Section 1: Shipping Industry Rate Increase Outlook
Shipping rate increases in 2018 looked a lot like they did in 2017 and 2016. The U.S.’s four major carriers — UPS, FedEx, the U.S. Postal Service, and DHL — raised base rates by their usual amount. UPS and FedEx matched their changes from previous years by upping base rates at the usual 4.9 percent.
There’s no reason to think that trend will change at any time in the near future. That’s because base rates aren’t where third-party shipping carriers really up their profit margins.
As 2019’s rate schedules prove, the real money-makers are accessorial fees and surcharges, fuel surcharges, and holiday rates. Shipping carriers use blackout dates, when discounts can’t apply, to force shippers to spend more than they bargained for.
Carriers also make invoices and refund claims processes as challenging as possible, in a not-so-veiled attempt to avoid paying out money they owe back to their clients.
In 2018, we saw a few key changes in the shipping industry. First, DHL announced that it would return to the U.S. domestic shipping space with Parcel Metro, a low-cost next-day or same-day delivery service in urban areas. Like many competitors in the tight-turnaround delivery market, Parcel Metro utilizes the Uber model: A network of on-demand contract drivers.
Second, the U.S. Postal Service announced its intention to raise prices by about 2.5 percent. The USPS has been in an increasingly difficult predicament in the age of Amazon. Although the USPS is a government agency, it does not receive tax dollars for its operating expenses. It must fully fund its services using revenue from sales of stamps and package delivery services. Yet it also has a mandate to serve all Americans, even those in far-flung rural areas. FedEx and UPS do not have to deliver along routes that are too inefficient to be profitable; USPS does. That helps it win customers, especially in the e-commerce market, but makes the math difficult.
USPS does provide one service that its competitors in the private sector began imitating this year: six-day delivery services at no extra cost. FedEx introduced that service during the 2018 holiday season and will continue it as a regular offering in 2019. At the end of 2018, UPS was working on a contract that would guarantee weekend delivery.
FedEx and UPS, for their parts, undertook pretty conventional rate increases this year. FedEx upped base rates by the usual 4.9 percent, plus hiked a total of 36 different surcharges.
Included in those increases are additional handling fees, address correction fees, oversize charges and residential delivery surcharges. FedEx did not announce any changes to its dimensional weight pricing schedule.
UPS increased fewer different surcharges than FedEx did, but increased surcharges on the largest packages significantly. The large package surcharge jumped from $90 to $110, the second $20 increase in just two years. And the over maximum limits surcharge is now $850 per parcel, up from just $150 two years ago.
Shipping is a complex industry, but in it is one absolute truth: Rates do not go down. Shippers are wise to treat not just these new numbers but these rates of acceleration as the norm. The large package surcharge may be $110 for now, but wise shippers will forecast for 2020 with the expectation that it could rise to $130. It could even be higher.
The shipping industry is facing significant challenges, however. Labor costs are rising. Automation is coming, and while it may save money in the long run, adaptation is expensive. The U.S. Postal Service, long viewed as an affordable and reliable option for inefficient rural deliveries, may be changing its rules.
To make matters more complicated, Amazon is reaching further and further into the shipping industry, threatening long-established carriers with new business models and slowly but surely taking control of the shipping it has long contracted out to FedEx, UPS and the U.S. Postal Service.
To make ends meet — and to make their shareholders happy — carriers need to continually generate more revenue. For the shippers on the other ends of those contracts, that means continually increasing prices.
Section 2: Shipping Rates in 2018 vs 2019
Why UPS and FedEx will increase their rates significantly in 2019
UPS and FedEx typically increase their base rates by 4.9 percent per year, and their 2019 rate schedules followed that pattern. But the U.S.’s two largest carriers are also facing some major headwinds as they approach the end of the second decade of the new millennium.
First, carriers are no longer subsidizing the high cost of home delivery through business delivery. The market for business delivery just isn’t big enough to do so; or, rather, the home delivery market has gotten so huge that business delivery can’t keep up. Home delivery remains the more expensive service to provide, however. As such, residential surcharges and fees that target home delivery — address correction surcharges, for example — are increasing more and more.
Both companies are going to have to make some big capital purchases in the coming years. FedEx and UPS are expanding and updating their aircraft fleets to keep up with increasing customer demand for two-day shipping, regardless of an item’s origin.
As artificial intelligence takes over warehouses and trucking, those sectors will need to be updated too. Both companies have already touted new state-of-the-art fulfillment centers. While those warehouses might be more efficient in the long run — they require fewer employees and can optimize which trucks should arrive and depart when, for example — building them is very costly in the short term.
