Parcel costs are set to tighten again in the fourth quarter after a softer third quarter. The TD Cowen/AFS Freight Index shows lower fuel surcharges and stronger delivery discounts eased shipping costs for FedEx and UPS customers between July and September, with the ground parcel rate per package 38.8% above its January 2018 baseline, a 2% quarter-over-quarter drop. The same index warns that peak season surcharges will reverse that relief in the fourth quarter.
Key Conclusions
The first conclusion is that the third-quarter relief was cyclical rather than structural. Fuel surcharges fell 4.7% quarter over quarter and discounting activity rebounded, both of which are consistent with seasonal patterns rather than a durable change in carrier pricing power. 4.7% quarter over quarter (Supply Chain Dive)Treating a seasonal dip as a permanent cost improvement leads retailers to under-plan peak budgets and then absorb an unforecasted margin hit in the final quarter.
The second conclusion is that the index baseline, not the quarterly change, is the number to manage against. Ground parcel rates sitting 38.8% above a January 2018 baseline means the structural level of parcel cost has risen far more than any single quarter's movement suggests. Retailers that plan fulfilment economics off quarter-over-quarter trends will systematically underestimate the cumulative increase embedded in their cost base since 2018.
Reading the Freight Index Correctly
What the components measure
The index decomposes parcel cost into a base rate, an effective fuel surcharge and the discount a shipper actually negotiates. Each behaves differently: base rates move on published tariffs, fuel surcharges track energy markets with a lag, and discounts reflect the shipper's volume leverage and contract timing. effective fuel surcharge (Supply Chain Dive)Because the three components move on different cycles, a single headline rate change can conceal offsetting movements that matter more for budgeting.
Why the discount component is underrated
Discount leverage is the most controllable component and the one most often left on the table. Shippers that consolidate volume, commit to minimum volumes across a longer term, or shift mix toward ground services typically improve their effective rate without any change in published tariffs. The third-quarter improvement was partly attributable to a rebound in discounting activity, which suggests negotiated terms rather than market fuel prices drove much of the relief.
Best Practices
Budget peak surcharges as a separate line
Peak surcharges behave like a seasonal tax on volume, so they should be forecast as a distinct cost line rather than blended into an average rate. That separation lets finance teams see the true incremental cost of promotional volume in the fourth quarter and compare it against the margin the promotion generates. peak season surcharges (Supply Chain Dive)It also creates a clear trigger for deciding when a promotion's shipping cost exceeds its contribution.
Model the customs and postal overlay
Parcel economics no longer stop at the carrier. US Customs and Border Protection is weighing earlier filing deadlines for low-cost imports alongside postal changes, which would alter the cost and timing of cross-border e-commerce shipments. earlier filing deadlines (Supply Chain Dive)Retailers importing low-value goods should model the combined effect of surcharges and filing requirements together, because the two changes land in the same operating window and interact through the same cut-off times.
Common Mistakes
The first mistake is extrapolating a soft quarter into the next one. Fuel surcharges and discount cycles mean third-quarter relief is regularly followed by fourth-quarter tightening. The second mistake is negotiating on headline rates while ignoring accessorial charges, which is where cost variance usually hides. The third mistake is planning peak labour and capacity without the shipping cost line, so the promotion looks profitable on gross margin and unprofitable after fulfilment. The fourth mistake is treating the freight index as a forecast; it is a backward-looking measure of realised rates and should be used to validate assumptions rather than to set them.
Where Parcel Cost Sits in the Retail P&L
For e-commerce operators, parcel cost is one of the few fulfilment expenses that scales directly with revenue, which makes it a first-order driver of contribution margin rather than an overhead item. When rates run above a long-run baseline, promotional depth has to be recalculated, because a discount funded from gross margin can be entirely consumed by incremental shipping cost on low-basket orders.
The pressure is amplified when demand itself is uncertain. Total retail sales rose 0.8% month over month in September with core sales up 0.2% excluding autos and gas, and ICSC research has found 49% of shoppers worried about affording gifts, a combination that pushes basket sizes down and shipping cost per order up. shipping cost per order (Retail Dive)Retailers should therefore set a minimum-basket threshold for free shipping using current parcel rates rather than last year's, and revisit it as peak surcharges take effect.
Summary
The TD Cowen/AFS index shows parcel costs easing in the third quarter on lower fuel surcharges and stronger discounting, with peak season surcharges set to reverse that relief in the fourth quarter. The durable insight is that ground rates remain 38.8% above the January 2018 baseline, so the structural cost floor is far higher than a single quarter implies. The metrics to track are effective rate per package, the discount achieved against published tariff, and peak surcharge as a share of total shipping cost.
Data Sources
FAQ
What did the index show for the third quarter?
A: Lower fuel surcharges and increased delivery discounts eased shipping costs for FedEx and UPS customers, with the ground parcel rate per package 38.8% above its January 2018 baseline, a 2% quarter-over-quarter drop.
What happens in the fourth quarter?
A: The index warns that easing fuel prices and a rebound in discounting gave shippers relief in the third quarter, but peak season surcharges will turn up the heat in the fourth quarter.
How much did fuel surcharges fall?
A: The average effective fuel surcharge paid by shippers fell 4.7% quarter over quarter.
Why is the baseline more important than the quarterly change?
A: Ground rates remain 38.8% above the January 2018 baseline, so the structural cost level has risen far more than any single quarter's movement suggests.
What should retailers do?
A: Forecast peak surcharges as a separate cost line, revisit free-shipping thresholds using current rates, and model customs filing changes alongside carrier surcharges.
References
- https://www.supplychaindive.com/news/fedex-ups-delivery-prices-set-for-record-high-q4-td-cowenafs/832992/
- https://www.retaildive.com/news/monthly-retail-sales-from-the-us-commerce-department/574252/
- https://www.supplychaindive.com/news/cbp-eyes-earlier-filing-deadlines-for-low-cost-imports-postal-changes/832877/
- https://www.retaildive.com/news/where-do-associates-fit-in-an-ai-world-retail/831640/
