You’ve read the title. You’ve felt the rising oil prices at the gas station. The question is: What does this mean for your shipping strategy?
With the war between Russia and Ukraine worsening, the parcel and shipping landscape is continuing to experience significant disruption. After the rewiring of the global logistics marketplace due to the COVID-19 pandemic, it now appears that a ‘return to normal’ is further away than was anticipated at the start of this year.
As oil prices continue to reach record highs, this is reflected in the fuel surcharges being applied by major carriers. UPS fuel surcharges for the week of the 14th March are up an average of 3.1% across Ground, Domestic Air, International Air Export, and International Air Import, while fuel surcharges on FedEx Express and Ground have seen a jump of 3.25% in just one week to the 14th March.
And it’s not just fuel surcharges that shippers need to worry about. On March 7th, FedEx took the step of introducing a so-called ‘war surcharge’ on international and freight shipments to offset supply chain disruptions caused by the war in Ukraine.
From March 7, FedEx has introduced fresh peak surcharges on FedEx Express parcel, freight, and TNT shipments for some shipments moving between Asia Pacific (APAC) and countries in APAC, Europe, Latin America and the Caribbean (LAC), and the Middle East, Indian subcontinent and Africa (MEISA). These are currently in effect until March 22nd, depending on how the situation evolves.
Given that the conflict in Ukraine is showing no signs of winding down, it’s very likely that other parcel carriers are also mulling over the introduction of their own ‘war surcharges’. Throughout the pandemic, we’ve seen a greater willingness of major parcel carriers to push rising operational costs onto their customers, leading to allegations by some commentators that the industry has transitioned into a surge pricing model where surcharges are used as a relief valve to try and cool demand.
“Perhaps warranted given global supply chain pressures on the transportation and logistics industry’s operating costs, but we’re sure stretching the meaning of the term ‘peak’ these days,” said John Costanzo, founder of LDK Global Logistics.
With the industry in a climate of perpetual peak and infrastructure still struggling to catch up to record-high levels of demand for services, these surcharges are not going to cover the total increase in operational costs. With GRIs for 2022 already released, we can expect to see further surcharges beyond March.
For shippers, this means shipping costs will go up considerably in the coming weeks.
But fuel surcharges are only one facet of an increasingly complex global arena that will limit rate-shopping opportunities for shippers during 2022. While the Russia-Ukraine conflict is currently limited to Eastern Europe, this new climate of uncertainty and economic sanctions is having widespread ripple effects, hampering the already long recovery from COVID-19.
The establishment of a growing number of no-fly zones over Russia and Belarus has disrupted regular air travel corridors, leading to aircraft needing to take longer, more costly routes. With a parallel rise in fuel costs, it’s likely that some airlines will choose to cancel some Asia-Europe routes, putting a further strain on air freight availability.
Moreover, sanctions against major Russian freight carriers Aeroflot and BridgeCargo Airlines that stop them from carrying cargo to the U.S. have resulted in a shrinking of global freight capacity.
This comes just as air freight volumes and capacity were beginning to stabilize close to pre-pandemic levels, causing rates to drop again after two years of high rates and limited commercial flight options due to border restrictions. With uncertainty and tougher sanctions on Russia likely to continue, this is definitely going to affect the recovery of air freight.
Shipping is yet another sector that is being hit hard by Russia’s war with Ukraine. The global shipping industry relies heavily on labor from both countries, with Russian and Ukrainian seafarers making up almost 15% of the 1.9 million-strong industry. With Ukraine having introduced conscription for men aged 18 to 60 and Russian seafarers struggling to get to vessels due to flight bans, the industry has taken a serious hit.
Heavy fighting in Ukrainian major port cities such as Kherson or Mariupol, where many seafarers live, has led to major crewing challenges as growing numbers of people flee Ukraine mostly to other EU countries. Sanctions on major financial institutions in Russia are also having an effect. with shipping companies grappling with how to pay for Russian labor as a growing number of Western payment networks pull out of the country.
It’s safe to say that oil prices are a long way from reaching their potential peak. The sky really is the limit – and not in a good way. This means that fuel surcharges, although currently being applied on a week-to-week basis, are not set to drop or even stabilize any time soon. With fear and uncertainty on the horizon due to the Russia/Ukraine conflict, shippers need to be prepared for cost increases that cannot be solved simply by switching carriers.
Now is the time to reach out to your 3PL to better understand how fuel surcharges and labor shortages are going to affect your shipping strategy in the short to medium term, and what you can do to mitigate the impact of this global disruption while meeting customer expectations for a seamless shopping experience.
“With oil prices are going through the roof, shippers naturally have a lot of questions about what this means for them and their customers,” says Sean Kim, Vice President of Customer Experience & Global Parcel Strategy at Whiplash. “We are closely monitoring the global supply situation and working with our customers to help them manage these significant cost increases.”