The Parcel Budget Parasite: Fuel Surcharge Matrix Increases and How to Mitigate Them

Fuel surcharges for parcel shipments have gotten out of hand.

If you’re responsible for your company’s shipping costs or product margins, there’s a good chance you feel the same.

It’s now a regular practice of parcel carriers like UPS and FedEx to increase their fuel surcharge (FSC) matrixes multiple times per year, effectively increasing the amount by which the FSC increases with the cost of fuel. Yes. Increases to the increases.

Since announcing their annual General Rate Increases (GRI) in Q4 2023, carriers UPS, FedEx, and OnTrac have announced two to three FSC matrix increases within the last half year alone.

UPS (3 increases):

• December 4, 2023 – 0.5% (50 bps)
• December 18, 2023 – 0.75% (75 bps)
• April 29, 2024 – 0.5% (50 bps)

FedEx (2 increases):

• December 11, 2023 – 1.0% (100 bps)
• May 6, 2024 – 1.0% (100 bps)

OnTrac (2 increases):

• February 5, 2024 – 1.25% (125 bps)
• May 27, 2024 – 0.5% (50 bps)

To understand what makes this practice frustrating for brands and what makes it, frankly, illogical, we first have to understand how the fuel surcharge works.

How the fuel surcharge is supposed to work, and how it actually works

The fuel surcharge was introduced to parcel shipments to purportedly offset the cost of the fuel needed to transport packages. If you’ve ever gotten a ride from someone and chipped in for fuel, you get the idea.

UPS, FedEx, and OnTrac adjust their respective fuel surcharges as often as weekly (when the actual cost of fuel is decreasing, they may extend the time between changes to maximize the amount they charge their shippers). They base ground service fuel surcharges on the National U.S. Average On-Highway Diesel Fuel Price, as most recently released by the U.S. Energy Information Administration (EIA), and air/express services on the U.S. Gulf Coast (USGC) price for kerosene-type jet fuel, also as most recently released by the EIA.

For example, here’s what part of UPS’s ground domestic fuel surcharge matrix looks like as of June 3, 2024:

If the cost of fuel increases, the fuel surcharge will increase to offset these costs. Makes sense, right?

But here’s the rub and what makes fuel surcharge matrix (e.g., the above table) increases so confusing and frustrating for shippers. If the fuel surcharge is already designed to increase (and decrease) with the cost of fuel, then why are shippers subject to constant FSC table increases? Why do UPS, FedEx, and OnTrac increase the amount by which the fuel surcharge increases per tier?

The implication of continual FSC matrix increases on top of the regular weekly adjustments is that the carriers’ fuel expenditure is continually getting less efficient. However, we know that’s not true. Parcel trucks have become more fuel efficient, and routes are continually becoming more and more optimized through technological improvements. So, what’s the justification for increasing their matrixes?

(That was a rhetorical question, but if you want the carriers’ customer-facing, post-game-“we gotta take it one play at a time” answer, it’s to continue to deliver the best possible service. If you want the actual answer, continue reading. Spoiler: it’s money. Yeah, you probably guessed that already though.)

From December 2023 to May 2024, UPS increased its domestic ground and air fuel surcharge matrix by 175 bps, FedEx increased its by 200 bps, and OnTrac increased its FSC by 175 bps… all while US fuel costs were dropping.

 And this wasn’t even the first time the FSC table increases have contradicted fuel price trends.

Shippers who thought they’d receive a reprieve from fuel surcharges when fuel costs dropped instead paid more for the same amount of fuel after the matrix increases were implemented.

But wait, there’s more: how the fuel surcharge increases from other surcharges

To make matters both worse and even more confusing, the fuel surcharge applies not only to a shipment’s base rate but also to other surcharges assessed on the shipment.

