Rising fuel prices are no secret. The average cost of diesel in the U.S. going up by more than a dollar in just a month has made plenty of headlines, but consumers aren’t alone in feeling the pinch at the pump. The recent high prices for diesel and jet fuel have significant consequences for trucking companies and carriers like UPS and FedEx, and in turn, the businesses that rely on them. In the last few weeks, both FedEx and UPS have increased their fuel surcharges (FSCs), passing increased costs onto shippers. And unlike the carriers’ last General Rate Increase (GRI) this past fall, these price increases are ones that shippers haven’t had the chance to plan for as part of their 2022 budgets, forcing shippers to adapt on the fly. So, with the fuel surcharge increases for both carriers in effect, what exactly do these surcharges mean for shippers? And what can they do to find relief?
First, the basics. How are carriers deciding fuel surcharges?
Most carriers use the U.S. Energy Information Administration (EIA) weekly retail fuel prices to establish their fuel surcharges. They reference the on-highway diesel per gallon fuel rates as the barometer for fuel surcharges for ground parcel, and the U.S. Gulf Coast jet fuel spot prices as the proxy for surcharges for air/express services. For both ground and air/express services, carriers develop their own fuel table based on the per gallon fuel price to establish their fuel surcharge. The fuel surcharge is dynamic in nature, fluctuating up or down with the changes in the EIA indices. To further protect margins, carriers also include a lot of surcharges or accessorial charges in the fuel surcharge calculation, such as residential delivery charges, delivery area surcharges, signature services and additional handling charges, just to name a few. Over the years, the list of fuel-eligible surcharges has grown significantly for both carriers.
The fuel indices published by the EIA serve as the general basis for the FSCs carriers levy, but there is no one-to-one match from the index to the actual carrier fuel surcharge table – and in fact, the recent FSC increases implemented by carriers have significantly outpaced the increase in the indices. For example, from October 2021 to April 2022, the fuel surcharge for air shipments has more than doubled for both carriers – going up 129%. But the USGC Kerosene type jet fuel price index increased by 82%. Likewise, the on-highway diesel fuel price index has increased by 51% in that time, but fuel surcharges for ground shipments have risen by 76% for UPS and 89% for FedEx.
Both carriers now also apply surcharges in shorter order to better account for the volatility of fuel prices. UPS recently changed their process to match FedEx, adjusting fuel surcharge one week after the EIA index release, shrinking from a previous lag time of two weeks.
Less-than-Truckload (LTL) shippers are also experiencing steep increases in shipment costs driven by fuel prices as LTL carriers adjust their own surcharge tables. According to the Q2:2022 release of the Cowen/AFS Freight Index, among major LTL carriers, the average fuel surcharge increased from 28.3% in the fourth quarter of 2021 to 42.1% in March of this year – a 49% climb in a matter of months.
Taking action to control costs
While no shipper can completely mitigate rising fuel costs, there are multiple levers that shippers can pull to help mitigate the impact. First, and perhaps most obviously, shippers can borrow a page from the playbook of carriers and consider passing some or all of the fuel costs over to their customers. Everyone recognizes increasing of fuel costs and the effect on total transportation cost across all modes. Shippers could build the increased fuel into base cost of products or add a fuel surcharge for final delivery. Afterall, with consumers paying for the personal protective equipment (PPE) at the dentist or fuel surcharge to garbage collectors, it has been accepted as a standard practice. But that’s far from the only option.
Shippers can evaluate their logistics operations to identify opportunities to reduce their spend, namely, an optimization exercise of carrier contracts. This involves a comprehensive review of a company’s freight spend by carrier, mode and service. A company’s shipping needs evolve over time, and so should transportation choices. As carriers make changes to their networks and revenue operations, shippers should closely monitor them closely and adjust accordingly to minimize spend and/or avoid unnecessary charges. Negotiating the best carrier contract is obviously a key factor, too. Carrier contracts are notoriously long and complicated. During negotiations, shippers should take a holistic approach in spend management, yet be laser-focused on the cost drivers. For example, dimensional weight may be the single most important factor for a mattress retailer, while signature service-related charges are critical for a jewelry retailer. Understanding cost drivers will help shippers negotiate better terms for a carrier contract. Since fuel surcharge applies to both transportation and other surcharges, a better contract will lead to lower overall spend – including fuel cost.
Going a step further, companies can also pursue a comprehensive study of their logistics network, with the goal of identifying options that can lower their costs. With the ever-increasing fuel surcharge and other punitive accessorial charges, some shippers are holding shipments and consolidating them into larger LTL or even truckload shipments to lower freight spend and accessorial charges. Shippers are also optimizing route design to explore multi-stop truckload as an alternative. Additionally, the escalating transportation costs are driving shippers to examine additional distribution centers as a way to minimize distance to consumers. For example, an east coast-based shipper with a client base on both coasts may consider adding a distribution center in the central U.S. to help reduce the coast-to-coast product movements. Of course, any changes to a company’s distribution network are likely to be longer term and costly. However, if the cost of adding an additional warehouse or DC could be offset by the savings in transportation spend, it could be worthwhile.
Last but not least, maximizing the accuracy of carrier invoices can help keep costs in check. Whether freight or parcel, there can often be shipment invoice errors that have a significant impact, not just on fuel, but on costs across the board. In fact, in our own experience with freight audits, we encounter invoice errors in 20% of the invoices that we audit and recover as much as 8% of transportation spend in savings. Shippers trying to mitigate exposure to rising transportation costs shouldn’t leave accurate invoicing to chance. That’s where a trusted partner with expertise and data-driven capabilities can really help to identify inaccuracies and reclaim lost profits – an increasingly critical measure as rising costs continue to pressure margins.