Parcel Carrier Fuel Surcharges Expected to Rise, Here's What Shippers Should Know

As more businesses call their employees back into the office after years of working from home, Americans are becoming increasingly concerned about rising fuel costs. A host of issues are starting to affect inflation and fuel prices in particular. It's barely been a month since UPS fuel surcharges were the latest topic, but with fuel prices skyrocketing to surpass records, they are once again on the table and weighing on the industry's collective minds.

Supply chain professionals are rapidly trying to understand what this means for their businesses. Price hikes from one week to the next require weekly, if not daily, rate changes. As rising parcel carrier fuel surcharges change the dynamics for shipping companies, owners and decision-makers need to stay level-headed and informed to make the best business decisions.

The State of Fuel Prices

Since skyrocketing fuel prices cannot be absorbed by one arm of the supply chain, the increased costs are changing the playing field for shippers locally and internationally. With fuel required across all forms of transportation, parcel carrier fuel surcharges are growing. Specifically, on-highway diesel and air fuel rates, which are expanding to record highs, catalyze higher surcharges that shippers need to understand. Here are those breakdowns rounded to the nearest cent.

On-Highway Diesel

According to the EIA, the national average for a gallon of deisel fuel on March 7, 2022, was $4.85, up a whopping $0.75 from the previous week and $1.71 year-over-year. These averages have impacted the United States in different areas. Although California boasts the highest average fuel price at $5.76 with a yearly increase of $1.86, its week-to-week price is only up to $0.68. The Lower Atlantic region is likely to see the most significant uptick in parcel carrier fuel surcharges with the nation's largest week-to-week and yearly price differences of $0.85 and $1.89, respectively. The Rocky Mountain region experienced the nation's lowest week-to-week change at $0.57, as well as the nation's lowest yearly price increase of $1.41.

Jet Fuel

In the Gulf Coast region, fuel has seen an alarming increase in the last week, rising from $2.68 on February 25, 2022, to $3.24 on March 4, 2022. This weekly increase of $0.56 is the largest increase ever seen since the EIA began recording this data in 1990. When considering the Gulf Coast region as a sample, most week-to-week changes were within 3-7 cent changes until December 2021, when 9 cent increases became regular without the typical fluctuating back down.

As of March 14th, jet fuel pricing is still $0.77 from the highest national average of $4.01 recorded in 2008 by the EIA. If weekly increases are jumping at the rate of the Gulf Coast region, it would only take two weeks to surpass the 2008 record. With the national average ending at $2.17 in December 2021 and jumping over a dollar more per gallon before St. Patrick's Day, parcel carrier fuel surcharges are imminent for omnimodal shipping.

FedEx and UPS Fuel Surcharges

Meanwhile, FedEx began charging international shipping surcharges effective March 7, 2022. The leading carrier pair utilize pricing bands to regulate their parcel carrier fuel surcharges. FedEx and UPS pricing bands are 9-cents-a-gallon and 12-cents-a-gallon, respectively. Therefore, if the average diesel price is or between $4.37 and $4.46, FedEx would increase their rate; however, UPS would wait until the diesel price reached $4.49. Both companies utilize US Energy Information Administration (EIA) data when implementing cost changes. These cost changes have impacted fuel in every category, but the two most crucial price jumps for shippers have been diesel and jet fuel.

Driving Forces of Higher Fuel Costs

Various media outlets have claimed that one individual or factor caused today's alarming fuel costs. However, the correct answer involves the weaving together of multiple factors. The factors driving parcel carrier fuel surcharges include:

