Are FedEx and UPS Sending Mixed Signals to the Market with Their Latest Surcharge Announcements?
FedEx threw small parcel shippers a curveball recently by increasing several Peak Surcharges. We did a Q&A with EVP of Operations at Transportation Impact, Brian Byrd, to understand the coming changes and get his perspective on what may be behind them. Coming this soon after UPS’s similar announcement from earlier in May, it could be a sign that the recent good times for the two largest small parcel carriers will be short-lived.
View the video interview here.
First, below is a breakdown of the surcharges as detailed on the carrier’s website.
Question: What are the basic elements of the announcement FedEx shippers need to make note of?
Brian Byrd: It states that effective 6/21/21, the Peak Surcharges already in place for Residential packages, Additional Handling (AHS) packages, and Residential packages in Ground Economy (formerly known as SmartPost) are increasing. The increases are significant, with AHS going up 17%, Ground Economy 33%, and Peak Residential 100%. There is no increase to the Oversize Surcharge, but it does remain in place.
Also interesting, and a word of caution for shippers, is that FedEx’s own email to customers (see below) about the surcharge increases only included language stating that the FedEx Peak Additional Handling was changing. There’s no mention of the other increases, and we’ve confirmed with several customers that they initially overlooked them because of these omissions.
Question: Figures aside, what else makes this announcement notable?
Brian Byrd: This is one in a series of Peak announcements from both UPS and FedEx since the start of the pandemic for both domestic and international packages. At first, FedEx labeled them as “temporary” but dropped that distinction in January of this year. Clearly, many residential deliveries are a central target of the surcharges. And packages requiring Additional Handling have seen more than their share of extra surcharges the past few years both through mid-year announcements and in annual GRIs. The following chart shows this history.
Question: What else could FedEx and UPS be signaling with the surcharges?
Brian Byrd: FedEx commented in a recent earnings call that peak charges were in the plans as part of FedEx’s efforts to improve margin quality, so the announcement is not a huge surprise. At the same time, the carriers are giving some mixed signals about how well their businesses are doing right now. Record earnings (including profits) and bringing back partial service guarantees seemed to be very favorable signs that the carriers were performing well and Peak Surcharges were beginning to sunset. But with these Peak Surcharge increases, it seems to tell the opposite story.
Historically, the carriers would take advantage of their once-a-year opportunity to level-set most of their surcharges and fees through a GRI. As the chart shows, that dynamic is changing because volatility in the marketplace is something FedEx and UPS are attempting to manage throughout the year. And as inflation fears have entered the picture, as well as concern over capacity, operating costs have become even more of a moving target for them. So despite blow-out earnings, solid profit margin, rising prices, and the ability to control costs, the carriers are still looking for opportunities to pad margins even more.
What Should Shippers Do Now?
At best, the carrier increases show the small parcel industry is not out of the woods yet regarding the impact of the pandemic. In the short term, shippers need to understand how this announcement from FedEx affects their costs. At worst, shippers need to prepare for more fees and surcharges as the carriers struggle with inflation and capacity issues.
Regardless, it is always important to make sure your company’s carrier service agreements and rates are the best they can be. Contact firstname.lastname@example.org for a no-obligation analysis of how all the year’s increases have impacted your rates and some expert advice on how you can optimize your entire small parcel operation.