U.S. express delivery fees will hit a record high during the Christmas season! Diesel surge triggers soaring fuel surcharges

Soaring diesel prices have driven fuel surcharges sharply higher, with surcharge rates for major carriers such as UPS and FedEx now approaching 30%, pushing parcel delivery prices in the fourth quarter to a record high.

On October 26, Reuters reported, citing the TD Cowen/AFS Freight Index, that ground delivery prices are expected to rise 5.8% year-on-year in the fourth quarter, while express delivery prices will surge an even higher 13.8%.

The index is based on anonymous data from 1,800 shippers and presents percentage changes to reflect overall industry cost trends.

According to the U.S. Energy Information Administration (EIA), as of October 19, the average U.S. on-highway diesel price had risen to $6.28 per gallon, up 65% since February 28, before the joint US-Israel strike against Iran. Based on that price, the UPS fuel surcharge rate is 29.5%, while FedEx’s is 29%.

Notably, the report points out that rising diesel prices explain only about 30% of the surcharge growth.

Mingshu Bates, Chief Analytics Officer at AFS Logistics, stated that the primary driver behind the sharp climb in surcharge rates is adjustments to carrier calculation methods, a mechanism that allows surcharges to keep increasing even when fuel prices remain unchanged.

Data from the index reveals the scale of this trend: in Q1 2021, when the average diesel price was $2.91 per gallon, the industry fuel surcharge rate was 7.75% of base freight; even if diesel prices returned to those levels, today’s surcharge rate would still be 23.75%—almost three times higher.

Bates noted that carriers have persistently adjusted their calculation rules to expand surcharge revenue, increasing cost pressure for retailers as a result.

UPS stated its pricing reflects the company’s premium services and investments in infrastructure, while FedEx did not respond to requests for comment. Both companies will announce quarterly results this week, and investors are watching closely to see whether clients are pushing back on surcharges.

Facing high surcharges, some retailers have started bringing in new delivery partners.

According to Satish Jindel, president of shipment tracking and management company ShipMatrix, fast-growing carriers such as OnTrac, GoFo, UniUni, Jitsu, and Veho now cover about 70% of the U.S. population and have expanded capacity to meet holiday season demand, attracting many shippers seeking to reduce transportation costs.

However, alternatives do not always deliver as hoped. For example, OnTrac’s fuel surcharge rate for the West Coast also reached 29.5% for the week ending October 25, as high as UPS and FedEx.

The United States Postal Service (USPS) and Amazon’s logistics division are other options. In April, USPS began imposing an 8% fuel surcharge on most parcels, while Amazon in the same month added a 3.5% fuel and logistics-related surcharge to seller fulfillment fees, both lower than traditional carriers.

But analysts caution that switching delivery services between carriers comes with significant costs: splitting shipment volumes can nullify volume-based discounts, and holiday season delivery arrangements are usually fixed months in advance, making last-minute changes difficult.

JPMorgan analysts also believe it is unlikely that Amazon will break UPS and FedEx’s market dominance in the short term.

Jess Dankert, vice president of supply chain at the Retail Industry Leaders Association (RILA), called the holiday shopping season the retailer's "Super Bowl" and noted that fuel surcharges have become one of the central issues in retailer-carrier contract negotiations.

According to Dankert, the industry is pursuing multiple strategies to ease cost pressures, including incentivizing customers to return items in-store and introducing more delivery partners.

However, with shipping volumes capable of doubling in the fourth-quarter holiday season, bargaining room is limited, and cost pressure is still highly likely to be passed on to retailers.