Retailers Face Record Holiday Shipping Costs as Diesel Prices Inflate Surcharges

U.S. retailers are confronting the highest-ever holiday season delivery prices, as soaring diesel costs push fuel surcharges from major carriers like UPS and FedEx to new peaks. The surge in shipping expenses is poised to squeeze retailers' margins during their most critical sales period of the year.

Surcharges Outpacing Fuel Costs

During the fourth quarter, pricing for ground deliveries, which includes most e-commerce purchases, is projected to be 5.8% higher than the same period last year, according to the TD Cowen/AFS Freight Index. The cost for speedier express parcel services is forecast to jump 13.8%.

The U.S. average on-highway diesel price stood at $6.28 per gallon as of October 19, a 65% increase since late February, according to the Energy Information Administration (EIA). However, AFS Logistics Chief Analytics Officer Mingshu Bates noted that rising fuel prices account for less than 30% of the surcharge increase. Changes in how carriers calculate these fees are a more significant driver, with surcharges now rising far faster than the underlying fuel cost. For example, AFS analysis shows that even if diesel prices returned to their Q1 2021 level of $2.91 per gallon, the fuel surcharge would now be 23.75%, roughly three times higher than the 7.75% it was at that time.

Based on current diesel prices, UPS's fuel surcharge is 29.5% and FedEx's is 29%, according to their respective company tables. In a statement, UPS said its pricing reflects investments in its service and infrastructure.

Market Impact and Alternatives

Ad

Investors are closely watching upcoming quarterly earnings from UPS and FedEx for any indication that customers are pushing back against the higher fees. The rising costs have created an opening for fast-growing alternative delivery firms, including OnTrac and UniUni, which now cover about 70% of the U.S. population, according to Satish Jindel, president of ShipMatrix. However, some of these competitors have also adopted hefty fuel surcharges, with OnTrac's reaching 29.5%.

Lower-cost options remain available, though they come with trade-offs.

• The U.S. Postal Service (USPS) instituted its first fuel surcharge of 8% in April.
• Amazon.com began adding a 3.5% fuel and logistics-related surcharge for sellers using its fulfillment services.

Analysts note that switching carriers can be difficult for retailers, as holiday logistics are planned months in advance and shifting volume can negate negotiated discounts. For this reason, JPMorgan analysts believe it is unlikely that Amazon will break the market dominance of UPS and FedEx in the near term.