September 17, 2014

Memo to FedEx ground shippers: Raise your budgets!

Rate increases, changes to dimensional weight pricing for all ground shipments could send shipping rates soaring.

By Mark B. Solomon

FedEx Corp. said late yesterday that it will hike average list rates by 4.9 percent on its three main product segments: domestic express and international air services connecting the U.S., ground parcel, and less than-truckload (LTL). The rate increases will take effect on Jan. 5, the same day that the company will begin pricing ground parcels that measure less than 3 cubic feet based on their dimensions instead of their weight.

In addition, FedEx today released its fiscal 2015 first quarter results showing a solid quarter across all of its product lines. The results exceeded most analysts' expectations and sent FedEx stock soaring more than $6 a share in early trading on the New York Stock Exchange.

The combined impact of the rate increases and the shift to so-called dimensional weight pricing are a double-whammy for many customers of FedEx Ground, FedEx's fastest-growing unit. Those especially vulnerable are businesses that tender overpackaged, lightweight shipments that occupy a disproportionate share of space in a FedEx van. Currently, those shippers qualify for a relatively low rate even though their goods cube out much faster than they weigh out. Effective Jan. 5, however, they could be hit with double-digit price hikes unless they can shrink their parcels' cube by using less packaging; FedEx executives said on an analyst call today that the company is working with many customers to streamline their packaging.

As if ground shippers don't have enough angst, the rate increases on millions of lightweight shipments transiting short distances will be significantly higher than the average rate hike announced yesterday. For example, the rate for a 1-pound ground parcel moving between 151 and 300 miles will rise by 7 percent, according to data from Spend Management Experts, a consulting company. The rate for a 7-pound package moving between 301 and 600 miles will increase by 6.5 percent, according to the data.

Virtually all of the increases above the 4.9 percent average will fall on packages weighing up to 15 pounds; the typical FedEx Ground business-to-business (B2B) package weighs less than 15 pounds, while the average residential shipment weighs less than 10 pounds, according to John Haber, Spend Management Experts CEO. In addition, the FedEx rates will be higher on shipments moving 600 miles or less, the normal distance of a ground delivery.

Haber expects FedEx rival UPS Inc., which hasn't unveiled its 2015 list rates, to match the FedEx increases. Like FedEx, will shift to dimensional pricing for parcels measuring less than 3 cubic feet.

The increases don't stop there. FedEx Ground's so-called minimum charge, which is the rate assessed on a 1-pound shipment moving under 150 miles, will increase by 6 percent to $6.61, plus any applicable fuel surcharge. That increase will mostly affect larger shippers, according to Jerry Hempstead, a long-time parcel executive and head of a consultancy that bears his name.

FedEx will also hike fees on a broad range of "accessorial" services that are provided beyond the actual line-haul operation. For example, fees for specialized types of deliveries will increase by 4.3 percent to as high as 16.9 percent depending on the services involved, according to consultancy Shipware LLC.

The rate increase on traffic moved by FedEx Freight, the company's LTL unit, will be the same as those for its other units, a departure from past practice, according to Rob Martinez, Shipware's president and CEO. In addition, the effective date for the FedEx Freight increases will be moved up three months to align with the rate changes in the rest of the portfolio, Martinez added.

In an email, Martinez said the increases were in-line with expectations. Yet he called them "very significant," especially when combined with the shifts to dimensional pricing. Haber added that many businesses shipping by ground with FedEx and UPS are "looking at double-digit percentage year-over-year increases" due to the impact of the rate increases and dimensional price change.

The slew of rate actions came as Memphis-based FedEx released strong fiscal first-quarter numbers before financial markets opened today. The company reported 24-percent increases in net and operating income, respectively, over the year-earlier quarter. Revenue rose 6 percent year-over-year to $11.7 billion, the company said.

The numbers were solid across-the-board. FedEx Express' operating income rose 35 percent from the year-earlier period, while operating margin increased 4.1 percent. Domestic package volume rose 5 percent, paced by an 8-percent gain in overnight and second-day package volumes.

FedEx Ground's operating income rose 13 percent year-over-year, while operating margins climbed 18.4 percent. The unit's revenue rose 8 percent to $2.96 billion. Additionally, FedEx Ground's average daily volume rose 6 percent, due mostly to growth in e-commerce. Revenue per package increased 3 percent because of higher rates and increases in residential delivery and fuel surcharges.

FedEx Freight's operating income rose 70 percent year-over-year, while margins increased 10.4 percent. Revenue rose 7 percent to $1.61 billion. The unit's average daily shipment volume rose 11 percent, paced by a 13 percent increase in its expedited LTL service. Revenue per shipment increased 3 percent.

Frederick W. Smith, FedEx's chairman, president, and CEO, called the numbers an "outstanding start" to the company's fiscal year. Company executives said it is on track to hit goals from a "profit improvement plan" announced in 2012 that is expected to add $1.7 billion annually to its bottom line by 2016. Most of the changes under the plan are targeted at the FedEx Express unit.

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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