On September 15 FedEx announced its 2016 general rate increase (GRI).  UPS followed suit exactly one month later. Unlike previous years, we have a number of changes that are being implemented on November 2, pre-GRI, and additional changes that will take effect with the planned GRIs (January 4^th, 2016 for FedEx, December 28^th, 2015 for UPS).

 

For the second year in a row, we are seeing more than just increases to list rate schedules and accessorials/surcharges.  Like the changes to Ground DIM logic implemented with the 2015 GRI, broader changes are being made to the infrastructural rating logic of the carriers’ Service Guides.

 

The Rates

UPS announced an average increase of 4.9% for Ground, and 5.2% for domestic US Air services.  FedEx announced a 4.9% average increase for both Ground and Express services.  Predictably, these announced increases tell, at best, part of the story.

With exceptions of Next Day AM / First Overnight, 3-Day / Express Saver, and Ground Residential / Home Delivery 70+ lbs. list rates have become homogenous.  UPS has merged their Standard and Daily list rates into a single rate base which, with the exceptions noted above, aligns with FedEx’s Standard list rates [1].  This continues a multi-year trend toward rate homogeneity. 

 

If we look at the transportation charge increases in more detail, we see that low-weight packages (where the bulk of the package volume lies) increase to a greater degree than do higher-weight packages.  This is also largely true across the air services, particularly in the next day services.  Surprisingly the zone 2, 1 lb. packages, the basis for most minimum package charges, generally increase to a lesser degree than do the majority on the other weights and zones.  However, the increases here are still higher than the announced increases by and large.

 

 

Third Party Charges

The most interesting, and potentially with the most long-term impact to shippers, is a 2.5% surcharge on total net package charges for third party (3P) shipments.  For shippers with large drop ship or 3PL volumes, this will be a non-trivial change in UPS’ pricing logic.  While 2.5% may seem like a small number, we must bear in mind that the carriers have a history of introducing new charges at low cost, and then increasing them dramatically in future years.  Also, we face a multiplier effect here, where list rates are increasing by X%.  But, because we have multiple stacking multipliers (fuel and 3P in particular), the true, landed impact is X+Y%.  See the example at the end of this article for more information on this.

 

Fuel

In recent years both UPS and FedEx have announced reductions to their fuel surcharge (FSC) indices in conjunction with their GRIs.  Those reductions were often, though not always erased by mid-year increases.  Neither UPS nor FedEx reduced their FSC indices in 2014 or 2015.  What we’re seeing this year is completely different.  Both UPS and FedEx are increasing their FSC indices beginning in November 2015, the second such increase this year.  UPS’ FSC has been higher than FedEx for the last few years.  FedEx announced their increase first, which would have brought them very close to UPS.  Subsequently, UPS announced a November increase as well, thereby widening the gap again.  There are three things to consider relative to fuel:

 

1. The increase itself – Understand that you are going to pay more for fuel, all else being equal.
   
   
2. Both UPS and FedEx are increasing FSCs in a falling fuel price environment.
   
   
3. By announcing the fuel increases in November, both carriers avoid having to make it part of their GRI announcement.  Many shippers focus primarily on the annual increases, and pay little to no attention to mid-year changes, believing them to be less consequential or immaterial.

The Surcharges

As is typical, most surcharges and accessorials are increasing to a greater degree than transportation charges.  The 2016 increase has an emphasis on large bulky packages, with large increases on Additional Handling, Oversize / Large Package, and especially Unauthorized [2] (over limit) surcharges.  In a sense, this extends the change made to Ground DIM logic in 2015.  The fact that the increased fuel surcharges, and the new UPS third party surcharges will apply to the bulk of these surcharges, only increases the total impact.

 

Although both UPS and FedEx are applying heavy increases to Indirect Signature / Delivery Confirmation surcharges, FedEx has increased their already-higher surcharge by a greater percentage, bringing Indirect and Direct to parity at $4.25.

 

The Bottom Line

UPS and FedEx are masters at structuring their GRIs, and marketing them as well, in a way that downplays the real impact on shippers.  We are in the midst of what we believe will be a multi-year trend of applying heavy cost increases based not on weight, but on cube.  We saw the beginnings of this last year, and the changes coming in 2016 bear out the theory.  Moreover, by announcing a straight-line average of all services, weight, and zone combinations for Ground and for Air, the carriers effectively mask the fact that the most commonly shipped combinations are impacted more heavily.  Finally, by stacking cost multipliers, the carriers are able to apply a much higher increase than what the individual increases portray.

 

For example, UPS announced an increase of 5.2% for Air services.  But the example at right shows that the list rate for a 2-Day package is going up 8.7%, and the landed (total) increase is going up 9.3%.  The implication is obvious.

 

For these reasons, it is a matter of best practice to evaluate the impact of the upcoming GRIs on your parcel spend.  This is not only a matter of budgeting, but of exploring proactive steps you can take to mitigate the upcoming increases before they hit your bottom line.

 

 

Joe Wilkinson is Director of Consulting within the Transportation Solutions Group at enVista.  He has more than 17 years of experience across all modes of transportation including parcel, LTL, rail, ocean and air freight.  Joe works with clients to advance profitability and corporate objectives, optimize and increase efficiencies of transportation and logistics activities, and communicate financial and strategic concepts within the organization.  He is a leading expert in parcel shipping and pricing practices and has negotiated hundreds of parcel agreements for both shippers and carriers.  His areas of expertise include transportation rating and analysis, shipping best practices, parcel market trends and developments, mode optimization, and transportation network and practice optimization.