Dive Brief:
- Ground parcel delivery costs reached a record high in Q1, although pricing discounts from carriers softened the blow, according to the TD Cowen/AFS Freight Index.
- The portion of the index tracking ground parcel rates per package in Q1 was 29.5% above its January 2018 baseline, up from 25.2% for Q4. Annual rate hikes taking hold and fuel surcharges not declining as sharply as fuel price indices over the past year contributed to the higher costs.
- Average ground parcel discounts increasing by 1.6% helped prevent costs from climbing even higher, a news release noted. This suggests carriers had to raise shipper discounts to mitigate the impacts of rate hikes.
Ground parcel delivery costs start climbing again
Dive Insight:
FedEx and UPS enacted higher rate increases for 2023 versus the previous year, which they attributed in part to inflationary pressures. This has added further pressure to shippers' parcel delivery spend, already strained by the various delivery surcharges enacted in recent years.
Carriers run the risk of driving customers to other options if they aren't willing to offer concessions. Alternatives in the parcel delivery sector have grown, and there's plenty of capacity for shippers to tap into as delivery activity shrinks from its pandemic-driven highs. These conditions have increased carriers' recent willingness to offer larger discounts.
"The pricing there might be more aggressive to try and get [customers] on board, because you need volume somewhere," said Micheal McDonagh, president of parcel at AFS Logistics.
It's unclear how aggressive carriers will be on pricing beyond the first quarter. Although demand has fallen, FedEx and UPS continue to maintain a strong focus on increasing per-package revenue by chasing after more profitable shipper segments.
Carriers could acquiesce to discounts for key accounts while being willing to let less valuable customers move volume elsewhere, said Mingshu Bates, chief analytics officer at AFS Logistics.
"They could be selectively giving out discounts only targeted at their strategic accounts," Bates said.
The index projects ground parcel shipping rates will increase further to 31.7% above the baseline in Q2. Express parcel shipping rates are expected to be 4.6% above their January 2018 baseline, up from 3.5% in Q1.
