Companies that use FedEx Corp. to deliver packages in the United States may need to improve their packaging or else face a potentially significant increase in their shipping costs.
Built into FedEx's recent announcement of a 3.9-percent net increase in air tariff rates effective Jan. 3 is a change in the amount of space that will be allocated to shipments it accepts for delivery. The result is that shippers will be allowed less cubic space for the same shipment weight at current prices. Unless shippers add more weight to their shipments or shrink a shipment's cubic dimensions through more efficient packaging, they will pay more for FedEx to ship their goods.
The change will also affect shipments moving on FedEx Ground, the company's ground parcel operation. Rate changes for FedEx Ground will be announced later this year, the company has said. It is expected that UPS Inc., FedEx's chief rival, will adopt similar cubing changes for 2011.
At the heart of FedEx's move is one of shipping's oldest maxims: that freight cubes out on a conveyance before it weighs out, and that a less-dense item generally occupies a higher volume of space relative to its actual weight. As a result, carriers charge more for shipments with higher "dimensional weight" ratings because they are less dense and occupy more space aboard a conveyance relative to their weight.
To calculate a package's density and determine what basis to use for calculating freight charges, carriers multiply a package's length, width, and height, and divide it by a certain threshold of cubic centimeters per kilogram, usually 5,000. The calculation determines if a shipment's cost should be based on its dimensional weight—how a shipment cubes out—or its actual weight. The higher of the two weights is used to calculate the shipping costs.
What FedEx has done is reduce the so-called volumetric divisor—the amount of space allocated to a shipment—from 194 to 166. In a recent analyst conference call, the company estimated that about 8 percent of its domestic packages would be exposed to higher shipping costs under the new FedEx formula—unless shippers find a way to either add more weight to their packages or shrink their cube through better packaging methods.
Satish Jindel, president of Pittsburgh-based consultancy SJ Consulting, applauded the move, saying it will give FedEx customers an incentive to adopt leaner packaging practices. Jindel noted that millions of items ranging from iPods to cereal boxes are shipped with either too much packaging or with wasteful excess air between the inside of the cardboard and the contents.
The FedEx move "should be used by shippers as a way to get their packaging under control," Jindel said. "We have overcubed our packages in this country."
Other parcel consultants, however, view the move as a back-door rate increase in a climate where the standard rate adjustments will meet with resistance from shippers. Jerry Hempstead, a long-time parcel executive and head of a consultancy that bears his name, estimates that the change will result in a $100 million increase in shipping costs.
The FedEx move was one of the main topics of conversation at a recent parcel shipping forum in Chicago. Thomas R. Wadewitz, a transport analyst for JPMorgan Chase who attended the conference, said in a research note that "many shippers still expect to be successful" in keeping parcel rates stable heading into 2011. Mid-sized shippers and consultants viewed the FedEx change in its dimensional weight formula as an "aggressive step" by the company "that will raise shipping costs," Wadewitz wrote.