Further, ground shipping has gotten more and more expensive. Fuel costs were pretty steady in 2018, but labor costs have been climbing. Carriers are struggling to find truck drivers, and to compete for a limited labor pool have begun spending more and more on wages. Although trucks may be automated in the not-too-distant future, goods still need to travel on truck beds for now.
Beyond those industry challenges, both UPS and FedEx faced setbacks of their own in 2018.
UPS’s corporate leadership struggled for months to finalize a contract with its unionized drivers. Negotiations became so tense that drivers nearly went on strike over the summer. And when Teamsters representation and executives finally did hammer out a contract, less than half of UPS’s workforce voted to ratify it. (It will take effect anyway.) The final contract includes some good news for workers, who earned promises of relative job security in the face of automation and reduced the scope of a program that they felt would create a “second class” of drivers at lower wages and with fewer benefits. But for executives and shareholders, the contract represents rising expenses — expenses that have to be recouped from shippers.
FedEx has been hearing plenty of complaints from its shareholders as well. Back in Q1 of 2018, the company dramatically missed its earnings per share estimate, which threw the stock price into a noticeable slide. FedEx will need to prove its profitability to shareholders if it wants to succeed in Wall Street’s eyes — and widening profit margins also have to be driven by shippers’ payments.
As such, UPS and FedEx may begin raising rates even faster — or more often — than shippers are used to. There’s nothing that requires shipping carriers to increase rates on January 1. They can impose rate increases with almost no notice at any time throughout the year.
For example, both companies have imposed holiday rate increases for the last two years, and there’s no reason to believe they will stop that practice in 2019. In fact, rates are all but certain to rise. Both companies may even expand the holiday season or tack fees onto services that didn’t carry them in 2018. Typically, UPS and FedEx have announced holiday rates in mid-summer.
USPS to increase rates significantly in 2019 for priority shipments
One of the reason shippers like USPS is that it charges flat rates for many shipments. And believe it or not, many shippers do actually like the Postal Service — it has been earning steadily higher ratings from patrons for years now. In 2017, a Parcel survey found that 84 percent of shippers had used USPS within the previous year, an 8 percent increase from the previous year. That meant USPS surpassed FedEx, which was used by 81 percent of shippers, and UPS, which was used by 78 percent of the market. Both private carriers saw declines from 2016 to 2017.
In contrast to its private-sector competitors, USPS doesn’t charge any surcharges at all. That means shippers know exactly what kind of service they’re going to get and exactly how much it’s going to cost.
Prior to this 2.5 percent rate increase, USPS was most cost-effective for parcels weighing less than three pounds. If a product fit into Priority Mail packaging, it could be as much as $1 cheaper per package to ship with USPS than a private-sector competitor.
Even with these rate increases, USPS will remain significantly cheaper than FedEx and UPS. That’s especially true for small businesses that have little leverage in negotiations with big carriers. Further, although USPS’s fastest services are usually slower than those of FedEx and UPS, its slowest ground services are usually faster than private carriers.
USPS has promised that it will not begin charging holiday fees nor accessorial surcharges.
It’s easy to see USPS’s 2019 rate increase as a sensible one. The agency provides a service that nearly nine out of ten shippers find valuable enough to use. But the move has not come without pushback.
Several major online and remote retailers, including Amazon and QVC, formed a lobbying group called the Package Coalition in 2018. Their argument is simply that USPS is already profitable and does not need to raise prices. The inclusion of Amazon in the Package Coalition may actually hurt their argument with the Trump Administration, though: The president called out Amazon on Twitter several times in 2018, suggesting that the e-commerce giant ought to pay the Postal Service far more than it does.
It is true that USPS negotiates bulk contracts with large shippers, including Amazon. The details of those contracts are not public and USPS declined to release them in 2018. However, many industry watchers believe the source of President Trump’s anger was not USPS’s financial status, but the fact that Amazon chief executive Jeff Bezos owns the Washington Post.
Regardless of the source of the feud, its outcome has now been determined: USPS is increasing its rates across the board, for nearly all of its services except international letters and domestic postcards.
Forever stamps will increase in price by about five cents. A small flat-rate Priority Mail box will climb from $7.20 to $7.90. A large Priority Mail box will jump from $18.90 to $19.95.
For Priority Mail envelopes, a regular envelope will increase from $6.70 to $7.35, and a padded flat-rate envelope will climb from $7.25 to $8.00.
