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Shipping News
So What Do the 2008 UPS and FedEx Rate Increases Really Mean?
UPS and FedEx have announced their rate increases for 2008, one of largest annual rate increases the companies have ever taken. UPS and FedEx are increasing rates an average 4.9% on ground packages and 6.9% on air shipments (less a 2% reduction in the fuel surcharge, resulting in an average 4.9% increase on air shipments). The UPS increase took effect December 31, 2007. The FedEx rate increase went into effect January 7, 2008. But what do the 2008 UPS and FedEx rate increases really mean to you and your business? With rates increasing every year and the cost of fuel continuing to soar, it's important to understand how increases in base rates and extra service charges impact your bottom line. It's important to note at the outset of this discussion that the UPS and FedEx rate increase announcements are presented in terms of averages. You might think, then, that your parcel shipping rates with UPS and FedEx should go up approximately 4.9% for all shipments. However, a 4.9% average increase is just that—an average. Rates for certain shipment types will increase more than 4.9%, while rates for other shipment types will increase less than 4.9%. Your package characteristics (size and weight), the service you most often utilize (ground or air), and the zone to which your packages are destined will determine the real rate increase impact for you. Ground package rate increases Let's start with UPS and FedEx ground shipping rate increases. We've already discussed that ground packages will average a 4.9% increase, but let's examine the impact to your bottom line based on the weight of packages you ship and the zone to which they are shipped.
Both UPS Ground and FedEx Ground have identical published list rates for ground packages. The largest percentage increase for both companies occurs on packages weighing less than 5 lbs. The increase averages 5.5% for all domestic U.S. packages weighing 1 to 4 lbs., with some increases as much as 5.9% (zone 5, 4 lbs. for example). The power of averages work out to a 4.9% increase because most packages in the higher weight brackets increased by less than 4.9%. How the carriers get to the average 4.9% increase is by taking less of an increase on higher weight packages. If you ship packages that weigh more than 80 lbs., your rates will, in many situations, increase less than 4.9%-and may even increase as little as 1% or less in many situations. That's great news if you ship heavy or oversize packages, however, this won't have any impact for the vast majority of shippers. Rates for all packages under 10 lbs. in all zones increased by a range of 4.9% to 5.9% on average. The 10 lb. and under packages appear to be bearing the brunt of this year's ground rate increase. This makes sense from the carrier standpoint, as more and more business moves directly to the customer. By increasing rates for lower weight packages and increasing the residential and delivery area surcharges, carriers are realizing tens of millions in additional revenue over previous years. Understandably, there are higher costs of delivery to residences, especially in certain areas. However, one could argue that as packages and density increase to specific areas, the carriers at some point should realize operational efficiencies that would allow them to lower, or at least stabilize some of these rates. Only time will tell.
2008 FedEx and UPS Ground Rates and Percentage Increase over 2007 Rates
Air Increases
For air shipments in 2008, both UPS and FedEx announced an effective average increase of 6.9% (less a 2% reduction in the fuel surcharge). Again, both companies announced average increases, so there is a good chance your rates could be going up by much more than 4.9%. The true increase and subsequent impact to you varies by service utilized, package size and weight, and the zone.
Let's look at a few examples of priority overnight, standard overnight and 2nd day air shipments and the percentage increase over 2007.
FedEx / UPS List Rate Comparison 2008 vs. 2007
For your reference and use, you can find charts that show percentage rate increases for package weights up to 150 pounds at www.partnership.com/08RateIncreases.
Carrier Surcharges and You: Dimes Add Up to Dollars
And what of those additional service charges? They don't seem like much…$.10 here, $0.20 there. These extra service charges are also on the rise, and it may surprise you to learn that these charges alone often account for 20% or more of your total transportation costs. Weekly pickup fees, residential delivery surcharge, declared value, delivery area surcharges are all examples of these seemingly small, extra charges that largely go unnoticed. Here's a look at changes in store for 2008 for some of the more common extra service charges. As you will see, the increase in most cases on these charges are also much greater than the 4.9% increase on your package rates.
Fuel Surcharges—or—"You said there was a reduction in the fuel surcharge. How is it that my fuel costs are increasing?"
Much as you have probably noticed every time you go to the pump, fuel costs have been skyrocketing over the last few years. Shipping companies are not immune from rising fuel costs. Their trucks, vans, and planes all use fuel, and to offset substantial increases in fuel costs, the carriers implement fuel surcharges on each shipment, a cost which is directly passed on to the shipper. Think for a moment about how both FedEx and UPS announce their rate increases for air packages. Both companies stated that rates for air shipments would increase an average of 6.9%, however, the fuel price at which surcharges begin will be adjusted for 2008, resulting in an overall fuel surcharge reduction of 2.0% and a net average rate increase of 4.9%. Notice how this works: 6.9% increase, 2.0% fuel reduction, 4.9% average rate increase. Well this is certainly good news, isn't it? Let's look more closely at this 2% "reduction"—it may not be much of a reduction at all, especially if fuel costs continue to rise, which we expect they will.
Quick background on how the fuel surcharge is calculated. Stay with us for one second. To calculate this month's fuel surcharge, the carriers reference an index-based average (for air shipments, FedEx and UPS use the U.S. Department of Energy's U.S. Gulf Coast Jet Fuel Prices; for ground shipments, the companies use the U.S. Department of Energy's National U.S. Average On Highway Diesel Fuel Prices). The carriers establish thresholds based on the price of a gallon of fuel, and apply a percentage (i.e., the fuel surcharge) to each threshold. So as the price of a gallon of fuel increases, the percentage you pay in the form of a fuel surcharge also increases. As the price of fuel decreases, the fuel surcharge percentage likewise decreases.
Curiously, the tables the carriers used to determine the fuel surcharge in 2007 only went up to $2.38 per gallon, and the fuel surcharge was capped at 18%. Really, who could imagine fuel prices going higher than that? Well they did. And what's a carrier to do in such a predicament? Why, revise the tables, of course! In short, if fuel prices fall, the 2% reduction in fuel surcharges will help. However, if fuel prices continue to rise, expect to pay more than ever before in fuel surcharges in 2008. So, let's look at an example of the difference in cost to ship the same air package in December 2007 and January 2008, taking into account the base rate increase of "6.9% less a 2% reduction in the fuel surcharge resulting in a average increase of 4.9%" and the 19.5% fuel surcharge present in January 2008.
You may be saying to yourself..."...they told me rates were going up 4.9% for air services through a combination of a 6.9% increase in rates and a 2% reduction in the air fuel surcharge. But my package rates just went up by 8.9% and the fuel surcharge is 19.50%, the highest it's ever been, resulting in a 10.73% increase in my shipping expenses. What happened?!" Welcome to the wonderful world of rate increases, surcharges and rising fuel costs. It is a difficult, if not impossible world to comprehend, and that's just the way the carriers like it. The future is uncertain, but one thing to count on in 2008 is higher shipping costs and for the majority of us, it will be substantially greater than the 4.9% advertised by the carriers. How much greater and to what extent will depend largely on the product you ship and to where it is shipped. Click here to read the UPS rate increase and FedEx rate increase release on PartnerShip.com. PartnerShip LLC, an independent third party logistics broker, delivers effective discounted shipping services to small- and medium-sized businesses. We currently provide exceptional savings and unparalleled customer service to over 16,500 businesses across the country. Since our founding in 1989, we have saved our customers millions of dollars through our deeply discounted shipping programs. If you have questions about your particular shipping situation and how the 2008 rate increases and fuel surcharges might affect your business and your bottom line, please give PartnerShip a call at 800-599-2902 or drop us an e-mail at sales@partnership.com. |
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