It's no secret that oil prices have tumbled since the summer, and consumers are already seeing a bit of relief through lower prices at the pump. With fuel prices now below $3 per gallon in many areas, you may expect those costly fuel surcharges to begin disappearing.
But don't move too fast, because not every company is taking this approach and some may just pocket the difference.
Shipping fuel surcharges
Much of the shipping industry determines its fuel surcharges by referring to the cost of fuel from a certain recent time. FedEx (NYSE:FDX) and United Parcel Service (NYSE:UPS) use fuel costs from two months prior and adjust the surcharge on a monthly basis.
For these companies that often deal with businesses, the delay in applying the surcharge helps to allow these businesses to plan for future costs.
To determine the fuel surcharge, FedEx and UPS use data from the Energy Information Administration, or EIA, to apply the national U.S. on-highway diesel price to ground shipments. For air shipments, these shippers use the U.S. Gulf Coast price for kerosene-type jet fuel.
But despite the drop in oil prices, prices for diesel and jet fuel would still have to drop significantly more to result in no fuel surcharges at FedEx or UPS.
FedEx eliminates the fuel surcharge when diesel drops below $2.47 per gallon and with the most recent data from the EIA showing the diesel price at $3.68 per gallon, elimination of this fuel surcharge would require another another 33% drop.
For air shipments, FedEx eliminates the fuel surcharge when jet fuel drops below $1.94 per gallon; 21% below the level from the most recent EIA data.
Finding out where UPS's fuel surcharge disappears is more difficult, since the fuel surcharge table doesn't extend all the way to $0.00 on the company's website. But looking at the table, it appears UPS takes 0.5% off the fuel surcharge for every $0.12 drop in diesel. While UPS may take a different policy if diesel prices fall further, by extrapolating this table I estimate that the fuel surcharge at UPS would disappear around $1.53 per gallon.
Using a similar estimation style, assuming UPS would continue to reduce its fuel surcharge for air shipments by 0.5% per $0.09-per-gallon decrease, I estimate that jet fuel would need to fall below $0.97 per gallon before the air shipment fuel surcharge disappears. Again, UPS may take a different route if prices keep falling, but these are the best estimates for now.
Although the drop in oil prices has lowered fuel surcharges at FedEx and UPS, it would still take another major drop to eliminate fuel surcharges in shipping altogether.
Airline fuel surcharges
To balance out the rising cost of fuel, many airlines instituted fuel surcharges on some of their flights. But some of these fuel surcharges seem to be sticking around.
North of the border, Air Canada (TSX: AC) is keeping its fuel surcharge on international flights which can run a few hundred dollars on certain tickets despite the drop in jet fuel costs. However, CBC reports that the airline has said it buys much of its fuel in advance and that the surcharge is also determined by other factors, such as currency fluctuations and market conditions.
Currency fluctuations are a big deal for Air Canada, since oil, aircraft, and much of the airline's debt are priced in U.S. dollars. And with the drop in oil being a contributing factor to the recent slide in the Canadian dollar, Air Canada is not benefiting as fully from lower jet fuel prices as U.S.-based airlines.
Air Canada's top rival, WestJet Airlines (TSX:WJA), doesn't impose a fuel surcharge. Although this may seem like another big difference to separate WestJet from Air Canada, it's important to note that the vast majority of WestJet's flights stay within North America and the Caribbean. In Air Canada's case, fuel surcharges are only applied on international flights where flights are typically longer and therefore use more fuel. But as WestJet looks to grow more flights beyond North America, it will have to decide whether to match Air Canada's fuel surcharge policy.
While airline fuel surcharges have held up fairly well so far, the director general of the International Air Transport Association, Tony Tyler, questioned how long this would continue for in October, citing consumer pressure and competition as potential factors. With this in mind, flyers should make sure to look into the details of their tickets to see if the fuel surcharge is sticking around.
With the price of oil dropping so rapidly, many consumers are wondering when they can stop paying those pesky fuel surcharges. In the case of shipping, the fuel surcharges are decreasing, but it appears another major drop in oil prices would be necessary to completely eliminate the fuel surcharges.
At airlines, the fuel surcharge is more opaque, leaving even less certainty as to the future of these fuel surcharges. While they are sticking around for now, flyers should watch to see whether competitive pressures force the elimination of these charges.
Alexander MacLennan owns shares of Air Canada. The Motley Fool recommends FedEx and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.