The annual general rate increases (GRI) published by parcel-delivery carriers FedEx Corp. and UPS Inc. are perceived by many as noise. The tariff rates don’t directly apply to contracts, which govern all shipper-carrier relationships. If anything, GRIs serve as a marker from which rate discounts are negotiated.
The 2023 GRIs may be a little more than noise, however. After years of keeping its GRI between 4.9% and 5.9%, FedEx (NYSE: FDX) hit the market last month with a 6.9% increase, higher than many had expected and the largest year-over-year increase in its history.
UPS (NYSE: UPS) has yet to announce its GRI, and the jury is still out as to where it will fall. UPS releases its third-quarter results Oct. 25, and it’s a reasonably safe bet it will publish its 2023 rates on or before then.
UPS may hike its GRI by 5.9%, which would end the long-standing practice of the two carriers matching each other on their GRIs and then competing for business through discounts, said Satish Jindel, founder and president of ShipMatrix Inc., a consultancy. UPS could come in lower because it has a better handle on its cost structure than FedEx, Jindel said.
Because digital tools like APIs are available for large shippers — many of whom use both carriers — to enable real-time rate shopping, UPS’ move could enable it to gain share from FedEx unless the latter resets its discounts for its shippers in the middle of their multiyear contracts, Jindel said.
At the same time, UPS could leave profitable revenue on the table if it undercuts FedEx, said Rob Martinez, founder and co-CEO of Shipware LLC, a consultancy. “When you think of how much each point of GRI is worth, it becomes hard (for UPS) to justify undercutting their competitor,” Martinez said.
UPS may not have much wiggle room to undercut FedEx even if it wants to. It faces a potentially contentious contract negotiation with the Teamsters union, which represents 380,000 UPS employees. The union has made clear it wants significant wage increases and has threatened to strike if a tentative agreement isn’t reached by Aug. 1, 2023, the day after the current five-year pact expires.
Because of the timing of the last contract, UPS locked in wage rates long before the post-pandemic environment sent labor costs soaring. That insulation will disappear next year, and shippers waiting for UPS’ 2023 GRIs need to be aware that the carrier may need to build in an unusually high GRI to offset the expected increase in labor costs.
For that reason, John Haber, chief strategy officer at Transportation Insight Holding Co., a consultancy, said he wouldn’t be surprised if UPS’ GRI came in above that of FedEx.
Big shippers typically have contractual language that limits the magnitude of their annual increases. Martinez estimated that the so-called rate caps range between 2% and 5%. Thus, if FedEx imposed a 6.9% GRI and a customer had a 3.5% cap, FedEx would need to adjust the shipper’s discount to effectively implement a 3.5% increase, Martinez said.
However, Haber noted that rate caps typically don’t apply to the multitude of delivery surcharges imposed by the carriers. Many of those charges, known as accessorials, are levied on services outside of the basic line-haul.
For several years, the carriers have tried to insert contract language to allow for a rate cap if it’s higher than the U.S. Consumer Price Index (CPI). If it’s not, then the cap would be adjusted upward to match the CPI. That formula would spell trouble for many shippers because year-on-year CPI increases are running well over 8%. However, Martinez said that very few shippers ever agree to such a provision.
Open the wallet
GRI interpretations aside, what is apparent is that small, midsize and large shippers will need to make more budget room for shipping costs next year. A high-profile example is in the area of ground-delivery rates. Ground prices will increase by 6% over 2022, according to estimates by consultancy TransImpact LLC. That would mark the largest year-on-year increase in 12 years, according to the firm.
Another hit will come in the fee category known as “minimum” charges, which is the lowest price a shipper can pay to move a shipment. TransImpact predicted that FedEx and UPS will impose double-digit hikes on ground deliveries in 2023 to $10.11 per piece. Minimum charges are the canary in the coal mine for shippers because, unless handled properly, they can offset most of the negotiated discounted rates.
At FedEx Express, FedEx’s air and international unit, minimum charges will increase to as low as 4.7% for the unit’s second-day delivery service, to 10.2% for its three-day delivery service, according to TransImpact data.
The one piece of good news for FedEx shippers is that the company’s fees for accessorial services will not increase by the same magnitude next year as they did in 2022, according to TransImpact. Only four of the 20 accessorials listed by TransImpact will increase by double-digit amounts next year. In 2022, 16 of the 20 accessorial fees increased at a double-digit pace, it said.
As the carriers look to offset rising inflation and increase revenue quality amid a slowing market for parcel-delivery services, shippers should expect multiple rate hits throughout 2023, said Haber. The carriers have shifted to dynamic pricing and will make multiple pricing changes during the year beyond the annual GRI, he said.
Many shippers are unprepared for what lies ahead, Haber said. Most “don’t really understand what their total year-over-year increases are going to be,” he said.