Even as they grapple with declining volumes, UPS and FedEx have both announced their delivery rates will soon increase by 6.9% on average. But the full force of their changes could cost shippers even more.
How much more depends on factors like the services they use, packages they ship and the destinations of their deliveries. Customers also need to consider larger increases for longer-distance shipments, additional handling fees and higher minimum package charges to reduce the sting of the hikes on their businesses.
"You can see how that will add up to be a very, very substantial increase for many, many shippers," said Melissa Priest, founder and CEO of Alexandretta Transportation Consulting.
Rate increases support network enhancements while helping maintain high service levels, UPS said in an emailed statement. Executives for both companies have pointed to inflationary pressures as another reason for a larger rate increase than the year before.
But shippers are also grappling with a difficult macroeconomic environment, adding further incentive for them to push back against rate increases. With volumes declining from the dizzying highs of 2021, it’s possible that carriers will become more amenable to negotiated discounts.
Here's what parcel shipping experts say customers should keep in mind when evaluating how the changes will impact their bottom lines.
Few differences between UPS, FedEx rate changes
UPS and FedEx have instituted nearly identical rate hikes across services and weight classes, according to an analysis by parcel and LTL spend consultancy Shipware.
Carriers’ base price increases don’t stray far from each other
|Next Day Air||7.68%||7.55%|
|2nd Day Air||7.64%||7.64%|
|3 Day Select|
Source: Shipware analysis. Note: UPS’ increases take effect Dec. 27, 2022. FedEx’s increases take effect Jan. 3, 2023.
The similarities between the two aren’t a coincidence, said Kevin Miller, VP of data insights at logistics software provider Sifted. If one of the carriers decided to implement lower rate hikes than its competitor, its network would be overwhelmed by a surge in demand that would hurt service levels.
"They will always be pretty similar, because right now, one of them can't absorb significantly more clients than the other one can," Miller said.
Surcharges add further cost pressures
The 6.9% average increase doesn't account for surcharges that can pile onto the final shipping cost. These include extra fees for residential deliveries, handling oversized packages and delivering to rural destinations — many that will become more costly when the new rates take effect.
Shippers should especially stay on top of fuel surcharges, as that applies to every package regardless of size or final destination, said Micheal McDonagh, president of parcel at AFS Logistics. The fuel surcharge percentages are subject to weekly adjustments by both carriers.
McDonagh’s colleague, AFS Logistics Chief Analytics Officer Mingshu Bates, provided one example to illustrate the extent of the surcharges: The cost to transport a surfboard from New York to Malibu, California, using FedEx's 2 day shipping service would be $153.77 this month, but will total $173.28 come January, according to an AFS calculation.
Longer-distance shipments to see greater increases
FedEx and UPS' rate hikes particularly punish shippers that need goods moved over longer distances.
Deliveries that fall under higher shipping zones will see greater increases. Rates for shipments spanning zone 5 and above will increase 7.8%, while rates for shipments in zone 4 or less will see a 6.6% average increase, Miller said.
One way shippers can reduce their exposure to higher-zone deliveries is to fulfill orders from facilities closer to the end customer.
"Whether you use 3PL companies or fulfillment center companies, adding additional warehouses is more important because people are so interested in getting their products faster, on time and for cheaper," Miller said. "The only way to do that is to expand your network."
Shippers who are able to trim the distance on deliveries will benefit from the ongoing trend of carrier diversification. Increasing competition from regional delivery companies, which focus on shorter-distance shipments, led to less drastic price increases in the shorter zones, according to Priest.
"For UPS and FedEx, it would be wise for them not to dismiss that impact and that is what you see in the pricing here," Priest said.
Higher shipping costs to rural destinations
FedEx is instituting a new $13.25 per package surcharge for domestic package shipments going to designated rural ZIP codes in the contiguous U.S.
This follows UPS’ announcement of a similar surcharge last year. For UPS, its per-shipment remote area surcharge will increase to $13.05 in the contiguous U.S., effective Dec. 27. These charges can particularly sting shippers who often ship to rural locations, such as merchants selling hunting gear, Priest added.
More than 3 million people in the U.S. are in areas covered by FedEx's new remote surcharge, according to an analysis by independent parcel consultant Nicholas Fanelli, former global head of logistics at Gelato.
To mitigate these delivery area surcharges, Fanelli said in a LinkedIn post that online retailers should explore alternative carriers for delivery to the affected ZIP codes that don't have these surcharges. Shippers can also negotiate the published fees with the carriers or pass the surcharge cost onto affected orders.
Demand is cooling — will relief for shippers follow?
Experts note that shipping rates are negotiable, but how amenable the delivery giants will be to concessions is up for debate.
Since the COVID-19 pandemic caused a surge in home delivery volumes, demand hasn't been an issue for the carriers. Ground shipping rates have climbed to record highs as a result, according to the Cowen/AFS Ground Parcel Freight Index. Discounts are easier to come by when FedEx and UPS are pursuing volume growth more so than higher profits, Bates said.
Per-package ground parcel rates expected to hit all-time high in Q4
But cooling demand reported by both carriers in their most recent quarters suggests that the pricing pendulum may be swinging back in shippers' favor.
UPS, for example, is open to passing on the savings generated from its in-house productivity initiatives to its customers, CEO Carol Tomé said on an earnings call Tuesday. Although UPS has prioritized increasing per-package revenue to expand margins under Tomé, the company will balance that strategy with its productivity efforts to fuel growth going forward.
"In fact, as we continue to drive productivity inside of our business, we're willing to give some of that back to our customer through a revenue share, because why not?" Tomé said. "If we can increase delivery density…we'll give some of that back, because we should."
Editor's note: This story was first published in our Logistics Weekly newsletter. Sign up here.
Correction: This story has been updated to reflect corrections Shipware made to its original analysis of UPS 3 Day Select shipping rates, which had been based on incorrect data. An earlier version of the story also included a quote based on that analysis that was no longer relevant.