Parcel experts weigh in on FedEx & UPS so far throughout the COVID-19 pandemic

Nothing has been predictable or consistent in the parcel shipping industry in 2020.  The onset of COVID-19 decimated shipping volumes in March and the beginning of April, as businesses sent employees home and shuttered facilities.  However, parcel volumes have raged higher and higher ever since, with both FedEx and UPS reporting daily volumes at and exceeding “peak” holiday volumes.

FedEx in particular has been hit hard with capacity concerns, and the delivery giant had to scale back the amount of volume it can accept from many high-volume e-commerce shippers, the beneficiaries of the new work-from-home economy.

As businesses closed and volumes continue to overwhelm, both FedEx and UPS have suspended service guarantees.  More recently, each of the delivery companies have imposed significant COVID-19-related surcharges.  For many shippers, the increases come at the worst time, when they can least afford higher costs. 

All the while, Amazon continues to add aircraft and resources to seemingly and eventually compete with FedEx and UPS.

Logistics Management reached out to executives from parcel consultancy Shipware, LLC including co-CEO’s Rob Martinez and Trevor Outman, as well as Dave Sullivan, VP of Professional Services, to get their respective takes on the current state of parcel trends.

Logistics Management (LM):  What is your take on the recent carrier-imposed surcharges during COVID-19?

Dave Sullivan: Well, first, the Carriers suspended service guarantees (FedEx March 25, UPS March 26), and eased on-time service standards on several products.  Given the carriers are late 1%-5% of the time, that’s a huge additional expense to shippers that they used to be able to file service refunds.

But the additional COVID-19-related surcharges are certainly confused and getting a lot of attention right now.

UPS Peak Surcharge

• Applied to shipments from Mainland China and Hong Kong (Started $.34, then $.45/lbs, now $.79 – HK=$.57/lbs);
• All other international shipments from all other origins $.11/lbs ($.34 for Freight);
• Ground residential and SurePos =$.30 (trigger = 25K/week packages over February 2020 weekly average volume, and exceeding 110% volume thereafter). Effective date May 31, 2020; and
• Large Package Surcharge=$31.45 additional if 500 or more instances in a week – applied to ALL shipments)

FedEx Peak Surcharge

• Parcels originating in China $.45/lbs within APAC, and $.90 all other countries.  Hong Kong is $.45/lbs withing APAC and elsewhere; 
• Matrix by country/origin & destination on FedEx website, but all international packages get at least a $.10/lbs surcharge; 
• Note, FedEx also charges a parcel minimum charge of $1 per shipment, and $50 for Freight; and

Domestically, FedEx and UPS also differ in these ways:

• Effective June 6, 2020, FedEx is applying a “Temporary Surcharge” of $.40 per package for all SmartPost shipments;
• $30/package for all shipments incurring the Oversize fee (Exceeds 96 inches in length, or 130 inches in length and girth {i.e. LENGTH + (2 TIMES HEIGHT) + (2 TIMES WIDTH}.  Unlike UPS which requires 500 or more shipments in a week to trigger the fee, FedEx will apply this fee to ALL Oversize packages; and
• a “Peak Residential” fee of $.30/package for not only Ground but also Express packages is applied when Express & Ground residential deliveries exceed 40,000 packages in a week, and that’s 120% or more of the average weekly volume in February 2020

LM: What’s the financial impact of these new COVID-19-related surcharges on shippers?

Trevor Outman: Some of these surcharges are so new that the financial implications for shippers is yet to be determined.  Shipware will assess the actual impact on UPS and FedEx customers in the days and weeks ahead.

That said, we did forecast likely increases amongst Shipware’s customer base to determine those shippers most likely to be adversely impacted.  High volume retailers and healthcare companies are most affected.

Based on Shipware’s interpretation of how the new Ground Residential surcharges will be applied, the average increase was $32,250 higher costs per week.

We also analyzed the data for those shippers exceeding 500 Large Package Surcharges.  As you can imagine, those retailers that ship larger, bulkier items like furniture, bicycles, stand up desks, retailer racking fixtures, oversized sporting goods (trampolines/basketball systems), etc. are most adversely impacted. 

One well-known retailer’s average increase for Large Package Surcharges was $140,000 per week!

LM: Between FedEx and UPS’S COVID-19-related surcharges, which is most aggressive?

Dave Sullivan: FedEx is more aggressive.  No gates or thresholds to implement for SmartPost ($.40) or Oversize ($30.00)—will apply to ALL shipments.

Also, at 40,000 weekly packages, FedEx has instituted a smaller gate for the application of the Express/Ground fee ($.30).  Unlike UPS that applies its fee when weekly package counts are >25,000 incremental above the Feb average, the FedEx fee will be triggered on more businesses.  Moreover, the FedEx increase applies to ALL services (excluding SmartPost and FedEx One Rate), including Express (UPS relegated increases to Ground products).

LM: Do shippers have any recourse against the carriers’ COVID related surcharges?

