Another year, another major carrier rate increase. UPS and FedEx continue to raise their shipping rates, and since many shippers received short-term relief on the 2015 Dimensional Weight rule changes, most parcel shippers will find their shipping costs increasing more during 2016 than in years past. It is therefore essential that businesses understand the distribution and impacts of the General Rate Increase (GRI) across each service level, weight, and zone distribution relevant to their shipping needs.
Contrary to 2015, when the changes to dimensional weight practices played a major role, in 2016 most of the announced increases are going to come from the transportation costs. The stated GRI for both major carriers remain similar for 2016 as in years past, with some notable exceptions. The following is the announced rate increase by carrier:
- UPS will increase shipping rates by an average of 5.2% for Air services.
- UPS will increase shipping rates for Ground Commercial and Residential shipments by an average of 4.9%. UPS SurePost rates will also increase by 4.9%
- UPS is merging the Daily and Standard List rates, which will match the UPS Standard List rates for all services, except 3Day and Next Day Air AM
- The UPS Fuel Surcharge index will increase by 0.75% in November 2015 (go figure)
- UPS will start charging a third party billing fee of 2.5% in 2016
- There are no additional changes to dimensional weight practices in 2016, but note that most shippers that received temporary relief in 2015 will experience some or all of the impact in 2016
As for Accessorial Charges, the following is a list of increases in 2016 versus 2015. The changes for UPS will be effective December 28, 2015, unless otherwise noted.
- Additional Handling Surcharge: The Additional Handling charge will increase $1.50.
- Address Corrections: The Address Correction surcharge will increase $0.50 to $13.00.
- Area Surcharges: The Delivery Area Surcharge applied to commercial and commercial extended addresses for Air Services will increase $0.10. For Air Services, the Delivery Area Surcharge applied to residential addresses will increase $0.15, and increase $0.20 for residential extended addresses. The Delivery Area Surcharge applied to commercial and commercial extended addresses for U.S. Ground Services will increase $0.10. For U.S. Ground Services, the Delivery Area Surcharge applied to residential addresses will increase $0.15, and increase $0.20 for residential extended addresses. The Delivery Area Surcharge for UPS Hundredweight Service will increase $0.50. For packages delivered to certain Zip Codes within Alaska and Hawaii, the Remote Area Surcharge applied to Alaska will increase $2.50, and for Hawaii will increase $0.25.
- Customs Brokerage: The Disbursement fee minimum will increase $2.00, while other Government Agency Clearance and Complex Entry fees will increase $0.75. Entry Preparation charges will increase $2.25 for values of $200.01 to $1,250.00, $2.50 for values of $1,250.01 to $2,500.00, and $0.10 for each additional $1,000 of value over $2,500.00.
- Delivery Confirmation: The charges for Delivery Confirmation Signature Required and Delivery Confirmation Adult Signature Required will increase $0.25.
- Delivery Intercept®: The charge for UPS Delivery Intercept request will increase $0.40 for requests made electronically and $0.70 for requests made by telephone.
- Fuel Surcharge: The index for determining UPS’s U.S. Ground Fuel Surcharge and for UPS’s Air and International Fuel Surcharge will increase 0.75%, effective November 2, 2015.
- Hazardous Materials and International Dangerous Goods: The Hazardous Materials charges for U.S. Ground Services will increase $1.50, and will increase $2.50 for U.S. Air Services.
- Large Package Surcharge: The Large Package Surcharge will increase $10.00.
- Next Day Air Early AM Surcharge: For customers receiving Standard List rates prior to December 28, 2015, the UPS Next Day Air Early premium will increase $2.00.
- On-Call Pickup® – Area Surcharges: The Area Surcharge for a UPS On-Call Pickup request from certain Zip Codes within the 48 contiguous states will increase $0.15 for residential addresses, and $0.20 for extended residential addresses. The Alaska Remote Area Surcharge for a UPS On-Call Pickup request will increase $2.50, and the Hawaii Remote Area Surcharge for a UPS On-Call Pickup request will increase $0.25.
- Over Maximum Limits: The Over Maximum Limits fee will increase $52.50 effective November 2, 2015.
