How UPS and FedEx Are Riding Diesel Costs to Higher Revenues
4m 58s
Package delivery giants UPS and FedEx are delivering strong earnings amid rising fuel costs, which have pushed diesel prices above $6 per gallon. While higher fuel expenses increase their operating costs, both companies have effectively mitigated losses through fuel surcharges now at 29% of the shipping price—passed directly to customers such as retailers and manufacturers. These cost burdens are eventually absorbed by consumers, but the companies remain confident in handling the surge in holiday shipping demand, supported by hiring tens of thousands of seasonal workers. Meanwhile, the financial strain on trucking has prompted a shift from trucks to rail for cost-sensitive shippers, resulting in a 5% volume increase for major railroads like CSX and Union Pacific. This trend has created a clear realignment in the freight industry, with railroads benefiting from increased business and stronger stock performance. The broader takeaway is that fuel cost pressures are not just a burden for logistics firms but are driving structural changes in how goods move across the U.S. economy, with delivery and rail sectors adapting through pricing mechanisms and strategic shifts in transportation.
I'm Pierre Bien-Aimé for The Wall Street Journal, and this is What's News in Earnings,
our look at some of the biggest themes standing out this earnings season.
Package delivery companies have unique insight into the American economy.
Every weekday, 90 million packages hit doorsteps across the country,
and the flow of parcels is steady, suggesting that consumers are still spending.
That's according to earnings calls this week at both UPS and FedEx,
some of the biggest players in this space.
They reported some strong earnings.
There were a lot of similarities there.
Both companies posted revenue of about $23 billion for the quarter.
They both beat Wall Street estimates, and they both raised their outlooks for the year.
One curveball for these companies, though, is rising fuel costs.
They burn a lot of diesel, but, and this surprised me,
higher fuel costs aren't necessarily bad for their bottom lines.
As my colleague Esther Fung tells me,
she covers FedEx and UPS as well as the smaller companies
and giant earnings companies.
They compete with them on the railroads, and she joins me now.
Esther, let's start with fuel.
Diesel costs are above $6 a gallon, and those are especially relevant for trucks and trains.
How have those high costs affected UPS and FedEx, for starters?
So, yes, fuel is up, and that hits the expenses.
All of these companies talk about higher expenses in the third quarter,
higher than what they had previously anticipated.
But they also have something called fuel surcharges pegged to the price of diesel
that customers pay for these higher fuel costs.
I think in recent weeks, the fuel surcharge for parcels at FedEx and UPS is 29%.
It's a huge number, and this is how they hedge against higher fuel prices.
FedEx and UPS have done a good job at it.
They both reported higher revenues, and they both reported that,
their profits have been protected because of the fuel surcharges.
So, who's eating those costs? They're customers, then.
Those are companies that need to ship things to their own customers, which might be American households?
Yes. It's companies stomaching these costs.
It could be retailers, manufacturers, industrial companies.
The retailer that you're buying from, it could be a Macy's or it could be Patagonia.
They pay the fuel surcharge.
But ultimately, these companies would also pass on the cost.
To us, to the consumers.
So, we'll pay the fuel surcharge.
So, that sounds pretty nice if you're UPS or FedEx.
And what about this upcoming holiday shopping season,
which you've described to me as their Super Bowl?
It's obviously a lot of demand.
How are fuel costs factoring into that?
They definitely want to deliver parcels on time for the holiday season.
So, UPS has said that they are hiring more seasonal staff.
I think it's 100,000 people this year.
Amazon has also said they're hiring more.
They're hiring more seasonal staff.
UPS gets projections from the top 100 customers who forecast a strong peak shopping season.
And even if fuel prices are higher, they are still able to charge that fuel surcharge to their customers.
Both of them are confident that they can handle it.
And what about for railroad companies?
One thing we've covered here at The Wall Street Journal is that they're getting a little bit more demand,
taking it from trucking.
But what do high costs for diesel mean?
So, at this point, high costs of diesel for the freight railroads is translating to higher volumes for them
because some of the more cost-sensitive shippers have jump-shipped from truck to rail
because it's so much cheaper.
So, the railroads are very happy for this new volume that's coming in.
They're like, okay, we'll accept this new volume.
It's helping to boost our revenue.
Yes, fuel is up, but we can handle the higher fuel costs.
And how much more business are they getting that might formerly have gone to a trucking bed?
It's pretty substantial.
Major railroads like CSX, Union Pacific, and Norfolk Southern,
they have gotten around 5% more volume because of the truck-to-rail conversion.
And this is the second consecutive quarter that they have talked about gaining more volume.
And this news has also boosted their stock prices.
That was Wall Street Journal reporter Esther Fung.
Esther, thanks so much.
Thank you. Bye.
And that's what's news in earnings.
Today's show was produced by me with supervising producer Tali Arbel.
Later today, we'll have the PM edition of What's News out for you as usual.
And we'll be back later this earnings season diving into another industry.
Until then, I'm Pierre Bien-Aimé. Have a great day.
Podcast Summary
Key Points:
UPS and FedEx reported strong quarterly revenues of about $23 billion, beating estimates and raising their annual outlooks.
Rising diesel costs, exceeding $6 per gallon, have increased operating expenses for both companies.
Both firms offset fuel costs through fuel surcharges, which are now at 29% and passed directly to shipping customers.
These surcharges are ultimately borne by retailers and manufacturers, with potential cost transfers to end consumers.
Despite high fuel costs, UPS and FedEx remain confident in meeting holiday shipping demands through expanded seasonal staffing.
Higher trucking costs have driven significant shifts from truck to rail freight, increasing volume for major railroads by around 5%.
Railroads like CSX, Union Pacific, and Norfolk Southern have seen sustained volume gains over two consecutive quarters.
This shift has boosted railroad revenues and stock prices, highlighting a realignment in freight transportation dynamics.
Summary:
Package delivery giants UPS and FedEx are delivering strong earnings amid rising fuel costs, which have pushed diesel prices above $6 per gallon. While higher fuel expenses increase their operating costs, both companies have effectively mitigated losses through fuel surcharges now at 29% of the shipping price—passed directly to customers such as retailers and manufacturers. These cost burdens are eventually absorbed by consumers, but the companies remain confident in handling the surge in holiday shipping demand, supported by hiring tens of thousands of seasonal workers.
Meanwhile, the financial strain on trucking has prompted a shift from trucks to rail for cost-sensitive shippers, resulting in a 5% volume increase for major railroads like CSX and Union Pacific. This trend has created a clear realignment in the freight industry, with railroads benefiting from increased business and stronger stock performance. S.
economy, with delivery and rail sectors adapting through pricing mechanisms and strategic shifts in transportation.
FAQs
Both companies pass on fuel cost increases to customers through fuel surcharges, which are tied to diesel prices. These surcharges help protect their profits despite higher operating expenses.
The fuel surcharges are paid by companies that ship products to consumers, such as retailers or manufacturers. These costs may eventually be passed on to end consumers.
No, higher fuel costs are not harming their profits. The fuel surcharges effectively offset rising expenses, allowing both companies to maintain strong earnings.
Both companies are hiring additional seasonal staff—UPS is adding 100,000 employees—to meet increased demand during the holiday period, despite higher fuel costs.
Higher diesel prices have made trucking more expensive, causing some shippers to switch to rail. This has led to a 5% increase in freight volume for major railroads like CSX and Union Pacific.
The shift from trucking to rail due to fuel costs has significantly boosted railroads' volumes and revenues, with this trend continuing in the second consecutive quarter.
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