Trevor Outman: Like every other charge in their carrier agreements, it’s a negotiation.  The first thing we encourage shippers to do is measure and understand the impact of these charges before seeking concessions.  By the way, Shipware is happy to conduct a totally complimentary and obligation-free assessment to determine the impact of these charges for each of our callers today, and to benchmark their pricing and contacts for that matter.

But can shippers get FedEx and UPS to back off of some of these surcharges?  Yes, absolutely.  Obviously, smaller shippers with less buying power will have a harder time getting the carriers to cave on some of these surcharges.  But high volume, multimillion-dollar shippers can – and should – add these COVID-19 related charges to their negotiations.  And if the carriers are less willing to bend on these particular surcharges, look for offsets elsewhere in your contract. 

LM: With history as our guide, we know that occasionally when a carrier introduces a “temporary” surcharge, it becomes permanent, like the fuel surcharge.  What’s your sense on how long some of these new surcharges will be imposed on shippers?

Rob Martinez: Everybody remembers when the fuel surcharge was “temporary,” and when these charges would “partially offset” annual rate increases.  And we’ve all seen what’s happened there.  In fact, as the cost of fuel has fallen, we’ve seen both carriers revise Fuel surcharge tables and indexes MULTIPLE times to ensure the money flow.  Based on the cost of fuel for the past year, had the carriers not tweaked their tables, you’d be paying NO FSC right now.

However, we don’t see these temporary surcharges becoming permanent.  As businesses reopen, as a vaccine for COVID becomes available, as the carriers catch up on the volume flood, as airfreight lift in China loosens, etc., we believe we’ll see partial and eventually full withdrawals of these temporary fees.

LM: Will retailers eat the higher costs?

Rob Martinez: Almost invariably, the merchant will eat the higher costs.  Obviously, those online merchants that offer free shipping through membership programs like Amazon Prime, Walmart+, have no recourse to recover higher shipping costs.  

Moreover, online shopping is simply too competitive for ecommerce sellers to build in higher shipper fees.  Asking online consumers to pay for shipping in general, more or less ask for higher shipping fees is the surest way to cart abandonment and lower customer lifetime value.

LM: We hear about the carriers capping volume, why and what can shippers do about this?

Dave Sullivan: It is a tough spot to be in, for sure.  The “why” behind this is straightforward, as we’ve discussed, COVID-19 has pushed the majority of retail sales online.  This has resulted in an unprecedented surge in B2C volume for the carriers, higher cost to serve, and lower margin, and as the networks get more stressed, this leads to delivery delays, unhappy customers, etc.  Capping volume is a way to get in front of this to a degree.  In addition, the fact that these volume surges are happening during a pandemic has really stressed the carriers, in that their costs are up not only due to having to deal with volume surges but also related to the fact that workers are scared about catching the virus leading to lost man hours, having to pay overtime to cover those hours. And they also have costs related to having to purchase PPE, sanitization stations, etc.  It really is just sort of a perfect storm for them.

What can shippers do?  It really sort of depends to the degree that a shipper is able, diverting overflow volume to alternative carriers is the best option, but it’s challenging for most shippers to do this without experiencing an increase in costs on those packages that are being diverted.  That may be OK, though, given that this is hopefully short-term and customer service is likely the more important factor.  The “other” national carrier may be a tough sell, as they’re both experiencing capacity constraints to a degree, but there are other options like USPS, DHL and other parcel consolidators and regionals. 

Operationally, we have a few clients who typically ran Monday through Friday but started processing over the weekend, when they found that they carrier had capacity to pick up when they might not have during the week.  So as the overflow trailer from each weekday bled into the next day, they could potentially tender a trailer or two on a Saturday and be caught up for Monday…and then start the process over again. 

This feels very similar to what happened when the Teamsters went on strike years ago. Shippers were left scrambling for alternative carriers…many shippers were scarred by that experience and came out of it with a mandate to diversify.  Some did, some didn’t.  From a rate perspective it’s usually not the best strategy but we’ll likely see more of that coming out of the pandemic.

LM: Some shippers have realized a significant volume increase as a result of Covid, should they renegotiate now?

Trevor Outman: Yes, but that comes with a few caveats. So, in most cases, more volume and therefore more spend usually equates to a business case that shippers can present to the carriers that will justify the request for new, better, and more competitive pricing.  That’s always been sort of the reality of parcel shipping and parcel rate negotiation, but COVID-19 and the tremendous surge of e-commerce and B2C volume has changed that dynamic slightly. I think most of us are aware of the carriers, in certain, maybe still isolated cases, capping daily volumes or the number of trailers that they’ll accept from certain shippers. In most of if not all of these cases, those shippers are heavy e-commerce, B2C shippers.  In addition, we’ve seen that both carriers have instituted new surcharges aimed at large volume, B2C, residential shippers. 