- Residential Surcharges: The Residential Surcharge for UPS Ground Services, UPS Air Services and On-Call PickUPS will increase $0.15. The Residential Surcharge for a UPS Hundredweight Service shipments will increase $1.30, and the Residential Surcharge for UPS International shipments will increase $5.00.
- Scheduled Pickup: The weekly charge assessed for Daily, Daily On-Route, and Day-Specific 4 Day Pickup service will increase $1.20 for customers with billing totals of $75.00 or more per week and $2.40 for customers with billing totals less than $75.00 per week.
- Third-Party Billing: Beginning January 4, 2016, UPS will institute a Third-Party Billing Service of 2.5% applicable to the total charges on all packages that are billed to third parties.
- FedEx will increase shipping rates by an average of 5.2% for U.S. domestic, U.S. export and U.S. import services.
- FedEx Ground and Home Delivery will increase shipping rates by an average of 4.9%.
- SmartPost rates will also increase by 4.9%.
- The FedEx Fuel Surcharge index will increase by 0.75% in November 2015.
- There are no additional changes to dimensional weight practices in 2016, but note that most shippers that received temporary relief in 2015 will experience some or all of the impact in 2016.
As for Accessorial Charges, the following is a list of the more common increases in 2016 versus 2015. Note that the changes will be effective January 4, 2016, unless otherwise noted.
- Additional Handling Surcharge: The Additional Handling charge will increase $1.50 to $10.50.
- Address Corrections: The Address Correction surcharge will increase $0.50 to $13.00.
- Area Surcharges: The Delivery Area Surcharge applied to commercial and commercial extended addresses for Air Services will increase $0.10. For Air Services, the Delivery Area Surcharge applied to residential addresses will increase $0.15, and increase $0.20 for residential extended addresses. The Delivery Area Surcharge applied to commercial and commercial extended addresses for U.S. Ground Services will increase $0.10. For FedEx Home Delivery Services, the Delivery Area Surcharge will increase $0.15, and increase $0.20 for extended addresses.
- Delivery Confirmation: The charges for Delivery Confirmation Signature Required will increase $0.25 to $4.25, Delivery Confirmation Adult Signature Required will increase $0.25 to $5.25, while Indirect Signature increases $0.75 to $4.25.
- Fuel Surcharge: The index for determining FedEx’s Fuel Surcharge will increase 0.75%, effective November 2, 2015.
- Hazardous Materials and International Dangerous Goods: The Hazardous Materials charges for will increase $1.50.
- Oversize Surcharge: Oversize Package Surcharge will increase $10.00 to $67.50.
- Over Maximum Limits: The Over Maximum Limits fee will increase $52.50 TO $110.00 effective November 2, 2015.
- Residential Surcharges: The Residential Surcharge for Home Delivery will increase $0.15 to $3.25 and Air will increase $0.15 to $3.65.
RATE INCREASES ARE GREATER THAN THEY APPEAR
Superficially, the good news for shippers is that from a service level perspective, 2016 rates had a similar percentage increase as they have had in prior years. Basic ground service, the service most commonly used by customers, received a stated increase of 4.9% for both carriers. However, on a rate by rate basis these averages are skewed considerably. Why? Simply put, the more numerous but less utilized weights are getting increases below that average, whereas the few services and weights that the carriers see most commonly shipped have much higher increases. Basically, like with previous rate increases, lighter weight shipments are seeing a much higher increase…
Here are the average increases by service:
- Ground: 1-5 lbs. zones 2-8 will average a 5.4% to 5.9% increase, versus a 3.8% increase for 50-70 lbs.
- Priority Overnight increases 3.1% in Zone 2 versus 5.2% in Zone 8
- 2 Day Air: 7.5% to 7.7%
- Express Saver: 6.5% to 7.7%
- Ground Hundredweight: 4.7%
- Ground Standard to Canada: 5.8% 1-5 lbs. (3.4% overall)
- International Express OB Lanes: varies, but 5.0% – 6.5% in more common lanes
These are aggregate averages across a broad spectrum of rates. The carriers have targeted specific zones and weight classes based on internal metrics so that every individual shipment rate receives an adjustment that falls below, above, and in some cases, significantly above, the stated average increase. That’s why having an independent party analyze your carrier agreement is not just a nice thing to do—it’s vital.
