How UPS and FedEx Are Riding Diesel Costs to Higher Revenues

Host Pierre Bienaimé opens the October 30 episode by presenting package delivery as a window into the American economy. About 90 million packages arrive at U.S. doorsteps every weekday, and the flow has remained steady. Based on earnings calls from UPS and FedEx, that consistency suggests American consumers are still spending rather than pulling back sharply. UPS and FedEx reported several similar results for the quarter. Each generated roughly $23 billion in revenue, exceeded Wall Street’s estimates and raised its outlook for the year. Pierre frames the companies’ performance as evidence that the consumer remains resilient, while noting that package-delivery firms have unusually direct insight into purchasing activity because they physically move goods from retailers and manufacturers to households.

Pierre asks Wall Street Journal reporter Esther Fung how diesel prices above $6 a gallon have affected UPS and FedEx. Esther says higher fuel prices increase expenses, and both companies acknowledged that third-quarter costs were higher than they had previously expected. But their contracts include fuel surcharges tied to the price of diesel, allowing them to pass much of the increase on to customers. Esther says the recent fuel surcharge for parcels at both FedEx and UPS was 29 percent. Although that is a large additional charge, she says the companies have used it effectively: both reported higher revenue and said their profits were protected from the fuel increase. The immediate cost falls on businesses that ship products, including retailers, manufacturers and industrial companies. Those businesses may include recognizable retailers such as Macy’s or Patagonia, and they can ultimately pass the expense to consumers through higher prices. In other words, expensive diesel is not necessarily bad for UPS and FedEx because the surcharge turns the added fuel expense into additional revenue from their customers.

The conversation turns to the holiday shopping season, which Pierre describes as the delivery companies’ “Super Bowl.” UPS wants to ensure that parcels arrive on time during the peak period and has said it will hire about 100,000 seasonal workers. Amazon has also announced plans to add seasonal staff. Esther says UPS receives forecasts from its 100 largest customers, and those projections point to a strong peak shopping season. Higher fuel prices have not undermined that outlook because UPS and FedEx can continue charging the fuel surcharge to their customers. Both companies therefore say they are confident they can manage the holiday surge while absorbing or passing through the higher diesel costs. The episode’s broader conclusion is that strong expected shipping demand, combined with the surcharge mechanism, supports the companies’ raised annual outlooks.

Esther explains that rising diesel prices are also helping freight railroads, though through a different mechanism. Trucking is generally more sensitive to fuel costs, so some shippers have switched from trucks to rail because rail is cheaper. The major railroads are welcoming the new business: even though their own fuel expenses are higher, the additional freight volume is increasing revenue and they believe they can handle the diesel costs. CSX, Union Pacific and Norfolk Southern have each gained about 5 percent more volume from this truck-to-rail conversion, according to Esther. She says this is the second consecutive quarter in which the railroads have discussed winning additional volume from trucking. Investors have responded positively as well, with the news helping boost railroad stock prices. Pierre closes by thanking Esther and noting that the program will return later in the earnings season to examine another industry.