What if the pepperoni pizza you had delivered last week cost 20% more because gas prices have gone through the roof? Well, that's how much fuel prices have increased standard express shipping rates if you "absolutely, positively" must ship a package overnight.
Nickels and dimes add up
Surcharges in the transportation industry are nothing new. FedEx (NYSE: FDX), UPS (NYSE: UPS), and DHL levy surcharges for all sorts of extras. Shipping a sweater to your mom in Des Moines? You'll pay extra to ship it to her home overnight unless, she lives in a Starbucks or another reputable business, because it costs $2.30 extra to deliver express packages to a residence. You'll pay even more if you get the address wrong or if the package is deemed too big.
The bulky fuel surcharge, which is directly tied to the price of fuel, varies whether or not you are shipping by ground or express. Because it costs more to fly a jet than drive a truck, the fuel surcharge is higher for express shipments than ground, with the current express fuel surcharge at 19.5% and the ground fuel surcharge at 6.25%.
You know that these surcharges are starting to make a difference in the price of shipping a package when the typically quiet U.S. Postal Service starts advertising its lack of surcharges (yes, I actually heard an ad touting the price benefits of the USPS on the radio the other day, and the USPS is also strategically placing ads in magazines such as BusinessWeek). The USPS website allows consumers to see how much they'll save by using those services versus UPS and FedEx, giving examples of how owners of small businesses have slashed costs by moving to their local post office versus using FedEx or UPS. With the economy being where it is, a penny saved is a penny earned, right?
Surcharges aren't the only variable driving (pun intended) rates up in the small package shipping industry, because FedEx and UPS raise their rates annually, no matter what the economic climate. These rate increases can be somewhat significant: This year, UPS and FedEx raised them by an average of 4.9% for ground and express services, which isn't out of line with inflation, but certainly is just another expense for business owners to worry about.
Pain at the pump
On the surface, you might think that these surcharges keep FedEx's and UPS's financials soaring, but the latest earnings suggest otherwise. FedEx's stock price is 30% off of its 52-week high, with a recent drop coming after its second-quarter earnings release. Prefacing the somewhat disappointing earnings, FedEx Chief Financial Officer Alan Graf said, "... higher fuel prices and continued weak growth in the U.S. economy have hindered profitability. While we have indexed fuel surcharges in place, they cannot keep pace in the short-term with rapidly rising fuel prices."
FedEx does have a point here: Gasoline prices jumped 29% in 2007, and the fuel surcharge only goes so far in making up for this, as demonstrated in the 8.9% year-over-year decline in FedEx Express's margin. Also, the impact at key competitor UPS is somewhat less because ground shipments (which have less of a fuel impact) make up a much higher percentage of its revenue.
So, is the U.S. Postal Service really going to give the big dogs a run for their money? Because of higher tracking capabilities and personalized services, many businesses are willing to pay the premium associated with FedEx and UPS. After all, there is a certain allure in sending that key contract by FedEx Priority Overnight, as opposed to Bob the mailman (sorry, Bob). And even if businesses decide to ship using the USPS, FedEx makes money, because it has an agreement with the Postal Service to ship its express packages and mail to airports in the U.S. through 2013.
At a 13.10 P/E, FedEx is about 25% cheaper than UPS right now, making it worth a look if you're thinking of taking the plunge in transportation stocks. Even with USPS competition, FedEx still benefits.
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