As reported by yesterday by LM in coverage of fiscal first quarter earnings for FedEx, the Memphis-based transportation and logistics titan said it has increased non-contractual rates for 2016.
Rate increases will take effect for FedEx Express U.S. domestic, U.S. export, and U.S. import services, effective January 4, 2016. FedEx Express will increase shipping rates by an average of 4.9 percent for U.S. domestic, U.S. export and U.S. import services, and FedEx Ground and FedEx Home Delivery will increase shipping rates by an average of 4.9 percent. FedEx SmartPost rates will also change. And FedEx Freight will increase shipping rates by an average of 4.9 percent.
FedEx will also be updating certain fuel surcharge tables at FedEx Express and FedEx Ground, effective November 2, with details becoming available on the company’s Web site by September 23. These changes are being made due to what FedEx described as changing industry dynamics, including, increases in average package size and weight, and increased residential deliveries.
The company also noted that it is upping surcharges for shipments that exceed published maximum dimensions, or unauthorized packages, in its FedEx Ground network. It explained that unauthorized packages that exceed length or weight limitations of FedEx Ground “are handled at the option of FedEx Ground.
“If you would look at one of these packages, you would more likely to expect it to travel in an LTL network,” said T. Mike Glenn, executive Vice President, Market Development and Corporate Communications, on yesterday’s earnings call. “It is up to FedEx Ground as to whether we accept these packages but we felt the change was needed in the price or the surcharge if we elected to do so.”
As for oversized packages, Glenn said these are packages that have specifications that are within FedEx’ current service guide features or service, but have to be longer or heavier than a typical package, adding that they carry a separate surcharge with the dramatic shift in e-commerce, where more and more e-commerce companies are electing to ship those packages through networks like the FedEx network rather than handle them in the store.
“We’ve seen an increase in those types of packages,” said Glenn. “We are working with those individual customers that are driving that change, at least the ones that are having the biggest impact and obviously, we always look at pricing opportunities to mitigate that where needed. So overall, we do an excellent job of handling those packages in our network but it’s obviously something we will continue to monitor.”
While FedEx announced several rate changes, the most significant takeaway are the ones related to fuel surcharges, as the other are expected, according to Jerry Hempstead, president of parcel consultancy Hempstead Consulting.
“The fact is that Fedex right now has a much lower fuel surcharge than UPS, and they have room to increase their margins without becoming less competitive with UPS,” he said. UPS currently charges a 3.75 percent fuel surcharge for air shipments. Fedex charges 2 percent. UPS charges 5.25 percent for ground shipments, and Fedex charges 4 percent.
Keep in mind both carriers changed their tables in February to charge higher fuel surcharges in the face of rapidly declining fuel costs. Lower costs were causing an income drop on the top line for the carriers and do as to damper the decline they changed the indexes. If life were fair there should be no fuel surcharge now because fuel has dropped so much, but the carriers now see the fuel surcharge as an entitlement. And since there is such a large margin between what UPS charges and what FedEx charges, FedEx management sees an opportunity to [capitalize], and it is completely legal.”
Rob Martinez, president & CEO, Shipware Systems Corp, a San Diego-based parcel consultancy, said that average rate increases can be misleading, explaining that actual 2016 rate increases for most Express products exceed 4.9 percent. He also explained that taking an “average” increase for Ground products is misleading as rates for lightweight Ground packages will increase much more significantly than heavier packages.
The majority of FedEx Ground packages weigh less than 20 pounds, and those packages will incur significantly higher increases than the stated average of 4.9, he wrote in a research note, while also explaining that the 2016 Ground increase takes a slightly more even approach to increases at all weights. In 2015, the Ground increases were significantly more pronounced at the lighter weights.