Finally, USPS will impose zone-based pricing on its First-Class Package Service, which is typically used by businesses for order fulfillment.
DHL to increase shipping rates across the world to support global network
DHL is increasing its international and Express rates by an average of 5.4 percent in 2019.
The shipper is increasing base rates as well as modifying a number of surcharges. Some of those changes include a common tactic of shippers: not changing the numbers on their rate sheets, but changing what they mean. DHL’s oversize package surcharge is jumping from $89 per shipment to $89 per piece in 2019. The non-stackable pallet charge is rising from $195 per shipment to $215 per piece.
Additionally, address correction surcharges, non-standard pickup charges, and dangerous goods charges (including the cost of shipping dry ice) are climbing.
Remote area delivery charges are increasing and changing, too. DHL’s Remote Area Delivery fee is rising from 36 cents per pound with a $36 minimum to 38 cents per pound with a $38 minimum. Its Remote Area Pickup charges are rising by the same amount, but with charges on a half-kilogram basis rather than a per-pound basis.
The Germany-based shipper attributed the fee increase to its growing international network, which now serves 220 countries. Company executives say DHL has been investing in hub expansions in markets worldwide; while that increases shipping capacity and can reduce transit time, it also costs a lot of money.
Like FedEx and UPS, DHL is working on upgrading both its regional and its intercontinental air fleets. It is also introducing automated sorting technologies at warehouse facilities and working on better e-commerce integration.
Additionally, in 2018, DHL rolled out its Parcel Metro service in the U.S. Limited to a handful of dense urban areas, this service seemed designed to serve retailers who want to offer same-day and next-day delivery to their online customers. In other words, DHL is positioning itself as a last-mile fulfillment partner: It can move packages from retailers to customers, but has not expressed interest in getting involved earlier in the supply chain.
That will help keep the costs of providing this service down, because the company doesn’t have to assume any of the high costs of long-distance fulfillment services. Parcel Metro also relies on a network of third-party contractors, which means the company doesn’t have to invest in vehicles or in long-term employee benefits.
Parcel Metro is a direct competitor to UPS SurePost and FedEx SmartPost. But in some ways, it’s more ambitious. For example, DHL is offering delivery times as short as two hours. Even if FedEx and UPS are able to make deliveries on such a short timeline, they typically don’t promise it, because they have to cover so many longer-distance routes as well.
One Cowen & Co. analyst said that she suspects DHL is working with Amazon. “Amazon is growing 35-plus percent per year, and they need to figure out a way to get stuff to the buyers” Helane Becker told the business news channel. “FedEx and UPS have told Amazon they won’t scale with them, meaning that Amazon has to figure out a way to support their delivery network themselves.”
Section 3: Comparing shipping rate increases between carriers
The major carriers: UPS vs. FedEx
As usual, the U.S.’s two largest private carriers increased base rates in lockstep in 2019. Looking solely at rates by weight and zone, the two services look very similar, with slight variations depending on what shippers are sending and where it’s headed.
But surcharges take up about 35 percent of most companies’ shipping budgets. Not every surcharge rises every year, but those that do can double or even triple almost overnight. And while not every surcharge affects every parcel, those that affect core products can force companies to make significant changes to their shipping budgets.
UPS’s largest surcharge increases came on its largest packages. The shipper raised its large package surcharge by 22 percent, its over maximum limits surcharge by 31 percent, and its additional handling surcharge by 19 percent.
For two years now, UPS has stuck with the holiday strategy of tacking small fees onto every package it moves between Nov. 18 and Dec. 1 — a period that includes Thanksgiving, Black Friday and Cyber Monday — and between Dec. 16 and Dec. 22. In 2018, those rates ranged from 28 cents per ground shipment to 99 cents per air shipment. UPS also added extra holiday surcharges onto large packages and those that required additional handling.
FedEx raised rates for two surcharges midway through 2018. It upped its additional handling surcharge by 67 percent and its ground unauthorized package charge by 125 percent. The carrier also increased its fuel surcharge.
In its 2019 rate schedule, which was announced just weeks after the mid-year rate increases took effect, FedEx spread its surcharge increases across a variety of packages. It upped its oversize charge by 12.5 percent, for example, which was a much smaller increase than UPS’s. But FedEx also increased everything from its address correction surcharge to the fee to print a return label.
FedEx has focused its holiday surcharges on the largest and heaviest packages, banking on gift-givers buying everything from furniture to workout equipment to heavy-duty tools for their loved ones. The carrier only charges holiday fees on packages that already carry oversize, additional handling, or ground unauthorized package charges. But those fees are huge — $27.50, $3.20 and $150, respectively. And remember, that’s on top of existing surcharges.
