UPS hikes fuel surcharges despite dramatic declines in oil, fuel prices

UPS Inc. today implemented a round of increases in fuel surcharges for its air, ground, and international services, the same day that rival FedEx Corp. put its own fuel surcharge hikes into effect.

The moves by the nation's two largest parcel carriers come as oil prices plumb their lowest levels in six years, despite a significant increase in Friday's trading. As of Friday, the spot price of West Texas Intermediate (WTI) crude was down to $48.24 a barrel, a near $50-a-barrel drop from the same period a year ago. Most of the declines have occurred in the past four to five months.

The UPS fuel surcharge increase was posted in the past few days on the Atlanta-based company's website. Under the new structure, its ground fuel surcharge will increase to 5.5 percent from 5 percent if diesel prices calculated by the Energy Information Administration (EIA), a unit of the U.S. Department of Energy, fall within an average national band of $2.91 and $3.05 a gallon. Should prices range between $3.06 and $3.20 a gallon, the increase would be equal to a quarter of a percentage point.

As of last Monday, the average price for a gallon of diesel stood at $2.86, according to EIA data. The agency, which publishes weekly data on nationwide price movements of gasoline and diesel fuel, will release its most recent data later today.

The surcharges on UPS' air and international services are based on jet fuel prices published monthly by the EIA. As of the end of December, jet fuel prices stood at $1.80 a gallon. Under UPS' new pricing structure, its jet fuel surcharges will rise to 5.5 percent from 5 percent if prices fluctuate between $1.95 and $2.02 a gallon. From $2.03 to $2.09 a gallon, the surcharge will jump to 6.25 percent from 5.5 percent.

Andy McGowan, a UPS spokesman, declined to comment on the changes, citing a mandatory "quiet period" before tomorrow's release of both fourth-quarter and full-year 2014 results. UPS last week warned that fourth-quarter earnings would be lower than expected due to higher-than-expected costs during the fourth-quarter peak season to handle an expected volume of holiday merchandise that never materialized.

FEDEX CHANGES
Memphis-based FedEx announced its fuel surcharge changes on Dec. 8. In an analyst call in mid-December, FedEx Chief Financial Officer Alan B. Graf Jr. said the company acted after determining that the decline in the company's fuel costs was offset by reductions in revenue due to lower surcharges. Graf added that FedEx labors under a six- to eight-week lag between its fuel payments and the surcharges imposed to recoup those costs. The adjustments allow FedEx to alleviate some of those cash flow issues.

Parcel industry analysts believe FedEx acted to bring its fuel surcharge levels into parity with UPS, whose surcharge rates have been higher since 2012. At that time, 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. After the dust settles on the actions of both carriers, FedEx's surcharges will remain lower than UPS', according to data from Shipware LLC, a parcel consultancy.

Both companies also impose fuel surcharges on a wide range of accessorial fees, charges for services such as Saturday pickup and delivery and delivery re-attempts, which go beyond the basic weekday line-haul operations.

The FedEx and UPS fuel surcharge increases come on top of annual rate increases that took effect either at the very end of 2014 or the start of 2015. Both also changed their pricing on ground shipments measuring less than 3 cubic feet to a model based on the parcel's dimension rather than just on its weight. That change is likely to result in the equivalent of double-digit rate increases for shippers of high-cube lightweight parcels, as their products will now be subject to rates based on the amount of space they occupy aboard a delivery van.

Rob Martinez, Shipware's CEO, said UPS could reap as much as $200 million in additional revenue from the fuel surcharges without doing anything more than adjusting numbers on spreadsheets. Martinez arrives at that figure by multiplying UPS' expected 2014 domestic and international package revenue of $40 billion by 0.5 percent, a rough median of the surcharge increases.

Martinez said shippers have little recourse, noting that they agree to all UPS-stipulated terms and conditions that are in effect at the time of shipping, language that can be changed without notice. He also said that virtually no customers have specific fuel surcharge language or tables written into their contracts.

In an email, Martinez called the latest UPS action a "pure money grab." Most shippers will pay it largely because they will be unaware of the changes, he said. According to Martinez, UPS thinks the potential rewards of hundreds of millions of additional revenue with no increase in operating costs is worth the risk of hiking surcharges in a climate of plummeting oil prices. The company also feels emboldened to hike surcharges because it hasn't lost much, if any, business to FedEx over the past two years despite the higher levels relative to its rival, he said.