NEW YORK (AFX) – Faced with escalating fuel and materials prices, businesses have been forced to pass on those higher costs to customers to save their profits. And for companies like FedEx Corp., the strategy has proven to be a winner.
Surcharges have become a chief executive’s best weapon in preserving balance sheets. But, the success of these extra fees has been a mixed bag as consumers grow increasingly wary about how far their dollars stretch.
One industry that has pulled off these extra fees without a backlash from customers is transportation companies like FedEx. Parcel delivery and trucking companies have levied sliding fees on customers to offset higher prices at the pump.
‘When you look at the environment in transportation in general, the providers have maintained some pretty solid pricing power whether it be in trucking, rail or parcel businesses,’ said analyst Jon Langenfeldof Robert W. Baird & Co. ‘Typically that hasn’t been the case.’
Indeed, industries such as housing builders and steel makers have had a tougher go at persuading customers to accept surcharges. Already high prices for homes and products such as aluminum have found resistance from buyers unwilling to take on extra costs.
Companies such as FedEx and United Parcel Services Inc. have had better luck. On Wednesday, FedEx trounced Wall Street projections in reporting a 27 percent jump in fourth-quarter profit.
The Memphis, Tenn.-based company took it a step further by issuing a bright outlook for 2007. In addition, FedEx even said it plans to dedicate $2.9 billion in capital spending and growth investments such as expanding operations in China and its recently announced $780 million acquisition of small-load trucker Watkins Motor Lines.
The strength in FedEx’s earnings bodes well for rival UPS, which reports its quarterly numbers next month, Langenfeld said. Both delivery companies — along with many trucking businesses — have employed a kind of sliding scale in which surcharges move up and down based on fuel-based government reports.
For instance, fees charged to customers have ranged from 10 percent to as high as 20 percent of the shipping rate. The costs are typically higher for parcels shipped by air.
FedEx and UPS — along with trucking companies such as JB Hunt Transport Services Inc. and Swift Transportation Co. — have been cheered by Wall Street for their use of surcharges. All four companies, like many of their competitors, have recently seen shares trade near yearly highs.
Beyond that, Wall Street in turn has been cheered on by FedEx. The world’s largest express shipping company is considered to be a barometer of the U.S. economy, and its strong quarterly performance helped spark a rally in U.S. equity markets this week.
‘Investors understand,’ Langenfeld said. ‘They’ve really passed through these costs in a relatively effective manner.’