With FedEx GRI in books, ball now in UPS’ court

In its 116-year history, UPS Inc. has proved very adept at skinning the parcel-delivery cat. That reputation for resilience will be tested again.

A new five-year contract with the Teamsters union, ratified by the union’s rank-and-file Aug. 22, imposes a significant cost burden on UPS (NYSE: UPS) during its first year. The initial payout, which has been estimated at an 8%-9% increase over the prior contract’s most recent levels, is retroactive to Aug. 1.

UPS will try to extract higher prices from its customers to recoup those higher costs, amid a cycle of slowing demand for parcel delivery services and increasing competition from regional carriers and parcel consolidators. At the same time, it is trying to recover traffic that skittish shippers diverted to rivals during the noisy pre-contract negotiation process, as well as win volumes that shippers were originally expected to tender but subsequently pulled back from out of an abundance of caution.

UPS must also respond to rival FedEx Corp.’s (NYSE: FDX) announcement this week of a 5.9% noncontract rate increase — known in the trade as “general rate increases” — on its 2024 FedEx Express and FedEx Ground services. That is 100 basis points below the record 6.9% rate hike that both carriers imposed in 2023.

Tariff rates serve as a benchmark for the contractual agreements that dominate the parcel industry. The prices that customers actually pay will vary widely depending on multiple factors. For example, rates on certain shipments may exceed 5.9%, while rates on others may drop below that threshold, thus neutralizing each other and resulting in a 5.9% overall increase. Delivery surcharges, which have grown in number and cost, will likely take up many shipper rates by 10% year on year, said Branden Burt, director of parcel operations for consultancy TransImpact LLC.

With current inflation rates abating over 2022 levels, FedEx’s lower GRI threshold could not have been all that much of a surprise. Still, the timing of the move left some wondering if FedEx was sending a shot across the bow at UPS and if it was intent on keeping UPS’ business that came its way in the months leading up to the contract’s ratification.

In a research note, Ken Hoexter, analyst at Bank of America, said that FedEx appears “poised to set a market ceiling in the global integrator sector, potentially limiting UPS’ ability to offset steep year 1 Teamster pay increases” in the contract.

Ronald Liebman, partner and head, transportation, logistics and supply chain management group for the law firm McCarter & English LLP, said it is “more likely” that UPS’ GRI will exceed FedEx’s because of the cost pressures emanating from the Teamsters contract.

When calculating its GRI, UPS will need to balance its higher cost to serve with concerns that it may alienate shippers it is trying to win back. Under current market conditions, it will be difficult for UPS to move much above FedEx’s GRI, if it can at all. Nate Skiver, head of consultancy LPF Spend Management LLC, said stagnant volumes don’t justify it. Burt, who forecast a 5.9% increase for FedEx, expects UPS to match FedEx in part because decelerating inflation makes anything above that threshold implausible.

Scott Lord, a former UPS executive who now runs Strategic Growth Advisory LLC, a consultancy, expects UPS to clock in with a 6.9% rate increase in part because tight capacity gives shippers little leverage. That view runs counter to estimates from SJ Consulting, another consultancy, that daily capacity currently exceeds 110 million parcels while daily demand is a little more than half that.

UPS is highly skilled at growing per-package revenue without straight rate hikes and will no doubt leverage those capabilities to build profitable revenue absent a sky-high GRI, experts said. UPS often ties shipper discounts to strict revenue commitments, an approach that Skiver said effectively locks in customers for the duration of a contract. Skiver also said that he expects UPS to be “selectively aggressive” in order to regain large shipper business, but that it won’t fully open the spigots just to fill the network. “It’s not their approach,” he said.

In addition, as UPS gradually parts ways with Amazon.com Inc., its largest customer but which generally tenders lower-yielding traffic, it will replace that business with higher-margin traffic from small and midsize (SMB) customers, Skiver said. “This affords UPS the flexibility to backfill Amazon revenue with a combination of high-yield volume from SMBs and ‘aggressively discounted’ enterprise retailer volume,” Skiver said. While UPS has much ground to cover to replace lost revenue and cover increased labor expenses, “I don’t think they need to do it through a higher GRI,” he said.

Lord said UPS will continue to work toward improving the profitability of its relationships with large shippers. “I am sure that UPS has been either removing rate caps” — which are maximum allowed annual rate increases allowed under contract — “or increasing what the caps are,” Lord said. Traditionally, the rate caps have been in the 3% range, but Lord surmised they are hitting the 4% range or higher. 

UPS is also extremely proficient at increasing surcharges to cover segments of its network that have higher costs to serve, such as residential deliveries, Lord said. In addition, UPS will tout its reputation as a premium service provider to convince shippers that the company offers a superior value proposition to FedEx, he said.

UPS declined comment for this story. Around mid-September, it is expected to hold an in-depth analyst meeting to discuss the contract’s impact. In a statement, FedEx said “this year’s adjustments reflect our intent to support our customers by continuing to deliver outstanding service at competitive rates.” FedEx will provide more detail on its pricing moves on Sept. 7.

In its GRI announcement, FedEx said it would also raise rates on its Ground Economy product but declined to be specific. Ground Economy is designed to handle lightweight, non-urgent parcels at low rates. Because it competes with UPS’ SurePost product managed in conjunction with the U.S. Postal Service’s last-mile delivery network, those changes will be keenly monitored, especially since language in the Teamsters contract calls for diverting as much as 50% of SurePost volumes from the Postal Service to UPS Teamster drivers by the end of the contract.

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