Express carriers' fuel surcharges hold elevated in early July

The Analysis

Fuel surcharges are the one line on an air express invoice that moves without anybody touching your rate card. For the week of June 29 to July 5 the tables sat at 42.75 percent at DHL, about 31.25 percent at FedEx Express and close to 39 percent at UPS, all of them reviewed on a weekly cycle against jet fuel. Read those as three clocks running at different speeds, not as three prices for the same service.

What matters to a shipper is not the percentage. It is which week's percentage attaches to which parcel, and whether the number you quoted a customer three weeks ago still covers it.

Here is where the charge actually lands, who feels it and who does not, and what to fix before the next table is published.

Start with the unit. A fuel surcharge is a percentage applied to a base, and the base is the only thing that decides whether the percentage matters. On a light document envelope the base is small, so 42.75 percent is a few dollars and nobody's margin moves. On a bulky parcel moving on volumetric weight, the base is already inflated by the box, and the percentage then multiplies an inflated number. Same rule, two shippers of completely different size, which is why a headline fuel number explains almost nothing about your own invoice.

The three percentages are not directly comparable, and that is the part the headline loses. Forty-two point seven five percent of what, exactly? Each carrier defines its base differently, and whether the percentage also applies to certain accessorials is a contract question rather than a public one. The ranking of 42.75 at DHL, near 39 at UPS and about 31.25 at FedEx Express is a ranking of published tables, not a ranking of what you will pay. The only comparable figure is your own all-in cost per kilo, on the same lane, for the same service, in the same week.

Weekly review is the operational fact that matters most. A weekly table means the surcharge carries a clock shorter than almost every contract you hold. If your rate validity is 30 days and the table turns every seven, you are carrying three or four revisions of an unknown inside a fixed price. Whether the charge attaches by pickup date, ship date or invoice date is set in your own agreement, and it is worth reading the clause rather than assuming: a parcel picked up on the Sunday and one picked up on the Monday can fall into different weeks and different percentages.

Who feels this. Document and sample shippers under a kilo barely do, and the correct response is no response. Dense, heavy cargo shippers see the charge scale with real weight, which is annoying but budgetable. Bulky, low-density shippers get the worst of it, because fuel is charged on chargeable weight, and for them chargeable weight is a number manufactured by carton dimensions. E-commerce returns carry their own fuel line on the way back, so a return costs the outbound charge twice over. Across directions the percentage may be identical while the base is not, so the same 39 percent is a different dollar figure outbound and inbound.

When do you feel it. Not at the invoice, at the quote. The exposure starts the second you give a customer a fixed all-in price with a validity longer than seven days. From that moment you are short a weekly index, and the size of your short position is your volume times the base times however many points the table moves. The invoice, weeks later, is just the bookkeeping on a decision you already made.

The point the coverage leaves out is that a weekly-indexed surcharge turns every fixed-price quote into a free option written to your customer. Nobody prices that option. A forwarder quoting thirty days firm on a lane with a weekly fuel table has sold the customer the right to pay today's fuel cost for a month and has taken the other side of the trade. The cost of that option is invisible until the table moves, and then it appears as a margin line nobody can explain. The fix is not to forecast jet fuel. The fix is to shorten the validity or attach a fuel adjustment clause, so the option is either smaller or paid for.

Second thing that goes unsaid: everybody negotiates the base rate and nobody negotiates the base definition. A one-point improvement in the rate is worth less than a redefinition of what the percentage is applied to, and that redefinition is usually available in exchange for volume commitment rather than for price. Procurement teams spend a quarter chasing four percent off the rate card and never ask what the fuel line multiplies.

Arithmetic, with the assumptions stated. Take a shipper moving 500 parcels a week, average 12 chargeable kilos, on a base of one dollar per kilo; that rate is my assumption, the story gives no rate. Weekly base freight is 6,000 dollars. At 39 percent the fuel line is 2,340 dollars; at 42.75 percent it is 2,565. The gap between those two carriers is 225 dollars a week, about 11,700 a year, on volume that small. Now compare two decisions: a hard-won 4 percent discount on the base saves 240 dollars a week, while moving the same volume from the 42.75 table to the 31.25 table saves roughly 690. The second one takes an email. The first takes a quarter.

The trap is quoting all-in and forgetting the clock, and the second trap is comparing carriers on the headline percentage. A carrier at 31.25 percent on a higher base is more expensive than one at 42.75 on a lower base, and the only way to know which is which is to price the same parcel three ways in the same week.

So the work this week is small and dull. Price one real parcel against all three tables in the same week on the same lane. Find the clause that says which date the charge attaches to. Put a fuel clause or a shorter validity on every quote you issue. The number that matters is not 42.75. It is the number on your own invoice next Monday, and whether you can pass it on before the table turns again.

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— By Nadia Pryce