With the increase in surcharges by FedEx and UPS, competitors see an opportunity.
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Experts say that the increased surcharges from delivery giants conflict with freight discounts, but customers have options to mitigate the impact.
Published on October 15, 2024
The growing prevalence of FedEx and UPS surcharges is limiting the benefits of parcel carrier freight discounts and creating opportunities for competitors.
Parcel pricing experts interviewed by Supply Chain Dive noted that these delivery giants continue to offer favorable freight discounts to shippers in order to boost volumes amid weak demand, while adjusting and adding new surcharges to recoup profitability.
This year, FedEx and UPS have increased their fuel surcharge calculations, added surcharges in major metropolitan areas such as Chicago and San Francisco, imposed surcharges on imports through high-demand routes, and announced higher peak-season fees.
According to Paul Yaussy, Director of Parcel Consulting at Shipware, this wave of charges in a base freight discount environment means that shippers are paying an increasingly larger portion of their parcel expenses from surcharges. Previously, 25% of Shipware client’s parcel shipping costs went towards surcharges, but now it is typically around 35-40%.
Yaussy commented on FedEx and UPS: “It’s a tug-of-war; the idea is they introduce new fees, but also give you good pricing.”
These charges beyond annual rate increases by major carriers can catch businesses off guard, especially when they rely on accurate annual shipping budgets, according to Shipware’s professional services advisor Adi Karamcheti.
For example, one Fortune 100 company using Shipware felt particularly pressured after UPS added delivery surcharges in several metropolitan areas in April, which was seen as a mid-year rate increase due to its impact on the bottom line.
Karamcheti said: “How do you budget for that? How do you plan? How do you tell your boss?”
### FedEx and UPS Confident in Their Strategies
Executives at FedEx and UPS expressed confidence during earnings calls that surcharges would not deter too many customers.
FedEx Executive Vice President and Chief Customer Officer Brie Carere said in October that the recent increase in international fuel surcharges “is the right mix and the right way to ensure we are driving margin.”
Both carriers also noted that higher peak-season fees were necessary to cover rising operational costs, especially with Thanksgiving falling later this year, meaning less time to handle holiday parcel volumes.
UPS CEO Carol Tome said during a July earnings call: “When you have that volume coming into your network, you actually need to charge for it because you have to hire people and lease planes and delivery vehicles.”
However, these delivery giants also pointed out the benefits of surcharges on their per-package revenue or margins. UPS CFO Brian Dykes noted in the same call that holiday surcharges would improve this metric. FedEx disclosed in a September securities filing that increased fuel surcharges had “a significant positive impact” on its FedEx segment’s all-parcel and freight services margin.
These recent surcharges by delivery giants could also be driving further financial goals in markets where their pricing power is weaker, ShipScience founder and CEO Anthony Robinson said.
Even if the surcharges make sense, they have sparked interest in carriers other than FedEx and UPS, Robinson added.
“It seems more people are raising their hands saying, ‘Hey, what else is out there?'” Robinson said.
### Alternative Carriers See an Opportunity
Several delivery companies are looking to capitalize on shippers’ fatigue with FedEx and UPS fees.
Alternative carrier Jitsu promotes a simpler pricing method on its website, offering “all-inclusive” rates along with two fuel and signature surcharges. The company also states it does not charge residential or peak-season surcharges.
CEO Raj Ramanan told Supply Chain Dive that Jitsu has seen more volume this year than the entirety of 2023, though he noted it was unclear how much of this growth is due to shippers being attracted by its pricing approach. Nonetheless, the emerging delivery company sees FedEx and UPS’ current pricing strategy as an opportunity to strengthen its market position.
“It seems our customers and people we talk to appreciate transparency, not just from an evaluation standpoint but also a planning one,” Ramanan said.
GLS US President Steven Bergan also noted that FedEx and UPS surcharges are motivating shippers to explore alternatives.
In the current cost-conscious environment, GLS US has kept its existing surcharges unchanged in contrast with larger carriers. For example, this year’s peak-season surcharge will remain at $1.50 per residential package, the same as in 2023.
“We’re not making noise like those big companies,” Bergan said, referring to FedEx and UPS.
While FedEx and UPS’ surcharges may increase interest in alternative carriers, experts expect no significant changes in market share in the short term.
Bergan pointed out that adding new carriers increases operational complexity, and many companies are not looking to expand quickly amid economic uncertainty and an upcoming presidential election. This means they can transfer fewer additional packages to new carriers without affecting their volume-based FedEx and UPS discounts.
“When companies stop growing, they want to save on what they already have,” Bergan said.
### What Can Shippers Do?
Regardless of whether smaller carriers can impact FedEx and UPS’ market share, they remain an option for shippers looking to reduce risk from national delivery providers’ price changes, experts told Supply Chain Dive.
Shippers can get particularly low rates in short-haul transport within and around major cities where FedEx and UPS face intense competition from regional carriers.
“Some rates are as low as $4 per package,” said John Haber, Chief Strategy Officer at Transportation Insight.
To further save costs, customers should push for contract terms that require notification of any new surcharges a certain number of days before they take effect, Haber added.
FedEx andUPS customers also need to understand the characteristics of their shipped parcels, such as weight and size, and how much volume is sent to residential versus commercial addresses, according to Shipware’s Karamcheti. This information can help shippers understand final delivery costs and find better pricing opportunities. For example, carriers may reduce fees for companies sending multiple packages to the same address because it results in more efficient delivery routes.
“The second package has no additional delivery cost, which is very valuable to them,” Karamcheti said. “Fewer stops mean more money in their pockets.”
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Source: Supply Chain Dive
