Accessorial charges, defined as add-on fees imposed by carriers to cover their costs beyond basic pickup and delivery services, are a fact of life in freight transportation. But nowhere are they as prevalent, meaningful and contentious as in the parcel-delivery industry.
Parcel carriers have long assessed fuel surcharges, a practice that is common across the modes. That is where the similarities end, however. In parcel, fuel isn’t considered an accessorial anymore, even though for years it was the only extra charge the carriers levied. Today, FedEx Corp. (NYSE:FDX) and UPS Inc. (NYSE:UPS) both list about 100 accessorials. They include, among other things, residential delivery surcharges, delivery area surcharges, extended delivery area surcharges, charges based on a parcel’s dimensions rather than its actual weight, additional handling fees, oversize fees and second-delivery fees. The list is seemingly endless.
With delivery demand expected to remain extraordinarily strong as more retail consumption moves online in the wake of the COVID-19 pandemic, parcel carriers are unlikely to throttle back on them. There is no doubt that the add-ons are growing in number, cost and complexity. Accessorials have no price caps, follow no annual timetable and can be difficult to challenge once they’re in place.
Carriers contend that the charges are needed to offset their elevated costs to serve, and to provide specialized pickup and delivery solutions that their customers want. The increase in deliveries of large, nonconveyable items ordered online has put pressure on the carriers’ cost structures, they maintain. Without accessorials, service levels and solutions that many shippers expect could not be offered because they wouldn’t be profitable, according to the carriers.
Shippers and parcel consultants, a coterie of specialists who work with shippers to better manage their parcel spending, acknowledge the validity of the carriers’ arguments. But their tolerance only goes so far. Shippers have complained for years that the carriers’ contract language governing accessorials is tantamount to playing against the house, and that frequent and random changes in requirements and costs make it hard to plan shipping expenses.
It is not surprising for accessorials to account for 40% of the typical delivery charge, a ratio that could easily rise if left unchecked, according to consultants. In some cases, especially for heavier, outsized commodities that require more labor-intensive deliveries, the cost of parcel accessorials is greater than the base rate. By contrast, accessorials in the LTL industry — which has a similar delivery profile — is about 5% of the typical total bill.
The role of accessorials came into sharp focus this past holiday season, when seasonal demand combined with the pandemic-related spike in online activity drove volumes to unprecedented levels. So-called peak delivery surcharges, aimed mostly at high-volume shippers, hit unheard-of heights of $5 per package.
Most concerning for shippers is that FedEx and UPS are keeping peak surcharges in place year-round, albeit not at such stratospheric levels. The message to parcel shippers is that, in the post-COVID-19 era the term “peak season” no longer has significance. The carriers’ actions have led many shippers to claim that the surcharges are designed to fatten the carriers’ bottom lines. Given that U.S. parcel demand is likely to continue to exceed capacity and that the carriers are profit-making entities, such concerns are not without foundation.
Fighting back
There is no one solution to managing accessorial charges. However, a combination of strategies can be effective, consultants said.
A good first step is to partner with a third-party audit company. It will audit invoices to identify incorrect charges, request refunds on behalf of the shipper for incorrect charges and provide real-time reporting to track surcharge expenses. Aside from providing auditing services, consultants can analyze a company’s parcel shipping profile and budget, and advise ways to mitigate the impact of accessorials. Consultants said they spend more time on accessorials than any other issue.
Everything is negotiable, and accessorials are no exception. If a carrier values the business, it will work with shippers to rein in the add-on charges, consultants said. Spreading around the spend to players like the U.S. Postal Service, which imposes very few accessorials, and regional parcel delivery companies whose surcharges are generally less abundant and less costly, consultants said.
Accessorials are also a way to modify shipper and consumer behavior. Parcel carriers don’t like sending a driver and a truck back to a residence any more than the consumer who has missed the delivery. From digital tools that enable receivers to direct package deliveries to multiple “access points,” generally commercial locations which allow drop-off and pickups, shippers and their customers have various options to avoid residential delivery surcharges. Another common accessorial charge, which is levied on parcels that are outside what the carriers consider the normal parameters for a shipment’s dimensions, can be mitigated by reducing carton sizes, consultants said.
FedEx and UPS strive for profitable revenue. They also compete vigorously, regardless of the duopoly they’ve long held on business-to-business (B2B) traffic. It is common for the carriers to slash base rates to big shippers if it results in market share gains. However, rate discounting can compromise their ability to generate profitable revenue. So, they increasingly turn to accessorial charges to compensate.
An apt analogy of the concept of accessorials is the construction of a house. The builder utilizes its volumes to lower the costs for items such as fixtures or upgrades. Most likely, it has also chosen items that require easy installation due to added efficiencies and cost savings. However, say the homeowner doesn’t like the faucet or wants to upgrade to granite counters. Every upgrade or change takes resources and time for the builder to hunt down and install the upgrades. These additional requests will cost extra.