For example, the fuel surcharge also applies to the:

• Residential surcharge
• Peak/demand surcharge
• Delivery area surcharge
• Extended delivery area surcharge
• Additional handling surcharge
• Large package surcharge
• Over max limits surcharge
• Pickup surcharge
• Signature required surcharge
• Saturday delivery surcharge
• And more…

UPS and FedEx assess these surcharges to offset their additional cost-to-serve for these supplemental services. Why, then, does the fuel surcharge also apply to these costs on top of the base delivery charge when the cost-to-serve is built into them?

Does getting a signature cost fuel? Is fuel more expensive on Saturdays? And, wait, aren’t larger packages actually more fuel-efficient than multiple smaller packages destined for different addresses; why does the FSC apply to large package surcharges too?

Details like these make fuel surcharge increases so impactful to shippers and make them such a lucrative revenue-generating lever for UPS, FedEx, and OnTrac.

Okay, so what even is the fuel surcharge?

While the fuel surcharge does have a connection to fuel costs, it’s so much more than that.

It’s a profit center.

As Sr. Director of Professional Services, Josh Taylor stated to dispel the general misunderstanding of what a fuel surcharge is, “The fuel surcharge is named that to create a psychological anchor in our minds that this is just a passthrough to pay for what the carriers are paying for fuel. But really, it’s a profit center.”

(Clip from “The True Impact of 2024’s General Rate Increases” Webinar)

Because of how high the fuel surcharge already is and how it also draws from all of these other common surcharges in addition to base rates, according to Taylor, a 100bps increase to a fuel surcharge table is effectively another 1.0% general rate increase.

That’s a one-to-one comparison (1% fuel surcharge = 1% general rate increase) UPS and FedEx made themselves as early as the mid-2000s when they would announce high annual general rate increases alongside FSC table decreases, ostensibly to offset the higher-than-normal GRIs.

After UPS’s last FSC increase on April 29, 2024, of 50bps (0.5%), making a sum total of 175bps in FSC increases (1.75%) since December 2023, Taylor said, “This is essentially another 0.5% GRI for almost everyone that ships.

“So, while 2024’s 5.9% wasn’t the highest ever, UPS has effectively turned it into a 7.65% GRI through increases to the fuel surcharge tables.

“UPS does this because fewer people understand how it will affect their bottom lines.”

UPS, FedEx, and OnTrac each implemented 5.9% average General Rate Increases at the start of 2024. Taking each carrier’s respective domestic fuel surcharge increases into consideration, we can bump those to an effective average GRI of 7.65% for UPS, 7.9% for FedEx, and 7.65% for OnTrac, which tends to mimic UPS’s rate increases more closely than FedEx’s.

During their quarterly earnings calls, carrier executives have themselves called the fuel surcharge a “lever” they can pull when they need to increase revenue-per-piece, a metric by which they approximate profitability.

Got it. So, the carriers tap the “fuel” surcharge to generate more revenue from me. How can I mitigate it?

Unchecked fuel surcharges can significantly impact your parcel spend. For some shippers, the fuel surcharge can account for half of their accessorial fees and sometimes as much as 20% of their total shipping costs.

Here are four ways to reign in your FSCs.

1. Negotiate direct discounts on fuel

 That’s right. Like other surcharges, you can negotiate the fuel surcharge down.

In the past, fuel surcharge discounts were an off-menu item reserved for enterprise-level shippers with large volumes to leverage for “hidden” discounts.

However, in the current “shipper’s market,” where parcel demand has slowed, and UPS and FedEx are clamoring for volume and offering unprecedented discounts, fuel surcharge discounts are even available to small- and medium-volume shippers which are shrewd enough to make the ask.

But heed this warning, shipper. Don’t fall into the pitfall of what we call “discount tunnel vision” – focusing too much on “pet peeve” discounts like the FSC while letting others fall by the wayside.

UPS and FedEx negotiations are give-and-take. Placing undue pressure on your rep to cut fuel may score you an excellent FSC discount, but you may have to accept subpar discounts on other surcharges and services in turn, the detriments of which can outweigh the benefits of your newly acquired fuel discount.