• E-commerce growth – When the pandemic brought home millions of Americans in late 2019 and early 2020, e-commerce became the source for every real need. While doctors fought for lives and information on this new virus, families and individuals clung to their sanity with two-day shipping promises and meal delivery services.
• Higher pump prices – As higher prices at the pump became "normal" in 2021, more consumers used this as another opportunity to minimize driving. However, doing so required more instances of ordering online, and taking advantage of parcel carrier fuel surcharges impacted e-commerce services.
• Russia-Ukraine war – The cost of every gallon of fuel covers crude oil, refining, distributing, marketing, and taxes. Due to the war and sanctions on Russia, the price of crude oil has increased dramatically, and there is only so much minimizing that can be to the other cost factors.
• Economic instability – The economy has yet to recover from consumer-based swings throughout the past two years. Financial analysts have been able to predict more consistently in previous years than today's neverending "unprecedented times."
• Continuing severe weather that takes refineries offline – Refineries are affected as states across the country continue to face increasingly harsh weather conditions that are not typical for the climate. For example, Texas has had two back-to-back winters with sudden freezes that impacted electricity and water across the state.

How Higher Prices Impact Parcel Carrier Fuel Surcharges

When a shipper is considering their best options for transportation, ultimately, almost all rail, road, ocean, and air carriers require a form of crude oil. As the prices for crude oil go up without favoritism, carriers have no option but to instill higher parcel carrier fuel surcharges. Although this does ensure a profit margin for truck drivers and fleet managers, for many, it might impact their ability even to afford to get to their next destination.

It's essential to keep in mind that not all parcels will travel by air. Exclusively going by air would be a worst-case scenario for gross profits as fuel prices trend upward. In the face of this and an overall carrier talent shortage, shippers must be creative with their freight network optimization to meet all of their customer's needs.

How Shippers Can Mitigate Surcharge Price Hikes

Ultimately one of the biggest concerns for shipping companies amongst alarming parcel carrier fuel surcharges is their ability to control their bottom line. With varying strategies across the board of how to absorb, pass on, or ignore these added costs, shippers can consider the impact of in-house decisions by doing the following:

1. Aggregate Data. With the large amounts of transportation data involved in every movement of freight, it's important for shippers to accumulate it into it a common source of truth that ensures data security for sensitive customer information.
2. Consolidate Freight Wherever Possible. Pursuing an outside perspective, such as a freight audit advisor, can help shippers see what loads they could be consolidating to minimize parcel carrier fuel surcharges.
3. Find Opportunities to Go by Ground Over Air, Zone Skipping. This essential retail e-commerce strategy reminds the shipper that all modes of transportation are still on the table and available to leverage for the right time.
4. Take Advantage of Hub Injection. Utilizing hub injection can minimize air transportation, especially when international reverse logistics operations are needed.
5. Leverage Domestic Inventory Before Ordering More Overseas. Shippers can delay overseas orders by gaining insight from an inventory management system with actionable analytics.
6. Have a Plan for Managing Higher Air Import Costs. An audit is only the beginning for shippers who must source essential supplies and pharmaceuticals from overseas, but it is the best way to create a concrete plan.
7. Identify Anomalies to Eliminate Problems. The value of automated anomaly detection is unmatched when pursuing accurate logistics that cut costs and maximize efficiency.
8. Track Billed Fuel Surcharges in Detail. Parcel carrier fuel surcharges will add up regardless of careful monitoring, but those who watch closely will be better prepared to address them.
9. Build Fuel Surcharges Into Product Price Points. Sharing the impact of parcel carrier fuel surcharges with consumers allows shippers to have more room in their working capital.
10. Stay Apprised of Changing Oil Market Conditions. Knowledge can be a guard to shippers as they make their daily business decisions mindful of the oil market.

Partner With Intelligent Audit to Gain Insight and Control Into Parcel Carrier Fuel Surcharges

As increased fuel costs across transportation types continue to change the shipping landscape, companies must equip themselves to move forward in business. Instead of adding parcel carrier fuel surcharge to the fine print of their customer contracts and moving on, shippers should use this as an opportunity to discover what areas of their business need a second eye. Despite the prevalence of parcel auditing myths, many resolve by working with an audit company that values integrity. For those interested in gaining visibility into their operations, start a conversation with Intelligent Audit today.