The final week of December 2015 marked the lowest On-Highway Diesel weekly price since June 2009; after falling for a seventh straight week, the price of diesel landed at $2.235. This is a 34 percent decrease over the price of diesel just one year ago when the fuel sat at an average price of $3.411. Since last reaching these lows over six and a-half years ago, the industry has seen the monthly average climb to more than $4.00 nine times, including a high of $4.127 in March 2012.
Despite the recent decline in fuel prices, the two leading parcel carriers, FedEx and UPS, have responded by implementing fuel index adjustments throughout the past year to maintain, and even increase, the cost of fuel for its customers. In February 2015, both companies announced a change to their respective index tables that establish the fuel surcharge on a shipment. The modifications by each carrier shifted where the determining On-Highway Diesel price fell within their fuel surcharge table, resulting in higher percentages despite lower average fuel costs. Then, in November 2015, FedEx announced its second change within the calendar year to adjust fuel index tables. While UPS has historically charged more for the additional fuel surcharge, FedEx took advantage of raising its fuel prices and narrowed that gap just before the holiday shipping season. Following the February change, the September On-Highway Diesel average of $2.505 would have placed the Ground Fuel Surcharge at 3.25 percent for the month of November – with both FedEx and UPS now operating on a two-month delay to determine fuel costs. With the November 2 change, that $2.505 September average now produced a November fuel surcharge of 4.25 percent for FedEx Ground services, adding an extra 1 percent fuel charge to a package’s cost just in time for transportation’s peak season.
A similar story has played out on the express shipping side as the U.S. Gulf Coast Kerosene-Type Jet Fuel price used by FedEx and UPS for air services is also at its lowest point in six years. The November dollar per gallon average of $1.326 is nearly a full $2.00 less than where it stood just four-and-a-half years ago when the April 2011 average hit $3.267. However, with the November adjustment to its fuel index, FedEx customers are now seeing a 2.25 percent fuel surcharge on air shipments during the month of January. Previously, the $1.326 average would have registered less than one percent on the air fuel surcharge table for FedEx Express.
The efforts by UPS and FedEx to keep the fuel surcharges steady, despite the declining trend of fuel costs, has customers paying less for both ground and air fuel than they were just a year ago. UPS Air fuel surcharge dropped from a 2014 12-month average of 10 percent to a 2015 average rate of 4.6 percent; FedEx Express shipments saw a similar year-over-year drop as fuel surcharge went from 8.8 percent in 2014 to 2.8 percent in 2015. The fuel surcharge on Ground services fell from 7 percent to 5.4 percent for UPS and 6.5 percent to 4.5 percent for FedEx. However, it’s easy to see the reaction by both carriers from 2015 and into 2016 is to make sure those fuel percentages do not tumble any further. FedEx and UPS have proven once again they are paying attention and willing to adapt to the market in terms of both accessorial and general rate increases. And while the fuel surcharge changes may seem minimal on the surface, the true impact can be substantial to a shipper’s bottom line when combined with each carriers’ annual rate increases, recent dimensional pricing changes, and in the case of UPS, a 2.5 percent third party shipping fee beginning this year. As FedEx and UPS continue to shift where they hit customers the hardest, it’s important for shippers to be aware of all carrier changes, understand their potential impact, and analyze best practices to combat and minimize price increases.
Greg Merz is an Analyst with the Transportation Solutions Consulting Group at enVista. He has more than four years of experience in the warehouse and transportation industry. While at enVista, Greg has served in roles to help clients in a number of areas including parcel audit, implementation, custom reporting and analysis, and contract negotiations. Prior to enVista, Greg worked as a warehouse manager at Mattress Firm. He holds Bachelor’s degrees in Supply Chain Management and Technology Management from the Kelley School of Business at Indiana University.