Death. Taxes. The sun rising in the East. FedEx Corp. and UPS Inc. taking nearly identical pricing actions as the new year begins.
The fourth of those immutable laws reared its head again on Friday when UPS (NYSE: UPS) imposed a 6.9% general rate increase (GRI) for 2023, the largest such year-over-year hike in its history. The move came less than a month after FedEx (NYSE: FDX) had announced the exact same increase, also the largest in its history. UPS’ GRI takes effect Dec. 27, a week before the FedEx change.
The dual moves surprised virtually no one, though there was an outlier thought that UPS might leverage its perceived efficiency advantages to apply a 5.9% increase in a bid to gain market share. In the end, though, the carriers did what they’ve often done for decades: the same thing.
The simpatico actions also extend to the all-important realm of accessorial surcharges, levies for services that go beyond the basic line-haul operation. Surcharges make up 20% to 40% of a shipper’s annual parcel spend. They are also critical levers for both companies to deliver profitable revenue in a slowing macro environment.
Out of a list of nearly 40 different surcharges compiled by consultancy Shipware LLC, the carriers differ on only 12. Of those 12, most of the differentials are measured in cents.
The beat goes on when comparing the different base rates of the carriers. For example, rate increases for U.S. commercial ground services, regardless of a parcel’s weight break, are exactly the same. Rates for next-day and second-day air deliveries will increase the same amounts.
In addition, both will increase by 7.9% their ground “minimum” charges, which is the lowest price a shipper can pay to move a ground shipment, to $10.11 per piece. Shippers need to focus on increases in minimum charges, parcel experts contend, because they can neutralize the benefits of lower rates and higher discounts negotiated with the carriers.
Three-day delivery services are the one area of significant rate differential, according to Shipware. FedEx is taking a much higher increase than UPS, with FedEx’s rates being 9.8% higher for shipments weighing 31 pounds or more. The differential narrows as the weights get lighter., Shipware said.
Paul Yaussy, senior professional services consultant at Shipware, said in an article published on Tuesday in Parcel magazine that FedEx is playing catch-up on the service because UPS hiked its three-day delivery rates by 27% last year.
UPS’ rates across all weight breaks will, with exceptions such as its three-day delivery service, exceed its 2023 GRI, according to Shipware data. Prices based on distance, or zones, will be set differently. Rates on UPS’ core ground delivery services for residential and commercial customers will come in significantly below the 6.9% GRI baseline increase, according to Shipware data.
Yaussy said the short-haul rates are designed to be more competitive with the growing popularity of regional delivery carriers.
Historically, shippers have been able to negotiate away at least part of their surcharge increases. Next year may be a different story. Facing a macro slowdown in the U.S. and abroad, slowing delivery demand relative to 2020 and 2021, and pressure from analysts and investors to achieve higher margins, the carriers may resist agreeing to material surcharge discounts.
A recession could change the carriers’ mindset. However, they may be more interested in boosting the profitability of the volumes they do have instead of offering concessions to win new business, Yaussy said in the article in Parcel.
Branden Burt, director of parcel operations at consultancy TransImpact, said overall price increases could exceed 10% for some shippers, depending on the mix of their parcels. Increases on many accessorials could breach the 10% threshold, Burt said.
Many big shippers have limits, or caps, on high their rates can increase in a contract year. However, FedEx and UPS contracts may include language that erases the rate cap should increases in the Consumer Price Index (CPI) exceed a shipper’s rate cap, Burt said. As of September, the seasonally-adjusted CPI rose 8.2% over the past 12 months, according to mid-October data from the Bureau of Labor Statistics.
UPS faces a unique challenge when it begins talks with the Teamsters union this spring over a collective bargaining agreement to replace the five-year pact that expires July 31. The talks will unfold against a backdrop of labor cost inflation and stronger union leverage. Though it is clear that UPS’ labor costs will increase, the wild card is by how much and whether it will impact the bottom line.
There are also concerns that the Teamsters, under the leadership of hard-line General- President Sean O’Brien, may agitate for a walkout if the 380,000 UPS union members don’t get what they want. This may cause worried shippers to divert business to other carriers.
UPS is banking on a number of efficiency initiatives recently rolled out to offset the expected hit on labor costs. At the same time, it may decide to hold the line on base rate and surcharge increases to buffer against rising labor expenses, said John Haber, chief strategy officer at Transportation Insight Holding Co., a consultancy.
“UPS has been holding pricing very tight,” he said.