Mid-year rate increases are a move shippers might reasonably expect from both FedEx and UPS in 2019. Both companies are facing internal struggles, as well as the industry-wide challenges that impact large and small shippers alike. If either or both companies disappoint investors this spring, they could announce targeted rate increases by summer to show shareholders that they are committed to maintaining or increasing profits.
And after two years, it appears that holiday surcharges are here to stay. Both FedEx and UPS doubled down on their 2017 strategies in 2018. If either were to try a new approach in 2019, it could suggest that they didn’t perform as well in previous years as they hoped. Holiday rates are typically announced in late summer.
Other players
The U.S. Postal Service and DHL are the two largest competitors to UPS and FedEx in the United States. Nearly nine in ten shippers use USPS, which suggests that many if not most shippers use its services in addition to those of a private carrier.
USPS offers what is widely considered the industry’s best deal on remote residential deliveries: The agency promises delivery to every address in the country and refuses to charge accessorial fees for those far-flung deliveries. However, a commission appointed by President Trump in 2018 reviewed that policy and suggested that USPS stop promising that service to business clients. Individuals could still send letters and parcels to friends, family and businesses far away at flat rates, but businesses would no longer be able to take advantage of those rates to ship their products.
That commission’s recommendations are still under review, but shippers who use the U.S. Postal Service — especially to reach those faraway buyers — should consider developing one or several alternative plans in 2019.
DHL in 2018 launched Parcel Metro, its competitor to UPS SurePost and FedEx SmartPost. The service targets retailers with large numbers of customers in urban areas who want same-day and next-day delivery. The service utilizes the Uber model: a network of third-party drivers, who are independent contractors and who largely set their own hours.
If all goes well, relying on this third-party labor force will allow Parcel Metro to adjust to high- and low-demand periods efficiently, cutting fat from its spending. The carrier’s “virtual delivery network” selects drivers that have the capacity to meet service levels along specific routes, promising efficiency and speedy delivery. DHL also offers retailers “a fully branded delivery experience,” including a custom branded design of DHL’s mobile interface, so that customers get the sense that their retailer is the one bringing their packages to their door.
For non-urgent orders, DHL says it will continue using USPS, as it has for years — even if those services get more expensive in 2019.
DHL Parcel Metro is one of several delivery services competing in the last-mile delivery space. The service relies on third-party couriers, as do food-and errands-focused services like Postmates, UberEATS and GrubHub. But so does one other major competitor: Amazon.
Amazon’s delivery service, Amazon Flex, operates with a similar model. Individuals sign up to be Flex drivers, perhaps intrigued by the company’s suggestion that they could earn $18 to $25 per hour. They can make their own hours, but are required to use their own vehicles. They exclusively deliver Amazon products from warehouses to customers’ doorsteps and lobbies.
By some estimates, Americans make as many as half of their online purchases on Amazon. If the company can be responsible for even a fraction of those deliveries, that’s millions of dollars it doesn’t have to pay to FedEx, UPS, USPS, or DHL. That’s great for Amazon — but it means FedEx, UPS, and their competitors bring in less and less revenue, and then have to charge every shipper who isn’t Amazon even more. However, if Amazon then begins offering delivery service to all retailers, it can undercut the prices of traditional carriers.
The e-commerce giant has implemented a few links in its delivery service each year on its way to building what most analysts believe will be a full-service shipping carrier. Recently, Amazon Air purchased a fleet of jets and began building out hubs in Kentucky and Texas.
In other words, Amazon poses a major threat to the delivery industry, and one that will only grow more pressing in 2019.
Section 4: Carriers now increasing rates in an ad-hoc basis midyear and impose seasonal, surge pricing increases
The major American shipping carriers, which are beholden to shareholders, face ever-increasing pressure to maintain if not increase profit margins. As every part of their process gets more expensive — from labor to fuel to capital investments for the future — market forces require them to generate more revenue. And the way they generate revenue is by charging the retailers and manufacturers who use their services.
As Amazon and other competitors threaten traditional shipping and industry headwinds make providing these services more and more expensive, there may come a time when annual rate increases aren’t enough.
We saw hints of this in 2017 and 2018, with the introduction of holiday surcharges in 2017 and FedEx’s mid-year rate increase in 2018. And in shipping, once one carrier creates or increases rates a certain way, its competitors usually follow soon after. Shippers should not be surprised if UPS, FedEx or both announce a mid-year rate increase this year.
