Making Sense of the New Peak Season Surcharges

Shippers need to be aware of recent developments with small parcel rates. UPS, and to a lesser extent FedEx, have announced “Peak Season Surcharges” that are raising the cost of shipping during the key holiday shipping period later this year.

Who is affected?

The intended target of the surcharges is clearly ecommerce retailers, with the focus of the surcharges being on residential deliveries and oversized deliveries during peak holiday shipping days. However, shippers who are not online sellers and are not affected by the holiday season will still be hit with the same surcharges.

Commercial shippers (non-residential) will likely feel the greatest impact of the changes to dimensional pricing. This is the effect of the carriers looking to keep large, odd-sized shipments out of their networks during this busy period.

Here are the highlights:

  • UPS has announced Peak Season Surcharges that increase costs for residential deliveries and dimensional (oversized) shipments during this period.
  •  FedEx has only announced surcharges that affect dimensional shipments — there are no changes to residential delivery rates.

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UPS

Although the UPS announcement tries to minimize the impact of the surcharges (read the full version here), the new Peak Season Surcharges will increase costs significantly for many lanes and sizes of shipments. It may also signal the start of major changes for the small parcel marketplace.

UPS is defending the surcharge by saying it is a necessity to maintain good customer service during the holidays: “We’re focused on helping our customers achieve success during some of their most important selling seasons,” said Alan Gershenhorn, UPS Chief Commercial Officer. “With the new peak charge, per-package costs for many shipments will only marginally increase during this very busy time of the year. For example, a five-pound UPS Next Day Air® package shipped from Atlanta, GA, to a residential address in Philadelphia, PA, will increase about one percent, compared to non-peak shipping times.”

You can see the complete surcharge charts here.

Here at TI, we do not feel this paints an accurate picture of the impact. Here is another example from our own analysis:

A 1-pound, zone 2 shipment that moves 3 Day Select will see its base price rise from $9.90 to $11.07, an increase of 9.8 percent. Of course, the more expensive the package, the less the percentage increase will be, but the 5 lb. NDA shipment from Atlanta to Philly UPS referred to in its news release is not indicative of the bigger picture.

The surcharges may also be a sign that UPS lacks confidence in its delivery network to handle the inevitable spike in volume and may serve as a not-so-subtle attempt to punish Amazon. Regardless, it’s obvious that UPS is attempting to position itself for the future. Right or wrong, UPS is perceived to be the better option for ground shipping compared to FedEx (which is how most ecommerce orders are shipped).

UPS has also indicated shippers should expect additional announcements prior to Sept 1st. This is rumored to include changes affecting SurePost and some international import lanes.

FEDEX

FedEx surprised the industry by NOT following suit with residential surcharges of its own, but did add a similar dimensional component.

According to FedEx’s website, surcharges for those three categories of packages during the holiday season are as follows:

  • Additional handling: $14 (normally $11)
  • Ground unauthorized: $415 (normally $115)
  • Oversize: $97.50 (normally $72.50)

Here is a link to a complete list of FedEx’s fees.

One reason we feel this foretells greater change for the market is that these types of surcharges are something both companies have been signaling for a while. This, from a recent article in DC Velocity:

Frederick W. Smith, FedEx’s founder, chairman, and CEO, spoke bluntly about the profitability problem last December during the company’s quarterly analyst call, acknowledging that there are e-commerce shipments it doesn’t make any money on. T. Michael Glenn, FedEx’s number-two executive until he retired at the end of 2016, said on the call that FedEx had “discontinued relations with a few customers” during the peak holiday season because their shipping profiles didn’t align with the company’s objectives of volume expansion and yield improvement.

Our perspective is that FedEx has more confidence in its delivery network and, as a result, feels better prepared for the upcoming peak season. Or, it could be it is using this as a chance to win over frustrated UPS customers. FedEx’s ground network is smaller, so there is less volume and risk to the company during this period.

Conclusion:

There is a precedent for this type of surcharge in logistics — Peak Season Surcharges (PSS) are common in ocean container shipping. But that’s an industry overrun with countless other surcharges, making it nearly impossible to calculate a shipping rate accurately. This is not a direction that the small parcel industry wants to follow.

The surcharges being implemented by both companies are a bold move, especially with so much attention currently being placed on the “final mile.” Competition is growing exponentially for UPS and FedEx from companies and startups focused on better servicing the B2C residential delivery markets. These extra fees may be short-sighted considering how crowded the marketplace is destined to become.

The additional burden on both companies’ networks during peak holiday shipping is unquestionable. As the ecommerce marketplace evolves, how shippers and carriers manage customer deliveries will change as well. These types of surcharges will become an annual discussion, as all parties are still trying to understand the fast-changing ecommerce marketplace. In the end, however, these issues indicate new growth and opportunities for the entire industry.

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