Why "fuel surcharges" are a scam.

Commentary about business and finance.
Aug. 21 2006 5:23 PM

The "Fuel Surcharge" Scam

The latest corporate trick to hide price hikes.

DHL trucks. Click image to expand.
DHL trucks

When higher costs squeeze them, most companies face two choices. They can raise their prices, risking the wrath of consumers and the loss of market share to cheaper competitors. Or they can sacrifice profits to keep prices steady and retain market share. But these days, some companies have found a third way: fuel surcharges.

At first blush, fuel surcharges seem like transparent, mathematically determined means for companies to recoup their expenses for the unexpectedly high price of gasoline. But as they spread into other industries, fuel surcharges more and more seem as if they're just an au courant way of raising prices, while duping customers into thinking they're not paying more.

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The surcharges appear to have a reassuring precision. The companies lay out exactly how fuel surcharges are determined. UPS notes that its surcharge, based on an index of fuel prices, changes monthly and kicks in only when the price of "on-highway diesel" is more than $1.50. As of early August, the surcharge was 4.75 percent on ground packages and 16 percent on air and international deliveries. FedEx's fuel surcharges, which kick in when diesel is $1.50 and jet fuel is 82 cents per gallon, are the same. DHL has fuel surcharges of 4.8 percent on ground service and 18 percent on air and international services. All rely on data provided by the Energy Information Agency, which shows that the price of gasoline, at $2.92 a gallon, is up 31 percent from a year ago, while diesel, at $3.03 a gallon, is up 44 percent from a year ago. It sounds pretty unobjectionable. UPS's most recent results, which show the company struggling with higher energy prices, make it seem as if surcharges aren't even recouping the higher costs.

But the more you delve into the fuel surcharges, the less sense they make. In theory, the basic price a delivery company charges covers operating costs—labor, supplies, insurance, energy, etc.—plus a profit. The fuel surcharge, we're told, is needed to pay for the marginal increase in costs due only to the higher cost of gasoline or diesel. If you weren't shipping the package, the company wouldn't need to buy the gas.

If you pay $21 to ship a document overnight with FedEx, the surcharge comes out to about $1—or about the extra cost associated with buying a gallon of diesel this year compared to last year. The implication is that it takes FedEx a gallon of diesel to process your package through its immense, technologically advanced logistics network.

No way.

Remember, these companies do huge volumes of business. Their trucks, planes, and vans are in motion every day of the week, regardless of whether you are sending one, two, or 10 packages. Let's say you send three packages from your New York office to three offices in Washington on the same block. You'll get hit with the fuel surcharge on each package. You pay the surcharge whether you live two blocks from a UPS station or 15 miles from one. And if you take steps to save the delivery company money on fuel—sending it from a storefront, where it gets picked up on rounds every day instead of forcing them to come to your house—you don't seem to get any benefit.

Something else is fishy about these fees. FedEx and UPS essentially argue that their current rate schedule works only if the price of diesel is $1.50 or less. Otherwise, they have to start tacking on fuel surcharges. Hello? The EIA notes that the price of diesel hasn't been below $1.50 since December 2003. In most other industries, when the cost of a key input rises (or falls) to a new level and stays there for awhile, the base price of the end product adjusts. The base prices of personal computers and flat-screen televisions get lower every year; Dell doesn't keep the same retail price and slap a rebate on every product to reflect lower manufacturing and assembly costs in China and Taiwan. A simple look at the futures markets or trends in global fuel consumption should convince UPS, DHL, and FedEx that we all need to adjust our business models to account for a higher price of gas. Fundamentally, they're imposing the surcharges instead of raising prices and are hoping customers are too dim to notice. (But the first signs of rebellion have appeared. Read about how shippers are fighting back against fuel charges by railroad companies.)

More recently, fuel surcharges have been spilling over into other services where they're even more absurd. Today, I sorted through a month's worth of bills from the service providers who visit my slice of suburban heaven each month. The company that fertilizes my lawn charges a $2.50 fuel surcharge every time it visits, but the tick-control sprayer (this is Connecticut, where fear of Lyme disease runs rampant) doesn't. Both are based in the same town. The landscaper, whose Ecuadorean employees arrive each week in a gas-guzzling pickup trick and then spiff up our lawn with gas-guzzling mowers and blowers, imposes no fuel surcharge. Neither does the pool guy or Peapod. But the garbage carter does—$3 per month. Does it really require that much extra gas for the truck to travel the extra 200 feet from our neighbor's house twice a week?

Daniel Gross is a longtime Slate contributor. His most recent book is Better, Stronger, Faster. Follow him on Twitter.

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