Consultant’s Insight: Raising surcharges to protect revenue per piece

A new round of fuel increases took effect for FedEx on July 1 and for UPS on July 15, shortly before the express giants raised surcharges. [caption id="attachment_76185" align="alignright" width="298"] Cathy Roberson, Cargo Facts Consulting senior consultant and Air Cargo Next columnist[/caption] FedEx raised FedEx International — excluding FedEx International Ground — and FedEx Freight fuel surcharges by 1%. UPS also raised fuel surcharges by 1% for U.S. domestic ground, UPS SurePost and U.S. domestic air. Both carriers attributed the decline in revenue per piece partly to lower fuel surcharges during recent earnings calls. Former UPS Chief Financial Officer Brian Newman noted that changes in fuel prices decreased the domestic revenue per piece growth rate by 90 basis points during the first quarter. “Strong base pricing drove a 360-basis point increase in the [international] revenue per piece growth rate,” Newman said on the April 23 earnings call . “A decline in fuel surcharge revenue combined with a stronger U.S. dollar negatively impacted the revenue per piece growth rate by 80 basis points.” On FedEx’s March 21 earnings call for the period ending Feb. 28, Chief Customer Officer Brie Carere said, “At FedEx Express, yields remained pressured due to a tapering of international export demand surcharges and an increasing mix of lower yielding e-commerce and deferred products. “Higher weight per package and favorable customer segment mix [for FedEx Ground] offset a lower fuel surcharge relative to the prior year,” she said. “And at FedEx Freight, revenue per shipment was down 1%, driven by lower fuel surcharges and lower weights.” Consistent price increases FedEx and UPS have consistently raised fuel surcharges since August 2021, according to the Q3 TD Cowen/AFS Freight Index , published July 16. “The current state of freight markets empowers shippers to wield pricing power and re-evaluate how to best make use of logistics networks,” Tom Nightingale , chief executive of AFS Logistics , said in a release. “Carriers, on the other hand, continue to step up the sophistication and nuanced defenses of their revenue streams, with subtle and frequent ancillary price increases.” Indeed, FedEx and UPS have increased their fuel surcharges despite a decrease in the U.S. Gulf Coast price for kerosene-type jet fuel, which is used to calculate domestic and international air surcharges. [caption id="attachment_57144086" align="alignnone" width="636"] (Courtesy/Energy Information Administration)[/caption] Meanwhile, IATA ’s Fuel Price Index indicates the global average jet fuel price for the week ending July 12 fell 3.2% from the week before to $103.50 per barrel. The index, produced in partnership with Platts , shows the average prices paid at the refinery for aviation jet fuel for the reported week. For North America, IATA’s Fuel Price Index notes a 4.2% decline week over week, an 11.4% decline from the prior year and a 3.5% increase from the prior month. Carrier discounting to drive competition UPS and FedEx may be preparing for potentially higher jet fuel prices in the second half of the year. Oil prices are forecast to increase in the second half due to withdrawals from global oil inventories, according to the Energy Information Administration ’s latest outlook on July 9. “We estimate global oil inventories decreased by 0.5 million barrels per day (b/d) in [the first half of 2024] and will fall by 0.7 million b/d in [the second half of 2024],” the outlook stated. “Inventory withdrawals stem in part from OPEC+ production cuts, which the group announced in early June would remain at current levels until at least the end of September.” Regardless, shippers will pay even more for express and ground shipments during the second half of the year. The TD Cowen/AFS Freight Index expects the third quarter to be one of seasonal trends and heavy discounting behavior from carriers. This behavior will drive more competition for express and ground parcels, but the carriers will protect their revenue-per-piece by implementing higher surcharges such as fuel.

Consultant’s Insight: Raising surcharges to protect revenue per piece

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