How Far Did That Parcel Shipment Travel? Pay Up! - FedEx (NYSE:FDX), United Parcel Service (NYSE:UPS)

Effective Jan. 24, FedEx Corp. will begin levying delivery surcharges on harder-to-process shipments based on the distance they travel, joining rival UPS Inc. in imposing another layer of costly fees on customers whose parcels require some form of special handling.

FedEx (NYSE:FDX) and UPS (NYSE:UPS) have long slapped surcharges on parcels whose weight or dimensions make it difficult, if not impossible, to move through the labyrinth of conveyors that most parcels traverse. However, the amount of time a parcel spends in a carrier's network was never factored into surcharge calculations.

That changed last April when UPS announced that surcharges on shipments requiring "additional handling" would be tied to how far they traveled. Parcels moving over intermediate and long distances — 600 to 1,500 miles — would be hit with relatively high surcharge increases. By contrast, shipments moving less than 150 miles would face mild surcharge increases, if any. The carriers' domestic networks are divided into geographic zones based on the distance from the origin facility to the end customer.

FedEx held back on making similar moves during 2021, an unusual step given the carriers' history of acting almost simultaneously. The new policy will apply to all eligible U.S. and international shipments moving via FedEx Express, the company's air and international delivery service, and FedEx Ground, which handles most U.S. parcel deliveries.

The carriers' programs will affect a relatively small segment of the parcel shipping market. However, delivery volumes of heavier and irregular-shaped shipments will increase as more consumers and businesses order those types of products online. Brian C. Gibbs, founder and CEO of The Refund Retriever LLC, a parcel data analytics and consulting firm, said that the carriers may find the distance-based surcharge pricing so appealing that they expand it to other service lines.

Double-Digit Increases

Under the carriers' policies, parcels must weigh more than 50 pounds to be subject to additional handling fees. Dimensional fees can also be imposed on parcels measuring more than 48 inches on the longest side, more than 30 inches on the second-longest side, or more than 105 inches in combined length and girth. In addition, surcharges are tacked onto parcels whose packaging doesn't conform to the carriers' standards.

The carriers can levy surcharges on weight, dimensions, or packaging but typically only choose one of those characteristics. Overweight parcels carry the highest surcharges, while the packaging surcharges are the lowest. The carriers determine if and when fees will apply and which ones will actually be assessed. Customers can challenge those decisions after the fact if they feel the carriers have erred.

FedEx, again following UPS' spring 2021 lead, will roll out distance-based surcharges on so-called oversized packages that exceed 96 inches in length or 130 inches in length and girth. Those fees are separate from the additional-handling levies.

Under the FedEx program, the domestic levy on a 51-pound parcel moving between 601 and 1,500 miles, considered the most common length of haul for heavier or irregular shipments, will climb $4 per parcel to $29.50 per piece. The additional-handling levy on a shipment exceeding any of the dimensional limits will increase by $3.50 per piece to $19.50 per parcel.

UPS, whose increases go into effect Dec. 26, will impose a $30.50-per-piece fee on heavier shipments traveling more than 600 miles, up from the current level of $27. Surcharges on shipments exceeding the dimensional limits and traveling 601 miles or longer will increase to $20.50 per piece from $18.

FedEx 2022 surcharges will actually be lower for shipments traveling less than 150 miles, while UPS' levies will rise modestly. That reflects lower carrier costs that come with the minimal amount of time that parcels spend in their networks, said Hayden Snow, senior account executive at TransImpact LLC, a consultancy.

Snow added that high-volume shippers generally ship over shorter distances. This allows carriers to achieve superior delivery density and thus reduce their delivery costs, he said.

By contrast, lower-volume shippers tend to ship over long distances, which translates into higher carrier costs, Snow said. "A non conveyable package routed through three or four UPS or FedEx locations gets handled four different times from start to finish," Snow said. "The longer these packages are in their networks, the more costly it becomes."

Analysts said the zone-based surcharge strategies are, to an extent, prudent attempts by the carriers to align their pricing with the higher costs of manually processing and delivering heavier or irregular shipments over longer distances. Ideally, FedEx and UPS want to automate every part of the process save for pickup at origin and delivery to the doorstep. Any step in between that requires human intervention carries with it an additional cost that the carriers want to be, and in many cases should be, compensated for, they said.

However, Josh Dunham, CEO of consultancy Reveel Group, said the magnitude of the increases on intermediate and long-haul legs are driven more by profit motives than by cost offsets. The fees are "a way for them to disguise what amounts to an egregious increase," Dunham said.

Shippers accustomed to forking over surcharge money just for their parcels' physical profile and not for the distance they move may need to rethink how they distribute their goods, said Dunham. "This is the type of fee that forces them to take a hard look at their networks," he said. Gibbs of The Refund Retriever said software tools are available that will provide customers with a heads-up on how the zone pricing will affect their costs.

However, Gibbs said that the higher surcharge levels, especially over the longer hauls, are meaningful enough to possibly force the carriers' customers to stop making or carrying certain items. It will be challenging for the customers to pass on higher charges to end users who've grown accustomed to "free" or nominally priced shipping, Gibbs said.

Shippers do have recourse, analysts said. The carriers can be persuaded to reduce the distance-based surcharges if they determine a shipper's business is too valuable to lose over the levy. Carriers may also be amenable to granting what is known as variances, where they allow a shipment whose length exceeds the 48-inch maximum by, say, 1 or 2 inches to slide by without a surcharge. Above all, shippers need to understand the impact their shipping profile has on their business as well as the carriers' business, they said.

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. The content was purely for informational purposes only and not intended to be investing advice.

Image Sourced from Pixabay

FDXFedEx Corp

$403.600.07%

Overview

UPSUnited Parcel Service Inc

$108.73-0.07%

Market News and Data brought to you by Benzinga APIs

To add Benzinga News as your preferred source on Google, click here.