More prevalent FedEx and UPS surcharges are limiting the upside of the parcel carriers’ shipping discounts and creating opportunities for competitors.
The delivery giants are continuing to offer shippers lucrative shipping price cuts to grow volume in a weak demand environment while tweaking surcharges and adding new fees to claw back profitability, parcel pricing experts told Supply Chain Dive.
This year, FedEx and UPS have increased their fuel surcharge calculations, added fees in major urban areas like Chicago and San Francisco, implemented surcharges on imports through high-demand shipping lanes and announced higher peak season fees.
The wave of fees in a discount-heavy environment for base rates is leading to a larger share of shippers' parcel spend coming from surcharges, according to Paul Yaussy, Shipware's director of parcel consulting. Twenty-five percent of parcel shipping spend for Shipware clients used to go toward surcharges, but that number is typically 35% or 40% today, he said.
"It's kind of a pull and a tug, in the sense that they're introducing new charges, but then giving you great pricing on the flip side," Yaussy said of FedEx and UPS.
The emergence of fees outside the regular cadence of the major carriers' annual rate increases can catch companies off guard, especially when they're counting on their yearly transportation budgets to remain accurate, said Adi Karamcheti, a consultant for professional services at Shipware.
For example, a Fortune 100 company using Shipware felt particular strain after UPS added delivery surcharges to several urban areas in April, arguing the change acted as a mid-year rate increase due to its bottom-line impact.
"How do you budget for that? How do you plan for that? What do you tell your boss?" Karamcheti said.
FedEx and UPS have faith in approach
For their part, FedEx and UPS executives in earnings calls have expressed confidence that surcharges won't scare off too many customers.
FedEx EVP and Chief Customer Officer Brie Carere said in October that a recent international fuel surcharge increase "is the right mix and the right approach to make sure that we are growing our yield."
Both carriers also have noted that higher peak season fees are necessary to cover increased operating costs, particularly with this year’s later Thanksgiving date meaning fewer days to handle the holiday package onslaught.
“When you have that kind of volume flowing to your network, you actually have to charge to service them well, because you have to hire people and lease aircraft and delivery vehicles, so on and so forth,” UPS CEO Carol Tomé said on a July earnings call.
But the delivery titans have also noted the benefits surcharges bring to their per-package revenues, or yields. UPS CFO Brian Dykes said on the same call holiday surcharges should improve that metric. FedEx disclosed in a September securities filing that increased fuel surcharges brought “a significant positive effect on yields across all package and freight services” for its Federal Express unit.
The delivery giants' recent surcharges also could be a push to further financial goals in a softer market where they have less pricing power, said Anthony Robinson, founder and CEO of ShipScience.
Even if the added fees are justified, they are piquing interest in carrier options outside of FedEx and UPS, Robinson added.
"It seems that I'm having more and more people raise their hand and say, 'Hey, what else is out there?'" Robinson said.
Alternative carriers see an opportunity
Several delivery providers are looking to capitalize on shippers' fee fatigue with FedEx and UPS.
Alternative carrier Jitsu touts a more straightforward approach to pricing with an "all-in" shipping rate along with two surcharges for fuel and signatures on its website. The company also says it doesn't levy residential delivery or peak surcharges.
CEO Raj Ramanan told Supply Chain Dive that Jitsu has already added more volume this year than in all of 2023, but he added that it's unclear how much of that growth is coming from shippers drawn to the company’s pricing approach. Still, the delivery upstart views FedEx and UPS' current pricing strategy as an opportunity to strengthen its foothold in the market.
"It seems that our customers and the folks we're talking to appreciate transparency just from an evaluation and from a planning standpoint," Ramanan said.
Steven Bergan, president of delivery provider GLS US, also says FedEx and UPS surcharges have incentivized shippers to explore alternatives.
In the current cost-conscious environment, GLS US is holding steady with its existing surcharges, providing a contrast to the larger carriers. For example, its peak season fee will remain at $1.50 per residential parcel this year, mirroring its 2023 amount.
"We held back from causing as much noise as those guys," Bergan said, referring to FedEx and UPS.
While FedEx and UPS' added surcharges could increase interest in alternative carriers, experts don't expect a significant shift in market share anytime soon.
Beyond the operational complexities of adding new carriers, many companies aren't expanding as fast this year amid uncertainty with the economy and the upcoming presidential election, Bergan noted. That means there are fewer additional packages they can divert to new carriers without risking their volume-based FedEx and UPS discounts.
"When companies are not growing, they're looking to save money on what they've got," Bergan said.
What can shippers do?
Whether or not smaller carriers can put a dent into FedEx and UPS' market share, they are still one of several options shippers have to reduce exposure to pricing changes from national delivery providers, experts told Supply Chain Dive.
Shippers can secure particularly low prices for short-distance shipments in and around large metro areas where FedEx and UPS face heavy competition from regional carriers.
"You're talking $4 a package on some of this stuff," said John Haber, chief strategy officer at Transportation Insight.
For further savings, customers can push for contract clauses that specify if any new surcharges are created, they must be notified within a certain number of days for it to take effect, Haber added.
FedEx and UPS customers also need to understand the characteristics of the packages they ship, such as weight and size, and how much volume is going to residential addresses versus commercial locations, Shipware's Karamcheti said. This information can give shippers a sense of their final delivery costs so they can uncover opportunities for better pricing. For example, carriers may provide reduced fees to companies that send multiple packages to the same address, as they lead to more efficient delivery routes.
"That second package has zero delivery costs attached to it, and that's extremely valuable to them," Karamcheti said. "There's fewer stops. That's more revenue in their pockets.”