The message that the carriers are sending, and this has always been the case, is that their cost to serve those shippers is much higher; margins are lower.  B2B volume is three times more profitable that B2C. 

So shippers need to understand this dynamic and where they fall relative to all of this before launching into a renegotiation effort.  And this isn’t to say that, even a shipper fits into this mold, they shouldn’t attempt to renegotiate, but they should be aware of a few things:

To what degree will the surge in volume be sustained?  If its temporary, shippers risk negotiating themselves into a short-term gain but a long-term loss once the volume drops and they potentially fall into a lower revenue tier in the contract. 

If the volume increase is sustainable, if there’s been a real shift from brick and mortar to e-comm, as an example than that’s the new reality, then go for it.
If the volume is sustainable and non-Q4 seasonal, then definitely go for it.

If volume is up and doesn’t fit the above mold, then you should be at the front of the line; increased B2B volume is an outlier right now.  The carriers love it, they want it and will negotiated aggressively.

Lastly, if your product dictates that you use express rather than ground, that can be an advantage, especially with FedEx

LM:  Can you please provide insight as to when carriers might reinstate money-back guarantees?

Trevor Outman:  When 80%+ of businesses reopen but that is anyone’s guess. Hopefully by Q4 of this year.

LM: We’ve been talking a lot about strategies for shippers, and the shipper’s perspective.  Can you perhaps speak the carriers’ perspective during COVID-19?

Rob Martinez: Challenging to say the least!  Networks overflooded with volume and subsequent delays have been well documented in nightly news.  Consumers are upset.  There’s no doubt, it’s already tarnished the FedEx brand.  Moreover, FedEx (and to a lesser extent UPS) have been capping nightly volumes for many high volume shippers, and will continue to do so, which of course can—and has already—led to client attrition.

Volume flood has led to higher costs for equipment leasing, storage, overtime costs, airline costs, hiring, etc.  Also, higher operating costs from COVID-19 related expenses (Personal Protective Equipment, sanitization stations in all high traffic facilities, facility sanitization, testing, consulting fees, etc.

Moreover, recent racial injustice protests and curfews are slowing deliveries. In addition, COVID-19 has demoralized workers, sorters and drivers, many are concerned about catching the virus.  Both have suffered COVID-19-related deaths, and even recently, 72 UPS workers tested positive in a German hub.

Finally, it’s important to keep in mind that B2C deliveries carry much lower profit margins than B2B (more miles, more stops, less delivery density).  B2B is three times times more profitable.  The carriers are justified in reasonably raising rates to offset the higher costs to serve their customers while maintaining strong delivery performance despite all these challenges.

LM: Shifting directions, what about Amazon?  Do you believe that Amazon is setting the table to compete directly with UPS and FedEx?

Trevor Outman: Very likely, yes.  As Amazon continues to invest in its own delivery network, it found a way to develop and monetize pockets of excess capacity.  Amazon Shipping was designed to capitalize on these pockets of excess capacity and deliver non-amazon platform orders. The logic being that Amazon as a self-serving carrier was already at an Amazon account, picking up Amazon orders and they could just as easily pick up non-amazon orders, inducting them into the Amazon delivery network. This falls in line with Amazon modus operandi; reflect upon AWS, which was originally designed to serve the internal needs of Amazon but is now a market leader in cloud infrastructure.

Amazon Shipping had a head start in the UK and was proving to have early success and will likely continue operations through the pandemic.  Amazon Shipping in the U.S. was still in its fledgling state as they worked on building out sort centers in major metropolitan locations, the original point of induction. While Amazon would only pick up in eight major markets, it would deliver nationwide.  This was an invite-only program and was initially only extended to Amazon sellers that had online orders and shipping volume outside the Amazon platform/network. 

When Amazon shared the news of suspending this service with their shippers the news leaked out to the press. COVID-19 has had a dramatic and polarizing impact on e-Retailers; it’s either boom or bust. Some of Shipware’s accounts that sell essential or consumable items are experiencing a surge in shipping volume, up by as much as 500% while other accounts that ship non-essential items are down by 50%.  The same demand whether up or down applies across all of Amazon orders. Naturally, this off-kilter consumer spending justified Amazon to reallocate personnel to support the surging demand of essential and consumable items. 

The real news is the underlying message which now publicly confirms Amazon was developing “Amazon Shipping” to eventually compete with FedEx and UPS.  This represents a long-term threat to both FedEx and UPS. However, the short-term outlook bodes favorably for both FedEx and UPS, both stock prices ticked upward in response to this news. The longer-term threat rests more on UPS than FedEx since FedEx did not renew their contract with Amazon last year. 

UPS continues to take advantage of Amazon’s growth despite the foreshadowing of an eventual competitor. Last year Amazon represented 17% of UPS’s total accounts receivable, which would put UPS in a precarious financial position once Amazon turns the corner and competes.  Although the Amazon Shipping service is temporarily suspended, I am sure this will come roaring back to life with no headlines or fanfare once COVID-19 has passed.