A Comprehensive Look into the 2018 UPS/FedEx Rate Increase

By the time you read this article you will already be paying significantly higher UPS and FedEx shipping rates than you were just a few weeks ago.  How much higher exactly? You really don’t know. But be certain, it will be more than the 4.9% increase announced by the carriers.

At this time, you are likely reviewing your shipping data and shipping trends to try to figure out how the 2018 UPS and FedEx rate increase will impact your shipping costs going forward.  The new shipping rates, rules, surcharges and policies introduced by the carriers are becoming more complex each year and companies who are already stretched for time and money, need to allocate ever more time and resources to try to quantify the changes and control their bottom line.  While every small parcel shipper’s profile and package characteristics are different, here are some general guidelines to help gauge how the 2018 increase may affect your company.

SurePost?  “Sure” is Increasing!

The stated 2018 UPS and FedEx increases are once again allegedly 4.9%; and once again, this number represents an “average increase”, as the carriers vary the levels of price increases based on service level, weight, and zone (more on this later).

Are you a B2C shipper?  If you ship significant amounts of residential packages, you are part of the so-called e-Commerce boom, which is driving revenue away from box stores and towards online retailers which is greatly benefitting UPS and FedEx. Residential shipments, however, are not desirable from a carrier’s standpoint; being a lower margin product, they eat away at the carriers’ profits and overwhelm their operations and distribution centers during the holiday peak season. This year, despite charging peak fees for residential shipments, which supposedly helps the carriers to hire additional personnel, both carriers suffered from operational failures that made national headlines and damaged not only the carriers’ reputations, but the reputation of its customers due to damaged products and delayed or missed deliveries.

Despite these issues, to save money on shipping, more and more e-Commerce companies are adopting UPS and FedEx’s last mile services (UPS SurePost and FedEx SmartPost), where the carriers bring residential shipments to the local USPS location, and the Post Office makes the “last-mile” delivery to the customer.  The advantage to these services has always been lower cost, and fewer accessorial charges, such as: no residential surcharge fees, and no address correction fees.  However, the knocks on these services has been: slower delivery times, no true delivery guarantee, less robust reporting and tracking, and image.

In a move to take advantage of this industry trend, UPS is heavily increasing its rates for SurePost.  While FedEx SmartPost rates have varied from their Ground Rates over the years, SurePost rates have always been identical to their Ground rates. For the first time, 2017 saw UPS Ground rates vary from both FedEx Ground rates as well as UPS SurePost rates, with a premium of 7 cents on zone 2 1 lb. shipments and similar amounts on others.

In 2018, UPS is making up for lost time, boosting their SurePost rates, compared to their standard Ground Rates (as well as SmartPost rates).  The below table shows the increase for selected weights and zones, as well as the impact of increases to SurePost Delivery Area Surcharges.

The next two tables illustrate the difference in the average rate increase between Ground and SurePost shipments by zone and weights for up to 9 lbs., the most common weight range for last-mile customers.

Factoring in dollar based reductions for minimum charges, we are coming across shippers whose SurePost spend is increasing by over 8%.  While overall transportation rate increases do historically vary from the stated carrier rate increase, this large of a variance is an outlier.  If you’re an ECommerce company or a shipper who primarily relies on SurePost, it may be time to reevaluate your agreement.

Ship Large or Heavy Packages?  Be Prepared.

What kind of freight do you ship?  How heavy are your shipments?  Just as importantly, how much space do your shipments occupy in the carrier’s trucks and planes?  Both UPS and FedEx have worn you down over the years with dimensional weight pricing, which originally used a 194 divisor and a three-cubic foot threshold, to their current calculation which uses a 139 divisor with no size threshold.  Will they continue to reduce the dimensional divisor as a way of extracting additional revenue with every rate increase? Have they already found new ways of adjusting their fine print so you’re paying more for irregular or bulky shipments?  Absolutely!

The table below makes clear how UPS is exponentially increasing the surcharges for undesirable freight.

The Additional Handling and Large Package surcharges are already increasing by 10.6% and 14.3% respectively in 2018.   UPS has tacked on additional provisions effective after July 8th, upping the Additional Handling by an extra $7 dollars if the actual weight of the shipment exceeds 70 lbs., and adding an additional $10 dollars to a Large Package fee if delivered to a residential area.  If your shipments qualify for these extra fees, by the third quarter of this year your Large Package fee will have increased by 28.6%, and your AHS by over 75%!  (It should be noted that while the FedEx Oversize Fee increase is less than UPS, both surcharges are $80 in 2018, if not residential, in the case of UPS.)

Of course, not to be neglected, is the Over Maximum Limits surcharge, which is increasing by 233% to $500 per shipment (FedEx’s increase for the equivalent Ground Unauthorized Fee is less dramatic, increasing by 161% from $115 to $300).  If your shipment exceeds 150 lbs. in actual weight, 108 inches in length, or 165 inches in length and girth (2x width + 2x height), you will be incurring this $500 fee in addition to a Large Package Fee; at this point, you need to weigh your options and see if LTL is a better fit for any freight that exceeds these criteria. Keeping these shipments going parcel could literally cost you a bundle of money.