Fuel surcharges also increased midyear in 2018. Fuel surcharges fluctuate from week to week as oil prices change, since these fees are pegged to the costs of diesel and jet fuel. That is a longstanding practice, since oil prices can change overnight and begin eating into carriers’ margins. But carriers don’t apply every penny of fuel surcharges to fuel costs — they keep some as profit. Fuel costs were fairly low in 2018. That means carriers didn’t collect as much revenue from fuel in 2018 as they did when oil prices were high.
In September 2018, FedEx upped its fuel surcharges. For air services, these fees used to start at 6.25 percent, when jet fuel was at its lowest rates; that jumped to 6.5 percent. On the high end, when jet fuel is most expensive, surcharges climbed from 9 percent to 9.5 percent.
For FedEx Ground, surcharges climbed from 4.74 percent to 5.75 percent at the low end and from 7.75 percent to 8.75 percent at the high end.
UPS increased its domestic air fuel surcharge by 0.25 percent for all thresholds at the end of 2018. But the carrier also found another way to increase its revenues from fuel surcharges: Apply them after some common accessorials, so they can squeeze another few dollars out of packages that are already very expensive for businesses to ship. As of Dec. 26, UPS began assessing fuel surcharges after additional handling, over maximum limits, signature required and adult signature required charges.
Shipping has also adopted a number of practices from companies like Uber. Using third-party contractors as drivers is the most obvious example. But it is not difficult to imagine a scenario in which UPS and FedEx implement “surge pricing” themselves and begin charging for shipping on their busiest days.
After all, that’s the rationale behind holiday surcharges: FedEx and UPS move significantly more volume during those five weeks than they do during the rest of the year, and they need extra revenue to cover the costs of meeting that increased demand. It stands to reason that carriers may begin adopting seasonal rates during other peak sale times, like Memorial Day.
Section 5: Mitigating the cost increases of shipping rates in 2019
Just as in life, the only constant in shipping rates is change. But shipping-based businesses can take cues from the recent past to understand what might happen next.
For example, holiday pricing is not going away. We know that undoubtedly after two years. That suggests that the model has proven successful at generating revenue for carriers — which means it’s probably a model they’ll try in other parts of the year at some point, if not in 2019.
Further, between UPS’s prolonged contract dispute and the growing supremacy of the Uber model, a growing third-party workforce in the shipping industry seems likely. That could save carriers money. While it’s possible they could pass some of those savings on to shippers, it’s far more likely they’ll share them with shareholders instead.
If Amazon expands its shipping programs to provide services to businesses other than Amazon, it could pose an enormous threat to long-established shipping carriers. That could be good news for shippers, however. If Amazon enters the market as a low-cost provider, carriers may have to lower their prices to compete, which means shippers could have their pick of services at rates much lower than they’re used to.
None of these trends are certain, but savvy shippers should pay attention to them. If the resources are available, they may even put aside some rainy-day money to address them.
Shippers can start immediately, however, by taking control of the present before rates rise again.
First, shippers need to be able to understand exactly how each announcement of rate increases will affect their business. That means they need to know exactly what they ship, where it goes, which surcharges apply, and how much they spend on each type of fee. Companies that have a detailed shipping profile at their disposal can quickly see which rate increases will impact them and calculate approximately how much they’ll cost.
Second, shippers should ensure that they’re squeezing every dollar out of their existing contracts. That means reviewing invoices to ensure that each package was delivered correctly and on time, and if not, identifying which refunds you qualify for. It also means taking the time to claim those refunds, which can be an arduous process. If your supply chain team simply doesn’t have the hours available — and many don’t — consider bringing in a third-party consultant to help manage these claims.
Third, shippers should comb those invoices for inefficiencies, which may change from year to year (or from month to month) as rates increase and carriers change the rules. Maybe a core product used to be priced by weight, but due to a carrier’s change of the dimensional divisor, is now subject to dimensional pricing. Perhaps if the quantity of a shipment increased or decreased slightly, it would be priced according to a different minimum, or price floor.
Supply chain leaders who understand those details don’t merely have to react to rate increases, although reacting quickly and nimbly is essential to shipping success. They can be proactive. Instead of accepting a new rate schedule when their carrier releases it, they can ask for a contract negotiation and target the rate increases that will take the biggest bites out of their bottom line.
Reveel exists to support shippers in all of these endeavors, from understanding how to analyze invoices to preparing for contract negotiations. Our expert consultants can help you save as much as 20 percent on shipping. If you’re ready to fight rate increases in 2019, reach out today for your free invoice audit.
