Dive Brief:

• Peak surcharges are "the new normal" for FedEx as the carrier has no expectation that e-commerce volume will slow down, FedEx Chief Marketing and Communications Officer Brie Carere told analysts on a Tuesday earnings call.
• "It will not be just for this fiscal year, but I anticipate customers to pay more for pricing in November and December moving forward," Carere said. FedEx has been dealing with high volume in its Ground network and various overseas routes during the coronavirus pandemic. Average daily package volume increased 25% year over year in the most recent quarter. The carrier put in place peak surcharges on China to U.S. airfreight routes early in the year and added surcharges on U.S. domestic SmartPost, Express and Ground packages in early June after UPS made similar moves.
• "Our FedEx Ground network has been teeming with peak-like residential volume for the past few months," said  COO Raj Subramaniam. Residential deliveries made up 72% of FedEx's total volume in the quarter ending May 31 — up from 56% the year prior. The carrier has repurposed SmartPost facilities for small or large package sortation to handle the shift and added regional sort facilities to help better route residential deliveries, Subramaniam said.

Dive Insight:

Though the surge in e-commerce sales as a share of total retail (and FedEx volume) were driven by the coronavirus pandemic keeping consumers at home, Carere said they are here to stay. "I believe that the e-commerce change is structural," she said, noting that volume of items such as furniture, other large items and high-value electronics is up, which suggests consumers are gaining comfort ordering almost anything online.

This reality led Carere to say peak surcharges are here to stay. E-commerce boosted residential delivery volume even before the pandemic; FedEx struggled to turn B2C parcel volume into profit. The operating margin for the company as a whole was down to 2.7% in the most recent quarter, from 7.4% the same quarter last year but up slightly from the previous quarter. Revenue for the Ground segment was up 20% year over year in the most recent quarter.

Surcharges are intended to help with that, though their full impact will not be visible until FedEx's next earnings release. CFO Alan Graf, however, said the company is already seeing the benefit.

"I don't know anybody's making margins in Ground like we are, not even close," the CFO said, adding that the moves the carrier has made to increase network density and improve productivity are shaking out now.

"There'll be a period of time, remember, when we continue to catch up with our sorting facilities and our capabilities," Graf said. One of these moves‚ the integration of SmartPost into FedEx Ground, will be complete by peak season, according to the company's earnings release.

The combination of the pandemic residential parcel boost and the integrated SmartPost volume has affected FedEx's on-time performance stats, ShipMatrix President Satish Jindel told Supply Chain Dive in June. FedEx's on-time delivery rate was 91% in May, compared to 95% in May 2019, according to ShipMatrix data. The carrier suspended its global Money Back Guarantee as of March 24 for all FedEx Express, FedEx Ground, FedEx Freight and FedEx Office services until further notice.

The current peak surcharges are likely to stay in place through the end of the year, according to several industry experts. Surcharges will likely roll into true peak (holiday season) and end when prices go up in January to match the level of turmoil in 2020, Glenn Gooding, president of iDrive Logistics, told Supply Chain Dive.

"What I believe they'll do is they'll run the surcharge throughout 2020 and 2021 — you're going to see a rate increase," Gooding told Supply Chain Dive in June. "That is massive, whereas the peak surcharge goes away."