Soaring diesel prices have pushed fuel surcharge rates for major carriers such as UPS and FedEx close to 30%, reaching a historic high. Ground delivery prices in the fourth quarter are projected to rise by 5.8% year-on-year, while express delivery prices are expected to increase by 13.8%. Some retailers are switching to alternative carriers like OnTrac, but switching costs are significant, and bargaining power is limited during the peak holiday season, meaning cost pressures will likely be ultimately passed on to retailers.
Surging diesel prices have driven a substantial increase in fuel surcharges, with rates for major carriers such as UPS and FedEx approaching 30%, pushing parcel delivery prices to record highs in the fourth quarter of this year.
On October 26, Reuters reported that, according to the TD Cowen/AFS Logistics Index, ground delivery prices in the fourth quarter of this year are expected to rise by 5.8% year-on-year, while express delivery prices are set to increase by as much as 13.8%.
The index is based on anonymized data from 1,800 shippers and presents changes in percentage terms, reflecting overall industry cost trends.
Data from the U.S. Energy Information Administration (EIA) shows that as of October 19, the average price of highway diesel in the United States had risen to $6.28 per gallon, a 65% increase compared to the period before the joint U.S.-Israel strike on Iran on February 28. Based on this price, UPS's fuel surcharge rate reached 29.5%, while FedEx's stood at 29%.
The increase in surcharges far exceeds the rise in oil prices themselves.
Notably, the report points out that rising diesel prices can only explain approximately 30% of the increase in surcharges.
Mingshu Bates, Chief Analytics Officer at AFS Logistics, stated that the primary driver behind the sharp rise in surcharge rates is the adjustment of carriers' calculation methods, a mechanism that causes surcharges to continue rising even when fuel prices remain stable.
Data from the index reveals the magnitude of this trend: in the first quarter of 2021, when the average diesel price was $2.91 per gallon, the industry's fuel surcharge rate was 7.75% of base freight charges; even if oil prices were to fall back to those levels, the current surcharge rate would still be as high as 23.75%, approximately three times higher.
Bates pointed out that carriers are continuously expanding surcharge revenue by adjusting calculation rules, thereby passively amplifying cost pressures for retailers.
UPS stated that its pricing reflects the company's premium service quality and infrastructure investments, while FedEx has not yet responded to requests for comment. Both companies are scheduled to release their quarterly earnings this week, with investors closely monitoring whether customers have pushed back against surcharges.
Retailers are seeking alternative carriers, but switching costs cannot be overlooked.
In response to high surcharges, some retailers have begun onboarding new delivery partners.
According to Satish Jindel, President of ShipMatrix, a delivery tracking and management firm, fast-growing carriers such as OnTrac, GoFo, UniUni, Jitsu, and Veho currently cover approximately 70% of the U.S. population. These carriers have expanded capacity to meet holiday peak demand, attracting shippers looking to reduce transportation costs.
However, alternatives do not always deliver the desired results. For instance, OnTrac’s fuel surcharge rate in the West Coast region reached 29.5% for the week ending October 25, comparable to levels charged by UPS and FedEx.
The United States Postal Service (USPS) and Amazon’s logistics arm represent other options. In April, the USPS imposed an 8% fuel surcharge on most parcels, while Amazon introduced a 3.5% fuel and logistics-related surcharge on seller fulfillment fees in the same month, both of which are lower than those of traditional carriers.
Analysts caution, however, that switching delivery providers entails significant costs: fragmenting shipment volumes may offset volume-based discounts, and holiday season delivery arrangements are typically locked in months in advance, making last-minute changes difficult.
JPMorgan analysts also believe that Amazon is unlikely to disrupt the market dominance held by UPS and FedEx in the near term.
Jess Dankert, Vice President of Supply Chain at the Retail Industry Leaders Association (RILA), described the holiday shopping season as the "Super Bowl" for retailers, noting that fuel surcharges have become a key issue in contract negotiations between retailers and carriers.
According to Dankert, the industry is pursuing multiple strategies to alleviate cost pressures, including offering incentives for consumers to return items in-store and engaging additional delivery partners.
However, during the holiday peak season in the fourth quarter, when delivery volumes can double, there is limited room for negotiation, and cost pressures are highly likely to be passed on to retailers.