DISTRIBUTION COSTS: Pain in the gas for delivery

Will soaring gasoline prices boost postal and parcel rates?

Are you getting sick of paying more at the pump? Think of what it’s like to fuel a fleet of vehicles – cars, trucks, and planes that are transporting your catalogs and packages to customers.

The U.S. Postal Service, which has coasted through four consecutive years of surpluses, could be heading for tougher times ahead as a result of rising gas prices. For its second quarter ended in March, the agency came in $33 million under plan, with expenses $10 million above plan.

In explaining to the USPS Board of Governors why costs have soared, CFO Richard Porras in April cited the recent gasoline price hikes. (Gas prices have risen more than 50% over the past year, from a nationwide average of $1.03 per gallon in April 1999 to $1.57 in early April this year.) Porras said that every penny increase in gas prices results in $5.5 million in added fuel costs for the USPS. For the agency’s fiscal year, which ends next September, he anticipates that the higher gas prices will add $300 million to the operational budget for USPS’s 200,000 trucks and cars.

U.S. Postal Service spokesman Mark Saunders says that differing fuel or gasoline rate increases will affect the agency’s ground and air services in different ways. But the agency won’t project at this point what effect rising gas and fuel costs will have on postal rates.

UPS’s fuel hedging pays off

While the quasi-governmental USPS has felt the gas pinch, United Parcel Service claims it’s in considerably better shape, due to a fuel hedging program it can take part in as a private-sector business. “We’re not suffering quite as deeply as other companies, because we have a very effective fuel hedging program,” says UPS spokesman Dan McMackin. For the remainder of 2000, UPS’s planes and trucks will all be fueled by gas and fuel that “we bought at a predetermined price two years ago.”

UPS employs experts to gauge fuel prices around the world, McMackin says, “using complex statistical models and mapping designed to figure out what fuel prices will be in the future and when to buy – and when not to. That insulates us, to a certain degree, from fuel cost spikes.”

Although spokespeople at Federal Express wouldn’t comment on how rising fuel costs are affecting the carrier’s air and ground transportation costs, one source did note that like UPS, FedEx has a fuel hedging program.

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