Transportation Management Focus: You Move It, We Write About It  
 
 

- Nov. 16 , 2010 -

Logistics News: UPS, FedEx Rate Hike Could be More Painful to Shippers than Many Realize


DIM Weight, Accessorial Changes May Increase Costs Well above Headline Increase Levels; 18.7% Increase in One Example


 
 


SCDigest Editorial Staff

SCDigest Says:
If you have not calculated the effect of the GRI announcements (base rates, accessorial increases, DIM rule changes, etc.) on your business you could be facing some embarrassing questions from your employer in February.

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Over the last few weeks, first FedEx and then UPS in near tandem announced a series of published rate hikes for 2011. The headline news was that the average increase at FedEx will be 3.9% and for UPS 4.9%, in both cases net rate changes based on a combination of even high rate hikes combined with a reduction in fuel surcharges. But many shippers can actually expect to see their costs rise even more than those numbers.

UPS announced late last week that its 4.9% net hike would come through a combination of a 5.9% jump in rates and a 1% reduction in the UPS Ground services fuel surcharge, while UPS Air and International services rates will also rise a net 4.9% through a combination of a 6.9% increase in rates and a 2% decline in the UPS Air and International services fuel surcharge.

FedEx had earlier announced similar rate hikes through a combination of base rate increases and fuel surcharge decreases, though the Memphis-based carrier's Express rates will increase a percentage point less than its Atlanta-based rival, coming in at a net 3.9% rise (5.9% base rate increase less 2% reduction in fuel surcharge).

The level of year-over-year increases are high in historical terms and vis-a-vis still relatively soft demand in most markets and services (Asia to US being an exception). But shippers need to be aware of several ways their parcel shipping costs could take a big jump in 2011.

For example, FedEx and UPS accessorial charges are set to increase even more substantially than the general rates. Some of the planned increases in accessorial charges by FedEx for 2011 - the largest in its history -  are listed below.

  • FDX Express Delivery Area Surcharge up 8.9% ($1.85 vs. $1.70)
  • FDX Express Residential Area Surcharges up 10.0% ($2.75 vs. $2.50)
  • FDX Express Extended Area Surcharge up 9.1% ($3.00 vs. $2.75)
  • FDX Express Indirect Signature Required up 14.3% ($2.00 vs. $1.75)

There was similar news out of UPS, with the Residential Surcharge Ground up 11.36%, the Residential Surcharge Air up 10%, and the Extended Delivery Area Surcharge up  9.09% for residential deliveries and 8.82% for commercial deliveries in some zip codes, among other accessorial charge increases.

Changing DIM Factors Could Pack a Real Cost Wallop

Perhaps having the biggest impact on many shippers, however, are the planned changes by both carriers in the dimensional weight (DIM) factor - a mechanism created a few years ago to enable the carriers to charge more for large but relatively lighter weight parcel shipments (dropping the previous "oversized" fixed surcharge).

Both FedEx and UPS are changing for 2011 the divisor on air and ground domestic shipments from 194 to 166, a factor used to determine whether a package is subject to higher DIM rates (almost, literally, similar conceptually to the IRS' Alternative Minimum Tax or ATM).

 
"Most shippers again will fail to appreciate how big an impact this change can have," says Jerry Hempstead, a long-time parcel industry executive and now president of Hempstead Consulting.

He notes, for example, that this change will likely mean many shippers that have not been subject to the DIM weighting or only marginally so in the past could now see a higher percentage of their parcel shipments are now impacted.

Hempstead says when the DIM concept was first introduced, many shippers at the time did not fully appreciate the impact it would have on shipping costs, and that all parcel shippers should understand how this latest change will potentially impact their spend.

"A shipper that may have had few packages DIM under the 194 rule may wake up in January to find all their packages dim," Hempstead says.

 

(Transportation Management Article - Continued Below)

 
     
 
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He offered SCDigest an example of the potential impact for a specific parcel shipment:

"Let's say a box is 18 x 18 x 24 inches that today DIMs at 40 lbs. Further say the fuel surcharge is 8.5% (will be for November) and that the shipper receives a 50% discount from published rates. Today, that shipper would you pay $92.58," Hempstead says.

However, "Come January that shipper will pay for 47 pounds because of the change in the DIM divisor," Hempstead notes. "The rate you will have to pay (assuming the fuel surcharge stays constant - but adjusted down by 2% because of the way the carriers structured the increase) now becomes $109.91. The increase that you are paying for that package over your current charge 18.7% - a far cry from the 3.9% or 4.9% net increases suggested in the press releases."

While some might wonder whether decreasing the fuel surcharges is a smart move by the carriers in a period of rising diesel prices, Hempstead says that there is not obvious logic in the move.

First, he notes that by reducing the level of fuel surcharge and putting more dollars in the General Rate Increase (GRI), the two carriers "don't have to give as much of it back" should fuel cost go back down.

Second, after the GRI is imposed, "the carriers always reserve the right to change their fuel surcharge formula at any time without notice," he says.

Third, the announced reductions of a percent or two in fuel surcharges aren't completely what they seem in any cases, because the somewhat reduced surcharges are applied on a now increased base rate, negating some of the impact of the nominal reduction in fuel surcharges.

 

What is Parcel Shipper to Do?

"If you have not calculated the effect of the GRI announcements (base rates, accessorial increases, DIM rule changes, etc.) on your business you could be facing some embarrassing questions from your employer in February when the January numbers are run and the expense for parcel shipping is way over budget," Hempstead says.

"Most shippers never thought to include a dimensional rule concession in their contract in the past. Some may have figured it really was not necessary or some may have been told by their rep that its non-negotiable," Hempstead adds. With these changes in cost and the likelihood more of a company's shipments may be hit with this parcel AMT, that approach needs to change, he says.

"The fact is DIM is negotiable. I have seen complete waivers of dim rules, I have seen divisors of 500, divisors of 250 and 200," Hempstead says.

"Always remember that most parcel contracts still don't have golden handcuffs in them and you can put your business out to competitive bid," he adds. "Do understand though that the way that game is being played out by the carriers right now you will most likely have to switch carriers to obtain the optimum result. The good news though is that there is such little service differentiation between the big two that a switch is fairly painless and the shipper may find that the incoming carrier is willing to provide economic enticements to temper the pain of change."

What is your reaction to the FedEx and UPS rate increases? How big an impact might the DIM divisor change really have? Let us know your thoughts at the Feedback button below.


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