Dear Santa: Could I please not have some more delivery surcharges?

The annual pre-holiday ritual of FedEx Corp. and UPS Inc. slapping their customers with higher peak-season residential delivery surcharges is upon us. This year, however, the increases are being force-fed into an economic environment that looks somewhat different than over the past couple of years.

Unlike the pandemic-fueled delivery frenzy of 2020 and ’21, demand during the ’22 peak is expected to be down from the prior two years due to higher inflation that’s curbing economic activity. Still, that hasn’t stopped the mega-carriers from pushing even higher holiday surcharges on customers.

The carriers will argue with credibility that their increases are warranted because inflationary pressures during this peak are much more of an issue than in the previous two. However, parcel shippers, hardly immune from their own inflation challenges, are reviewing their anticipated holiday volumes and may be wondering how much envelope is left for the carriers to push.

Nate Skiver, founder and president of parcel consultancy LPF Spend Management, said that with package-delivery growth slowing to near-stall speed, shippers should ask how the carriers can “justify these excessive surcharges” and “how long will [shippers] continue to pay them?”

Mark Taylor, director of parcel consulting at enVista, said the carriers have reached the “point of overstep” with surcharge escalations. “Shippers know that volumes are softening, and there is a statute of limitations on how long they’re going to put up with COVID-level pricing,” Taylor said.

The U.S. Postal Service is well aware of how the peak season is about to play out. In a blast email distributed Wednesday, the Postal Service highlighted its viable delivery option status because it is effectively bereft of surcharges. It titled the email “What you see is what you pay” and asked rhetorically “is your shipping company taking you for a ride?”

Carrier executives may hear the backlash, but it may not influence their behavior or strategies. FedEx (NYSE: FDX) and UPS (NYSE: UPS) have become increasingly reliant on year-round surcharges to profitably boost their respective revenues per-package. This in turn curries favor with analysts and investors. 

Theoretically, surcharges can be discounted or even removed during contract negotiations. But that is not easy to do. Shippers can take their business elsewhere. However, they risk losing rate discounts and other carrier perks if their business drops below specific revenue thresholds.

It is unclear how much available capacity resides with regional parcel-delivery carriers to take on business from the disaffected customers of the big boys. Last year, all regional delivery carriers maxed out fairly early during the peak cycle. 

Rob Martinez, president and CEO of Shipware LLC, a consultancy, said FedEx and UPS will continue to ratchet up the quantity and cost of delivery surcharges into 2023 because they are a proven method to boost margins. The carriers’ implementation of fuel surcharges, which has become a particular bone of contention with shippers, will move further away from being a traditional pass-through and more to what has become “pure EBITDA arbitrage,” Martinez said.

FedEx and UPS will announce general rate increases of 6.2% for 2023, Martinez predicted. That would be higher than the historical annualized range of 4.9% to 5.9%.

Mirror images

Unsurprisingly, the FedEx and UPS peak surcharges mirror each other, though there are some variations. Residential delivery levies will range from $1.25 to $7 per parcel depending on how weekly peak volumes stack up to the volumes that a shipper generated in June. Surcharges will be calculated each week, which consultants said will add more complexity to shippers’ lives. One difference is that FedEx has imposed a two-week gap between when its surcharges are calculated and when they are applied.

Peak surcharges will kick in Oct. 30 or Oct. 31, depending on the carrier. Effective Sept. 7, FedEx will impose its annual charges for handling shipments that don’t meet the carriers’ shipping profiles, are out of their dimensional requirements or considered unauthorized because the carriers don’t want to process them. However, the larger and more meaningful charges take effect at the start of October within 24 hours of each other, and are similar almost to the dollar.

The year-over-year increases, again unsurprisingly, will fall on shippers with the largest peak traffic. For example, FedEx customers with volumes at the low end of the spectrum will pay only 10 cents more in surcharges than last year. At the other end, the highest-volume FedEx shippers will pay $1 more in surcharges than in 2021. 

Shippers with volumes that fall somewhere in the midpoint could get off with about a 25 cent per package increase depending on their precise weekly peak volumes and how they compare with similar volumes in June.

The story is not quite the same at UPS, but it’s within hailing distance. Shippers with relatively low volumes will absorb a 10 cent per-package surcharge increase over last year’s levels. The increases will escalate to as high as $7 per parcel for the highest volume shippers using the carrier’s air delivery service. That amounts to a rise of 85 cents per parcel over 2021 levels.

The dollar-for-dollar increases are not the end of it, though. This year, surcharges will be imposed on shippers tendering total weekly volumes of 20,000 packages — the definition of “total” depends on the carrier. Last year, the threshold was 25,000 packages. 

What’s more, the carriers have changed the volume parameters for specific surcharges. The alterations are not in the shippers’ favor.

At both carriers, for example, the highest surcharges last year applied to shippers whose average weekly peak volumes were 500% above the same weekly volumes during February 2020, the last month of normal pre-pandemic shipping activity. This peak, the high-end thresholds have been reduced to 400% above volumes tendered during June 2022. By lowering the threshold, the carriers will catch more high-volume shippers in their most expensive surcharge nets, according to analysts.

FedEx and UPS have also changed the time frames that govern what they call “peaking factors.” For the past two years, the carriers have used February 2020 volumes as their “baseline” calculation, meaning peak surcharges would be applied based on how many parcels were tendered each peak week over the weekly volumes in 2020. 

The new baseline month could actually benefit shippers that tendered large volumes during  June. As it did last year, UPS incorporated a twist: Should average weekly volumes during tSeptember be less than 80% of the same weekly volumes during June, then September would become the new baseline month from which surcharges would be applied.

The carriers adopted the “peaking factor” mechanism to smooth out weekly volume spikes and ensure they have enough labor, equipment and infrastructure to meet delivery commitments. It also became a way to apportion most of the cost burden on the shippers that used their services the most.

However, the calculations, combined with the intricate supporting fine print, has caused a crisis of clarity among shippers. Based on a long string of LinkedIn posts on Wednesday, that is by design. As one put it, “There is money in confusion.”

Source: freightwaves - Dear Santa: Could I please not have some more delivery surcharges?
Editor: Mark Solomon