Customers of FedEx Corp. (NYSE:FDX) and UPS Inc. (NYSE:UPS) that tender a lot of packages weighing 50 to 70 pounds are in for some price pain in 2020 unless they are excellent contract negotiators.
The reason: For the first time, FedEx and UPS will slap an “additional handling surcharge” on air and ground deliveries of parcels in that weight range. Currently, shipments up to 70 pounds are exempt from the surcharge. The changes take effect when the carriers’ 2020 rates kick in, which will be Dec. 29 for UPS and Jan. 6 for FedEx.
The policy changes will subject far more parcels to the surcharge, which appears to be substantial. Shippers tendering heavy parcels can expect a 15-24% per-package increase over the carriers’ base rates and fuel surcharges, both of which are also increasing, according to Matthew White, a strategist for iDrive Logistics, a consultancy. UPS, which released its 2020 rate schedule Monday night, said it will raise list, or non-contract, rates on parcel services by 4.9%. That is the same as FedEx, which disclosed its 2020 rates in mid-September.
B2B shippers currently make up the lion’s share of the companies tendering the heavier goods. That may change, however, as more business-to-consumer traffic enters the space with the increasing popularity of online buying.
UPS currently has a $44.43 base rate on a 50-pound ground commercial parcel moving between 1,000 and 1,400 miles and has five-day transit times, according to figures compiled by iDrive. UPS also assesses a $3.22 fuel surcharge, bringing the total to $47.65. Come 2020, that same shipment will be assessed a $24 handling surcharge on top of a $46.75 base rate and a $5.12 fuel surcharge. This will bring the total charge to $75.69, a 58.8% year-on-year increase, according to iDrive. Applying the same set of numbers to FedEx will yield a 58.6% increase, according to iDrive data.
The increases will fall hardest on mid-market and small to mid-size shippers who don’t have the negotiating leverage of big shippers with enormous volumes, according to White. High-volume shippers whose parcels fall predominantly within the 50-70 pound weight band might be able to bargain away about half of the projected increase during contract talks with the carriers, White said. But no one will emerge unscathed, he predicted.
Parcels weighing 50 pounds and above are typically costlier for the carriers to handle because they often have irregular dimensions that require special handling by the carriers. The question, according to White, is whether those higher costs justify such massive rate hikes.
Steve Gaut, a UPS spokesman, said that because heavier parcels are more likely to be asymmetrically shaped, they would be priced under a formula based on the shipment’s dimensions rather than its actual weight. That is often a costlier proposition for the shipper. Such a shipment may also have to be hand-processed outside of UPS’ new facility network, which is being built to handle smaller, symmetrical packages that account for most of its volumes, Gaut said. In some cases, even parcels with symmetrical dimensions require special handling if they have challenging delivery characteristics, Gaut said.Â
All this requires additional labor and costs, the company has said. “We are charging customers for the value we provide,” he said.
Jonathan Lyons, a FedEx spokesman, said the surcharge is needed to offset the higher costs resulting from a “surge in oversized and heavy items” that are ordered online. Changes to the company’s operations are necessary to “ensure that we continue to provide the level of service that our customers expect while responsibly managing capacity through our network,” Lyons said.
The higher-weighted parcel segment is less price-sensitive and tends to stick with their carriers. That is one reason UPS and FedEx feel comfortable expanding the surcharge, according to White. However, weights of business-to-consumer (B2C) traffic that dominate e-commerce have been rising as more manufacturers and retailers throw open their stock-keeping units (SKUs) for online purchases.
The more relevant reason is that the carriers — unlike in the lower weight bands where the provider market is more competitive — have a duopoly at the higher weights, White said. The U.S. Postal Service (USPS) is not price-competitive, and Amazon.com Inc. (NASDAQ:AMZN) is not a meaningful player in the B2B parcel segment where many of the shipments are found, he said. With the market belonging to UPS and FedEx, they could price their services accordingly, he said.
Lighter-weight shipments, those in the 4-10 pound range, still account for the bulk of B2C traffic.
