FedEx Corp. plans to hike its diesel and jet fuel surcharges effective Feb. 2 amidst the steepest decline in oil prices in nearly six years.
The changes mean that most FedEx air and ground shippers will be looking at higher fuel charges next month except for those shippers with contracts that contain specific language governing surcharge implementation. Typically, parcel contracts give the carrier latitude to impose the fuel surcharge that's in effect on the day a package is picked up. The carriers are also free to change surcharge levels without prior notice. Surcharge levels can fluctuate depending on changes in oil and fuel prices.
As of Monday, the national average for on-highway diesel fuel stood at $3.13 a gallon, according to data from the Department of Energy's Energy Information Administration (EIA). The weekly index is the benchmark from which truckers set their fuel surcharges. FedEx's diesel and jet fuel surcharges are based on price bands derived from the EIA index. With diesel prices remaining in a range of $3.07 and $3.19 a gallon, surcharges imposed on FedEx surface transport shipments will increase to 5 percent from 3.5 percent, according to data from consultancy Shipware LLC.
In addition, with jet fuel prices at current levels of $2.30 a gallon, the fuel surcharge imposed on shipments moved by FedEx Express, the company's air and international division, will rise to 6.5 percent from 4.5 percent, according to Shipware data. U.S. jet fuel prices are set by the EIA based on a survey of spot prices in the Gulf Coast region. The survey is published monthly.
Diesel and jet fuel prices have declined precipitously during the past five months, mirroring the sharpest drop in U.S. and world oil prices since the depths of the Great Recession in the first half of 2009. Jet fuel prices have fallen from $2.83 a gallon in August to $2.29 a gallon at the end of November, according to EIA data. Diesel prices as of Monday were down more than 77 cents a gallon compared to the first week of 2014, the EIA said. The Gulf Coast region reported the lowest average diesel price last week at $3.04 a gallon. California, as usual, recorded the highest price at $3.34 a gallon.
Alan B. Graf Jr., FedEx's chief financial officer, disclosed the impending change in mid-December during the company's conference call with analysts to discuss its fiscal second quarter results. According to a transcript of the call, Graf said that although FedEx has benefited from the decline in fuel prices, the gains have been mostly neutralized by revenue reductions from lower fuel surcharges.*Graf added that the six- to eight-week lag between FedEx's fuel payments and the surcharges imposed to recoup those costs meant the company was stuck with higher prices in September before it could adjust its surcharges accordingly in November. For jet fuel, for example, FedEx Express saw only an 8 percent sequential reduction in costs in its fiscal second quarter despite a near 30-percent drop in fuel prices during that period, according to Graf's comments during the call.
COMING INTO ALIGNMENT
Industry consultants say next month's adjustments are designed to achieve parity with archrival UPS Inc., whose diesel and jet fuel prices have been higher since 2012 when UPS embarked on a fuel-hedging strategy designed to insulate its cost structure against then-higher prices and the chances of them going higher still. Based on current diesel prices, UPS' ground fuel surcharge for February would be 5.5 percent, according to data on the company's website. Based on current jet fuel prices, UPS' surcharge on air and international services would be 7 percent, according to the website.
Rob Martinez, Shipware's CEO, said FedEx acted because it spent 2013 and 2014 taking less fuel surcharge revenue than UPS, and it had grown tired of the disparity. The February adjustments could increase FedEx revenue by about 4 percent, according to Martinez. Based on fiscal 2014 revenue of more than $45 billion, the change could translate into a $1.7 billion top-line boost.
What's more, FedEx stands to lose few, if any, business-to-business customers to UPS because its surcharge levels will still be slightly below its rival's even with the increases, Martinez said. The two companies have a virtual lock on domestic business-to-business parcel traffic.
Martinez expects FedEx customers to "grin and bear it" just as they have done with other price increases. Few shippers have raised a furor over the recent shift by both carriers from weight-based to dimensional pricing for ground parcels measuring less than 3 cubic feet. If shippers aren't vocal in their opposition to what Martinez called a "major rate increase," there is little reason to think they will object to FedEx's upcoming changes to its surcharge structure, he said.
Jerry Hempstead, a long-time parcel executive and now head of a consultancy bearing his name, said in a mid-December column in Parcel magazine that few FedEx customers are aware of the surcharge differential between the two companies unless a FedEx representative raises the issue. Most shippers wouldn't be able to calculate the benefits during a competitive bid comparison without using the services of a parcel consultant and sophisticated modeling software, Hempstead added.
Hempstead called the planned adjustment a "hidden rate increase" that will unlikely result in lost business to UPS as long as the companies' surcharge tables are essentially in alignment. Still, he wondered how FedEx would be able to justify the planned increases given the ever-descending trajectory of fuel prices.
Editor's note: An earlier version of this article incorrectly stated that Graf's comments were from CFO magazine. They are actually from a transcript of an analyst conference call.