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Higher Price of Fuel Costs UPS $1.4 Billion Annually

March 29, 2005

ATLANTA – United Parcel Service (UPS) is hoping a $600 million cost-cutting system will keep its profits climbing even though gas prices are, too, according to the Atlanta Business Chronicle. United Parcel Service Inc. is in the midst of re-engineering its package pickup and delivery processes in an attempt to achieve hundreds of millions of dollars in reduced operating costs annually. The goal is productivity improvements, as well as reduced fuel usage from driving an estimated 100 million fewer miles each year. The system, whose implementation is behind schedule, was first introduced in 2003 and won't be finished until 2007 at the earliest. Once fully deployed, it is expected to save $600 million in costs, anually. But it can't be deployed fast enough. UPS suffered a 35 percent increase in fuel costs last year. In the fourth quarter alone, the package delivery company's fuel costs increased a whopping 58 percent. UPS, which has re-instituted a ground delivery fuel surcharge to match its air surcharge, has not said what will happen if fuel prices continue to soar. On March 17, Memphis, Tenn.-based FedEx Corp. warned rising fuel costs could negatively affect margins for the quarter ending March 31. UPS, which acknowledged having a challenging fourth quarter, is expected to announce first-quarter results April 21. UPS operates 88,000 ground vehicles and more than 500 aircraft each day. The company's fuel costs have jumped nearly 49 percent in just two years. Last year, the company spent $1.42 billion on fuel, up from $1.05 billion in 2003 and $952 million in 2002. The worst of the high prices came toward the end of the year. In the fourth quarter, UPS spent $446 million on fuel, up 58 percent from the $283 million spent during the year-ago period. And the prices show no signs of abating: As of mid-March, average diesel fuel prices were up more than 35 percent from a year ago, and jet fuel prices were up 65 percent from a year ago. Nevertheless, thanks largely to a rebounding economy that has led to increased demand, UPS' net income increased 15 percent to $3.3 billion last year. And UPS and other shippers, unlike the airlines – which have more capacity than customers – can pass along much of the increased fuel costs to customers, analysts say, because shipping demand outstrips capacity. The surcharges are adjusted monthly depending on average diesel and jet fuel prices. For the period from March 7 to April 3, the ground surcharge was 1.75 percent and the air surcharge was 9.5 percent, which is up from 6.5 percent a year ago. But the company's cost-savings initiatives represent its biggest opportunity to temper the impact of rising fuel prices. "We have no control over what the price of oil is going to be ... [but] we do have more control over how we use that barrel of oil," said Bob Godlewski, a UPS spokesman. Alternative-fuel vehicles play a large role in the process, and UPS operates a fleet of more than 1,800 such vehicles, including 1,024 compressed natural gas vehicles -- the largest private fleet in the United States.
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