While we have analyzed patterns according to weight, zone, and service levels, it is important to remember that, across a very broad spectrum of rates, there are always outliers and exceptions. For example, while the overall trend sees higher increases concentrated for lighter weight ranges, don’t discount the possibility of significant, and surprising, increases for heavier shipments. For example, UPS international increases are somewhat higher than the domestic increases. The rates up to 25 Lbs. take a relative low increase of about 3.5%, but over 25 lbs. are closer to 7%.
The main takeaway is that, while higher increases in the past have allowed the carriers to introduce more modest increases in 2016 relative to prior years, there is no doubt that rates and fees have increased, and will continue to increase at levels beyond the averages the carriers publish, regardless of economic conditions. The compounded effect of each year’s increase means that the same shipment may cost 30%-50% more today compared to five years ago.
SURCHARGES AND FEES
In addition to the compounded rate increases mentioned above, the same applies to accessorial charges. The below table summarizes many of the FedEx surcharges and fees, comparing 2008, 2012, and 2016:
Though the taxonomic structure varies slightly for UPS versus FedEx, most of the fees are the same or similar. Fuel is the one exception, with UPS fuel surcharges tending to be 1.25 to 1.75 percentage points higher. Many are not aware that the fuel surcharge not only applies as a percentage of your base rate, but also to select fees, including the following:
- Residential Delivery Charges
- Delivery Charges
- Pickup Charges
- Return Services Charges
- A.M. Charges
- International Extended Area Charges
- Saturday Delivery and Pickup
- Large Package Surcharge / Oversize Fees
The fuel surcharge is applied in a similar fashion by both carriers, but the subtle differences could have a meaningful impact based on your shipment trends.
MITIGATING THE RATE INCREASE
Whether you prioritize your logistics needs on any combination of convenience, reliability, on time performance, controlling damages, or any other criteria, we all want to work with a reliable carrier that meets our service expectations. Although FedEx and UPS justify their rates and increases by claiming to protect margins and yield, they are still, in the end run, competing for your business. As a result, there remains pricing flexibility from the carriers consistent with what we have seen in the past.
Having a solid grasp of your shipment analytics will allow you to identify which fees, as well as other unexpected charges are most commonly incurred, and this knowledge will provide you with a better framework when approaching the carriers for either your initial contract negotiations or adjustments. At minimum, on annual basis, one should perform a comprehensive assessment of the year/year impact on transportation costs, dimensional weight, accessorial charges, minimum charges and other areas. Competitive pressure between the carriers, and your own shipment profile, are key components to what options may exist for the shipper. A solid grasp of key variables including, but not limited to, dimensions of packaging, conveyability, pickup and delivery density, single versus multi-piece, commodity type, need for special handling, perishability, hazardous materials, weights, services and products, and zone distributions will help you get a better contract specifically tailored to your business and impactful to your bottom line.
The unexpected and understated increases that accompany the 2016 GRI are a great reason for you to introduce your concerns now about rising shipping costs when you have the conversation with your carrier. Ultimately, the bottom-line is that the flexibility to negotiate your small parcel typically exists, as long as you understand your business, recognize what flexibility exists with each of the carriers, and know how and when to ask for the right kind of discounts.
In the end, remember that your business is extremely important to the carriers! Each one has specific discounts, fees, rebates, and incentives that are negotiable beyond just the initial offer they put on the table. Taking the time to analyze your shipment profile and assess your needs versus your costs will allow you to negotiate discounts and fees beyond just their average, standard template contract, to one that fits your business and operations model. Most importantly, being within the term of a current contract with any of the carriers does not mean you must continue to overpay, and having another year or two left on your current contract does not limit your ability to negotiate any component of your contract, as a 30-day out clause exists, for you the customer, as well as the carrier.
Thomas Andersen is Partner / Vice President of Supply Chain Service for LJM Consultants. LJM Consultants has been helping shippers save time and improve profitability with expert FedEx & UPS auditing, as well as shipping consulting services focused on cost management since 1998. Please visit our website at www.myLJM.com. To speak with Thomas and/or for a complimentary analysis of the impact of the GRI, please call (631) 844-9500 or emailtandersen@myLJM.com.