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Peak parcel surcharges likely to stick despite slowing demand, carrier overcapacity

FedEx, UPS unlikely to budge on holiday levies, analysts say

In event of strike, FedEx to focus on customers who use both, consultant says (Photo: Jim Allen/FreightWaves)

The past two peak seasons for parcel delivery services were cut and dried affairs. Parcel carriers imposed delivery surcharges almost at will. Shippers, knowing their service options were limited during an unprecedented period of pandemic-related demand, mostly absorbed the levies.

This year’s peak season, which starts in earnest at the end of October, will be a different beast. Shipper activity has slowed as inflation, higher interest rates and recession concerns have curbed consumer spending. Many shippers already hold too much inventory or have moved holiday traffic into their networks due to ongoing concerns about supply chain disruptions. 

Quotas, or caps, that carriers imposed on big shippers during the last two peak seasons to mitigate the effect of huge demand spikes are a nonfactor this year except perhaps for the very largest of shippers. 

Carriers that have ramped up labor and infrastructure capacity in anticipation of stronger demand may find themselves scrambling to pull in business to justify their investments. FedEx Ground, the ground delivery unit of FedEx Corp. (NYSE: FDX) and the unit that delivers most of FedEx’s holiday volumes, has already warned about lower peak traffic than it originally projected.

But the shifting macro landscape won’t impact the slew of peak-season surcharges that are now in place, most analysts said. Barring the unlikely scenario of one carrier taking the initiative to undercut the other, FedEx and rival UPS Inc. (NYSE: UPS) are unlikely to budge on their respective surcharges, especially at this late date.

Both carriers are being pressured to make margin in the face of rising costs. As a result, they will resist downshifting on surcharge levels even in the face of punk demand, overcapacity and shipper resistance, they said. 

“We’d be very surprised if national parcel carriers blink on this year’s peak surcharges,” said Bascome Majors, transport analyst for Susquehanna Investment Group. “Inflation is still rampant even if the peak proves weak.”

The 2023 holiday season could be a different story, Majors said. However, those issues are months in the future, Majors said.

Nate Skiver, founder and president of LPF Spend Management, a consulting firm, said that any breaks on peak surcharges, if they have occurred at all, has already taken place. Any surcharge reductions would have been reserved only for those shippers whose year-round revenue and margins are materially important to the carriers., Skiver said.

“The revelation that there’s soft volumes doesn’t produce a flurry of shipper negotiations this close to peak,” Skiver said. A shipper would only have leverage at this point if it has enough of a diverse carrier base and can easily shift volumes on short notice where it could threaten to leave, he said. 

That is an unlikely prospect, said Jason Murray, co-founder of Shipium, a provider of multi-carrier delivery options for e-commerce companies. Parcel shippers, he said, don’t “have much of an option to go elsewhere because the overwhelming majority of customers do not have the type of required software installed to allow for quick additions of new carriers to their network.” 

Surcharge reductions will materialize only if one carrier blinks and the other is forced to respond, Murray said.

Branden Burt, director of parcel operations for TransImpact LLC, said UPS and FedEx over-projected holiday demand. Because of that, the carriers need to maintain their surcharges to boost profitability.

Burt advised shippers to forget about the surcharges and focus instead on their 2023 pricing programs. Next year kicks off with the largest general rate increase (GRI) in FedEx’s history and what is expected to be a hike of similar magnitude by UPS, which at this writing has yet to announce its GRI.

As capacity is expected to exceed demand for some time, shippers have the best shot in several years to take the lead on next year’s negotiations, Burt added. 

“Both carriers are hungry for business,” he said. “Shippers that are looking to submit requests for proposal to capitalize on the opportunity should do so quickly to get ahead of the GRIs in January.”

Paul Yaussy, senior consultant at Shipware LLC, a consultancy, takes a different view on peak surcharges. According to Yaussy’s channel checks, FedEx has become very aggressive in bidding on new business and is going to market with stronger discount incentives than UPS. This is a possible sign that FedEx is struggling to fill its network, Yaussy explained. It also suggests that, with some effective negotiation practices, shippers might be able to push the carriers off their rock-hard stance on surcharges, he said.

“Both carriers openly talk about surcharges being levers that can be pulled at any time to control margins, he said. “Because there is a degree of uncertainty for peak season, that naturally opens up the idea that they are indeed negotiable.” 

The ability to negotiate peak season surcharges is independent of how much business a shipper does with the carrier, he added. 

If there is one saving grace for shippers, it’s that they won’t have to worry too much about getting their holiday stuff moved in a timely manner. With demand weaker than in the past two years and with volume caps largely a thing of the past, UPS and FedEx will be more flexible in responding to shippers’ concerns during this peak than in the previous two, according to Skiver.

“The carriers need the volume and revenue enough that they would only restrict volume when there’s high service risk to the network,” said Skiver. Given what is expected to be a relatively muted peak, such scenarios “should be far less frequent.,” he said.

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Mark Solomon

Formerly the Executive Editor at DC Velocity, Mark Solomon joined FreightWaves as Managing Editor of Freight Markets. Solomon began his journalistic career in 1982 at Traffic World magazine, ran his own public relations firm (Media Based Solutions) from 1994 to 2008, and has been at DC Velocity since then. Over the course of his career, Solomon has covered nearly the whole gamut of the transportation and logistics industry, including trucking, railroads, maritime, 3PLs, and regulatory issues. Solomon witnessed and narrated the rise of Amazon and XPO Logistics and the shift of the U.S. Postal Service from a mail-focused service to parcel, as well as the exponential, e-commerce-driven growth of warehouse square footage and omnichannel fulfillment.