Be prepared to make a case that bolsters your ask. For example, do you have an attractive mix of B2C and B2B volume? Carriers want B2B volume because of its lower cost-to-serve due to its higher delivery density, making a strong case for fuel surcharge discounting.

2. Negotiate larger discounts on base rates and other accessorial surcharges

We’ve already established that the fuel surcharge is applied to your net rates (after discounts are applied) and many other highly assessed, common surcharges, such as residential, additional handling, and peak/demand.

Basically, the more a shipment costs before the fuel surcharge is applied, the higher the fuel surcharge. So, if you want to mitigate FSC costs, negotiate better discounts on the charges that the FSC pulls from.

It sounds pretty obvious when laid out like that, but it’s not as completely straightforward as it sounds. The fuel surcharge is assessed equally on the applicable fees that make up the cost of a shipment. So, when negotiating, it’s important to break down your parcel spend by service and surcharges so you know where the fuel surcharge is pulling from the most. Discounts on these items, because of fuel and because fuel surcharge tables are constantly increasing, will have an exponential impact on your parcel spend, so much so that it may be worth conceding discounts on other items where the FSC pile-on effect is weaker.

2.5. This is a combination of #1 and #2, so it doesn’t get its own number

In the current shipper’s market, you’ll want to negotiate fuel in tandem with service rates and other surcharges. It’s not one or the other.

After receiving each pricing proposal from UPS or FedEx, run it against a large set of your shipping data. If you’re a heavily seasonal shipper, use some peak season data as well since fuel surcharges also apply to peak surcharges. Consider your growth outlook for the next year or two. Using the proposed discounts, run a financial impact analysis on your sample data set to understand how they manipulate fuel costs and where to push and pull with your carrier rep on the next negotiation round.

Rinse and repeat.

3. If you’re a very high-volume shipper, these non-standard provisions might be for you

If your business ships high volumes (read: millions of packages annually), some cost-reduction strategies you can investigate are:

• A fuel surcharge cap
• Negotiating points below the prevailing fuel surcharge
• Locking into a date-based fuel surcharge table
• Shipping on blended rates

These FSC mitigation tactics will only be available to a very small percentage of shippers. If you’re interested in whether or not you may be a good candidate for one of them, consider consulting an experienced third-party negotiator like Shipware to learn more about these niche pricing strategies.

4. Model some alternative shipping options

Hey, the USPS doesn’t even have fuel surcharges.

Consider shifting some volume to a carrier without an FSC. The tactical movement of selected parcel volume between carriers and services can reduce those fuel surcharges and overall costs and, in some cases, improve transit times.

However, carrier diversification modeling is a complex and time-consuming endeavor. Not only do you have to benchmark multiple carriers, analyze multiple data sets over the course of numerous proposal rounds, and consider each carrier’s pricing and discount tiers within the context of other carrier’s evolving proposals, but you have to do so with a mind to how volume will eventually have to shift fluidly across these carriers to achieve the greatest possible cost reductions while maintaining customer satisfaction levels.

That said, carrier diversification efforts, while difficult, are typically worth it, even for small shippers. If you have questions or need support modeling alternative shipping options, our Carrier Mix Optimization team can help.

Conclusion

Before you decide how to approach increasing fuel surcharge costs, you should understand your shipping profile, what characteristics it has that carriers find desirable, and have a detailed breakdown of what’s contributing to your FSC costs.

UPS and FedEx may use the fuel surcharge as a revenue-generating lever, but as a shipper, particularly in the current market, you have several cost-reduction levers you can pull yourself (e.g., the right fulfillment partner can help you optimize pickup density, zonal distribution, weight/dimensions).

Identifying those characteristics through a comprehensive analysis of your shipping data will inform the best approach to mitigating fuel surcharges.

For a complimentary parcel spend analysis, contact us today.