U.S. retailers face record holiday parcel delivery surcharges as diesel costs lift shipping prices

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U.S. average diesel price reached $6.28 per gallon on October 19, up 65% since late February, driving record holiday parcel surcharges.
UPS' and FedEx's fuel surcharges now stand at 29.5% and 29% respectively at current diesel prices, up from about 7.75% in 2021 due to formula changes.
Alternative carriers like OnTrac, GoFo, and UniUni now cover 70% of the U.S., but still apply high surcharges, limiting retailers' cost-cutting options despite increased capacity.

Holiday shipping costs climb on fuel surcharge changes

As reported by Reuters, rising diesel prices and revised fuel surcharge formulas from major carriers are pushing parcel delivery costs higher for retailers during the holiday season.

Holiday-related package volume can double in the fourth quarter, according to the TD Cowen/AFS Freight Index, which analyzes anonymized data from 1,800 shippers including major retailers. The index reports percentage changes rather than dollar figures because parcel costs vary by weight, size and destination.

Mingshu Bates, chief analytics officer at AFS Logistics, said fuel remains a central concern for shippers. The U.S. average on-highway diesel price stands at $6.28 per gallon as of October 19, according to the Energy Information Administration, up 65% since the U.S. and Israel attacked Iran on February 28.

Bates said diesel price increases account for just under 30% of the fuel surcharge cost, with the rest driven by changes in how carriers such as UPS and FedEx calculate those fees. She said those surcharges are rising faster than fuel prices and can increase even when fuel prices do not.

According to the index, when diesel was $2.91 per gallon in the first quarter of 2021, the fuel surcharge was 7.75% of the base shipping rate. Even if diesel returns to that level, the surcharge now would be 23.75%, reflecting how revised pricing formulas are lifting carrier revenue and retailer costs.

Based on company surcharge tables at the EIA average diesel price of $6.28, UPS' fuel surcharge is 29.5% and FedEx's is 29%. UPS said its pricing reflects premium service and infrastructure investments, while FedEx does not immediately comment. Both companies report quarterly earnings this week, with investors watching for signs of customer resistance to surcharges.

Retailers weigh alternatives as market grip holds

Alternative delivery providers including OnTrac, GoFo, UniUni, Jitsu and Veho now cover about 70% of the U.S. population and have added capacity for the holiday period, Satish Jindel, president of ShipMatrix, said. He said many shippers are adopting those services to lower transportation spending.

Still, lower-cost options are not always free of similar fees. OnTrac's West Coast fuel surcharge is 29.5% for the week ending October 25, according to its public surcharge table.

Retailers may also look to the U.S. Postal Service or Amazon.com's logistics arm for savings. USPS imposes an 8% fuel surcharge on most packages from April, while Amazon begins adding a 3.5% fuel and logistics-related surcharge to sellers' fulfillment fees in the same month.

Analysts said changing delivery partners late in the year can reduce volume-based savings and is difficult because holiday shipping plans are typically set months in advance. JPMorgan analysts said it is unlikely Amazon will soon loosen UPS and FedEx's grip on the parcel market.

In our earlier article on the spike in crude oil tanker shipping costs, we explained how conflict-related risks and rerouted voyages drove freight and insurance rates sharply higher, turning transport into a major component of oil pricing. We also noted that these higher logistics costs can feed through into gasoline and, ultimately, the prices of everyday goods as supply chains absorb new surcharges and risk premiums.

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