COVID-19 Is Making Delivery More Expensive and Harder for FedEx and UPS
Since the start of the COVID-19 outbreak, the small parcel shipping industry has been front and center to its impact. In addition to creating shifts in how carriers must operate their delivery networks, the coronavirus has impacted consumer demand and ramped up the trend[JM1] in ecommerce buying.
This has created a shift in the types of deliveries the carriers are having to make. And most of the changes are not positive ones. For example, on a recent earnings call, FedEx announced its current Domestic Residential volume is 72% of total packages, whereas it was 56% at this time last year. With unprecedented internal delivery network struggles, small parcel carriers are being asked to do more than ever, while still providing reliable, top-quality service.
The Impact on Shippers’ Costs and Service
One way UPS and FedEx have dealt with the impact of COVID was to suspend their money-back service guarantees in March. Just like that, shippers no longer had a right to a refund for packages that failed to arrive within the designated delivery window. While some people believe this suspension is only temporary, there’s no end date in sight for now.
The suspension was driven by the severe challenges both carriers’ operating networks have had to work through. For example, both FedEx and UPS ceased additional delivery attempts when the economy first shut down; it is estimated that FedEx had around 2 million packages sitting in unutilized trailers for a couple of weeks. This stalled FedEx’s organic growth because there was little capacity to bring in new business. It was reported that at one point, a two-week implementation of rates and pickups was the minimum time to process new business for what was an otherwise “turnkey” operation.
Both companies also began to enforce Peak Season Surcharges (PSS) in June. Typically, implementing a PSS is a tactic that’s used around the holidays during “peak” shipping season to help mitigate the growing costs of large spikes in volume, so the June timing was unusual. However, some easing on international surcharges has started, which may be a good sign.
Carriers are noticing big changes in the types of deliveries that are moving through their networks due to the recent shift in consumer demand toward online retail. Because FedEx and UPS have networks designed to maximize the number of shipments and minimize the number of stops, both companies would much rather make commercial deliveries. Also, transporting products to businesses typically involves smaller, more consistent package sizes, so commercial deliveries tend to mesh better with the automated sorting and handling processes both carriers use.
Now carriers are having to work with lighter-weight packages that require frequent stops and increased mileage in relation to decreased delivery revenue. In an effort to adjust to this transformation and mitigate additional operating costs, carriers are clearly relying on PSS.
The demand for express shipping services, like Overnight Air, has similarly changed. Shippers are now choosing slower, more cost-effective options over more expensive premium alternatives post-COVID. Express services once accounted for 17% of packages, but now equates to as little as 11%. Many blame the suspension of money-back service guarantees for the decline.
Shippers should plan on carriers announcing future fees and surcharges related to residential packaging, given the fact that these kinds of deliveries go against their fundamental operating efficiency. Also mentioned on the recent FedEx Earnings call is that the carrier plans on instituting more Residential Peak Season Surcharges by the end of the year.
Other new potential surcharges and fees shippers should watch for include services related to SurePost/SmartPost, Delivery Area Surcharge (DAS), and large/oversized packages. As always, shippers need to make sure they understand how future carrier announcements will affect service performance and costs. Even though it may take a little extra work on your part, it’s always necessary to pay attention to carrier behavior as a way to protect your company’s margins.