What the table above does not illustrate is an additional “quirk” to UPS’s rate increase.  In the past, the length qualification for a Large Package Fee was 108 inches; both carriers reduced their thresholds to 96 inches for 2018.  This one change alone, taken in consideration with the higher surcharge rates, can cost even a small to mid-sized shipper ($500K – $2 Million Annual spend) tens of thousands of dollars.

Do you ship during the Peak Season?  Keep Paying More

You’re probably aware of peak holiday surcharges announced mid-year by the carriers, and if you’re a residential shipper or you frequently incur Large Package or Over Maximum fees, you’ve begun paying premiums for the privilege to ship your product during the busiest weeks of the typical business cycle.

Remember when gas prices were $4.50/gallon and the carriers added a “fuel surcharge” to recoup some money?  Well, gas prices have come back down to about $2.50/gallon, yet you are still being charged for fuel on every shipment. Actually, you are paying fuel surcharges on top of your surcharges.  Once the carriers implement an additional surcharge, get ready to pay those fees forever. As a matter of fact, UPS has already announced their 2018 “peak season” surcharges.

This next table shows the full impact of shipping heavier or bulky freight during the weeks in November and December that both Carriers deem to be peak, with both the standard and peak surcharges combined.

Compared to the increase to the standard fee, Over Maximum Limit fees netted, incur an increase of 66.7%.  Increases for Large Package fees look reasonable, but only because 2017 already established a high benchmark with its $24 peak surcharge.  Additional Handling sees dramatic increases because while they did not incur a Peak Surcharge in 2017, they will in 2018 ($3.15 per shipment).

Residential Peak Surcharges continue to increase in 2018.  The standard Ground residential peak fee increases only 1 cent to 28 cents, with increases of 2-3 cents per fee on Domestic Ground.  FedEx forsook the Peak Resi fee in 2017 but did charge peak fees for Additional Handling, Oversize and Ground Unauthorized.  They have yet to announce any 2018 peak rates, but logic and history suggests they may follow suit to match UPS’s residential peak fees.  Conversely, FedEx could seek to introduce a new, unprecedented peak fee in 2018, which UPS will likely follow suit with in 2019.

Operational Fees (Accessorial Fees)

If you do not ship to residential customers, do not utilize SurePost, and do not ship heavy or bulky products, you may avoid the worst of the carriers’ rate increases. But be aware of the other accessorial fees.

We have already covered the dramatic increase to surcharges relating to Large Packages, Over Max Limits, etc.  The two tables above illustrate that some of the most dramatic increases are contingent on events when operations aren’t perfect, the rule rather than exception in the real world.  Delivery Intercept surcharges are going up by 13% and almost 19% for Phone and Web requests.  Address Corrections increase dramatically as well, also close to 19% on UPS.  (It should be noted by the way that not all Address Correction issues can be attributed to the shipper; do you have an auditor to make sure the carriers aren’t charging you for more than you deserve?) $15.90 for an address correction, REALLY?

Other increases to note include Delivery Area Surcharge (rural) Fees for both SurePost and SmartPost, and Residential Fees on FedEx Express.  If you’re a B2B shipper who has avoided some of the worst increases thus far, be sure to study UPS’s increases to their commercial Delivery Area Surcharges (13% on Ground, 12% on Air, 8% on Extended DAS).

As you well know, both UPS and FedEx vary increases across weights and zones strategically, aiming for higher increases where utilization is higher, or margins are weaker, while still claiming to average their stated 4.9% increases.

Increases by Service

The above table compares UPS and FedEx Ground rate increases averaged across zones and weight.  Both carriers are especially targeting higher increases in zones 3-5 for midweight shipments ranging from 6 lbs. to 30 lbs.; as usual, the heaviest shipments incur the lowest weight increases since they are less common and besides, as we have already seen, UPS and FedEx have found other ways to for heavyweight shippers to pay their due.  FedEx’s increases for lightweight shipments are slightly higher than UPS’s, but much of this can be attributed to lower rates relative to UPS in 2017; in 2018 FedEx Ground rates either match UPS or jump a few cents higher.

Further tables illustrating the distribution of the carrier increases for each Domestic Air service are below.  As a generalization, the lighter weight and lower zones incur lower increases for first and second day priority services.  Conversely, those same shipments see some of UPS’s highest increases for Domestic Air, while the 2 Day increases for both carriers are somewhat scattered in pattern.

As you can see, the effect of the 2018 Rate Increase will depend on your company’s own unique shipping profile.  If you’re lucky and you can avoid some of the worst increases outlined today, you may actually see an overall increase close to the stated 4.9%.  But 2018 continues to bring more and more complexity to your small parcel universe, and who knows what new rate increases and rule changes the carriers will introduce throughout the year.

Is your company truly capable of negotiating carrier agreements on your own? Can your company afford to go it alone again without a trusted negotiation partner to guide you through the intricacies of the carrier agreements?  Our savings results and past experience say, Not a Chance!

Victor Zhou is a Senior Analyst for LJM Group. LJM Group has been helping shippers improve profitability with; expert carrier re-negotiations, 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 us and/or for a complimentary analysis of the impact of the general rate increase, please call (631) 844-9500 or email kenwood@myLJM.com.