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 have instituted an array of surcharges because package volumes have surged during the COVID-19 pandemic… [they expect] the industry’s demand to exceed capacity by 5 million pieces daily during peak. Shippers are diversifying by shifting more volume to regional carriers, but capacity is still hard 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.
The Peak Season Surcharge Definition
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.
Why Do Carriers Create Peak Season Surcharges Outside of Usual Peaks?
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.
Why Peak Surcharges are in Place
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.
Considerations for Peak Surcharges by Mode
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 :
- Risks of local unrest and war/turmoil in shipment path.
- Fees and duties required at ports of entry.
- Fluctuations in product flow and import/export levels.
- Increased use of technology for tracking cargo and driving better communications/collaborations to improve service.
- Need for increased security measures and insurance.
- Awareness of increased import activity at US ports,such as the 70 ships waiting at sea seen at the Port of LA, that are causing massive delays for those goods looking to move inland,
- Actual weight of the cargo transported.
- Dimensional weight and how much space it occupies.
- Fuel surcharges related to distance traveled.
- Container freight handling and storage fees.
- Airline terminal surcharges and expenses.
- Customs and duties charged upon arrival.
- Miles driven to fuel consumption rates.
- Insurance coverage for cargo loads.
- Associated fees for loading and unloading containers.
- Pay rate increases for drivers and team members.
- Increased expenses related to vehicle maintenance and upkeep.
- A rise in e-commerce and online shopping volumes.
- Increase consumer demand for fast and reliable shipping.
Intermodal & Multimodal
- Expenses associated with transferring between modes.
- Combined charges specific to a particular mode.
- Additional equipment and man-hours needed for transportation.
- Greater risk for loss and damages with every transfer.
- More challenging time monitoring and tracking handoffs.
Know How Your Shipping Spend Stacks up Throughout Peak Season Surcharges and Beyond With Intelligent Audit
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.