Understanding peak season surcharges and why they occur makes a significant difference in how well shippers and carriers alike can plan for market volatility. The best way to look at the peak season surcharge definition is to consider why surcharges and increased rates occur in the first place. According to a recent report from Supply Chain Dive, "FedEx and UPS haveinstituted an array of surchargesbecause package volumes have surged during the COVID-19 pandemic… [they expect] the industry's demand to exceed capacity by5 million pieces dailyduring peak. Shippers are diversifying by shifting more volume toregional carriers, but capacity is stillhard to come by." This underscores the importance of effective peak season transportation management. By understanding this aspect of transportation management and budgeting, peak season surcharge ocean freight and other modes become easier to plan for and anticipate.
A peak season surcharge is a variable addition to regular fees that carriers often apply during times of peak demand. These increases can happen at any time of year but they often occur during peak shopping seasons such as Thanksgiving/Black Friday, Christmas, New Year's, and other key U.S. and global holidays. Carriers generally announce these surcharges as an additional fee on top of the base rate as in most market situations, baseline fees continue to increase rather than decrease. It functions similarly to General Rate Increases on freight capacity but tends to follow a slightly more predictable pattern. What remains difficult to predict is how much the rates will increase each year.
Many of the largest carriers are increasing rates and surcharges ahead of the peak season, even more so than what occurs typically ahead of peak holiday shopping seasons. This has changed the peak season surcharge meaning in that it may occur at any period in which demands are higher than typically expected. Many of these companies, including FedEx, increase handling rates and surcharges for oversized and heavy items and for large shipping loads throughout the holidays, but in recent history, historically high volumes have led to additional peak season surcharges that are well beyond usual peak durations. FedEx said the surcharges are necessary to maintain optimal services: "We are entering another holiday peak season during which we expect continued high demand for capacity and increased operating costs across our network. We again anticipate the surge in residential volume to carry over into the new year." The continual increase in volume and demand drives surcharges higher and causes them to occur even outside the usual peaks that shippers have grown accustomed to these days.
The underlying reason for these peak surcharges is the simple economics of balancing supply and demand. During peak season there is more demand for a carriers' service and the increased volume can stress the resources of a carrier. Carriers have implemented peak surcharges in the fall to address the increased volume of packages due to the holiday shopping season. However, in recent years, as the COVID pandemic forced many consumers to shop online, e-commerce volumes have exploded, putting even more parcel packages into the system than ever before.
Coupled with an increase in direct to consumer, volumes are also surging for the last mile. Therefore, to offset these increased demands, carriers have also started implementing surcharges for peak season earlier than typical years. Shippers either will choose to pass these costs onto consumers or absorb the cost, reducing the shippers' overall margin. In the end, the increased volumes necessitate these peak surcharges so carriers can recoup the expended resources in staff hours and extra processing, and also price capacity right, as it is capacity that is in high demand.
Therefore, carrier network optimization and having a diverse set of carriers, as shipping costs increase, will benefit a shipper to not only meet transportation spend targets but simply fulfill consumer demand. The peak surcharges are a response to the fundamental economics of supply and demand in a capacity tight market as a way to keep all parties involved in the delivery of goods properly compensated so operations remain smooth.
Peak season surcharges happen across all lines and modes of transportation, though each mode has other considerations that shippers must keep in mind during peak season :
Intermodal & Multimodal
The best way to plan for and accommodate peak season surcharges is to plan ahead as much as possible. Look at past trends and know when usual peak season increases occur. Compare historical data on past rate increases to look for patterns or indications of how much of an increase may be coming down the line. With expert insight and guidance, knowing how your shipping budget and freight and transportation spend stacks up during air, ground, and ocean freight peak season surcharges is easier. Contact Intelligent Audit today to learn more.
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CEO Raj Subramaniam says FedEx exceeded its fiscal Q2 earnings target primarily through “higher yield and cost management actions.” Read on to learn more.