82% higher than August 2021, 2% lower than July's year-over-year change and 58% lower than June's YoY change, according to EIA data. Retailers cut back While UPS and other air carriers are reducing fuel surcharges, retailers are cutting back on their airfreight costs as inventory levels grow. "With respect to inbound freight cost increases, we are seeing some relief from last year's peak levels,” Guess CEO Carlos Alberini told analysts during the company's Aug. 24 Q2 earnings call. “We have focused on reducing our airfreight with success, resulting in meaningful cost reductions; while the freight cost pressures we experienced may subside in the future, we are not planning significant improvements for the second half of this year." Other retailers noted a negative impact on their financials due to high airfreight costs. "We realized an estimated $50 million of incremental airfreight during the quarter, which resulted in approximately 130 basis points of margin deleverage," Gap Inc. Chief Financial Officer Katrina O'Connell told analysts during the company's Aug. 25 Q2 earnings call. Cutbacks in airfreight demand may last into 2023 as retailers work down high inventory levels amid a slowing economy. "From a profitability perspective, we expect cost pressures to continue in the back half and into the beginning of 2023, particularly across our supply chain, from the incremental distribution centers and related costs to support our growth plus higher ocean freight and other freight-related costs resulting from the global supply chain disruption," Williams-Sonoma Chief Financial Officer Julie Whalen said during the company's Aug. 24 Q2 earnings call. UPS orders more 767 freighters Despite retailers putting the brakes on airfreight spending, UPS is still optimistic. The carrier placed an order for eight 767 freighters in August, according to an Aug. 29 Boeing announcement. UPS will begin taking delivery of the new airplanes in 2025, with an additional 767-300 converted freighter entering service in late 2023. This purchase further builds on UPS’ order for 19 767Fs in December 2021 . Carriers will require 2,795 more dedicated freighters over the next 20 years, according to Boeing's 2022 Commercial Market Outlook forecast . The global freighter fleet is expected to grow to 3,610 airplanes by 2041, up from 2,250 today. Still, UPS reported that average daily export volumes declined 4.4% due to factors such as high global inflation and COVID-19 lockdowns in Asia. But, for the second half of the year, UPS Chief Financial Officer Brian Newman anticipates growth, despite external factors. "In the second half of the year, we anticipate volume growth rates will improve relative to the first half, driven by our speed and service advantages in Europe,” Newman told analysts on July 26. “We expect revenue growth to be in the low single digits. Additionally, we expect currency will remain a headwind in the year's second half. Operating margin in the international segment is anticipated to be about 23%." Join Air Cargo World for our next webinar, “Forward Thinking: Best practices for freight forwarder success,” on Tuesday, Sept. 13, at 11 a.m. ET. Click here for more information and to register.

Consultant Insight: UPS lowers air fuel surcharges amid weakening airfreight demand

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