FedEx narrows threshold of dimensional pricing on U.S. parcel shipments, hurting shippers

FedEx Corp. threw a curveball at the U.S. parcel-shipping market last night by announcing an expansion of the universe of packages subject to a costlier pricing formula.

Effective Jan. 2, FedEx will change the formula used to calculate rates on domestic air or ground parcels based on their dimensions, rather than their actual weight. Currently, FedEx determines a package's dimensions by multiplying its length, width, and height in inches and dividing the sum by 166. On Jan. 2, the divisor resets to 139.

Under FedEx's current formula, a parcel that measures one cubic foot, or 1,728 cubic inches, would yield a "dimensional weight" of 11 pounds, rounded off to the next highest weight. The same parcel, with a divisor of 139, would yield a dimensional weight of 13 pounds, a near 20-percent increase. The shipper would pay the higher of the parcel's dimensional or actual weight.

In addition, any applicable fuel surcharges would apply to the higher dimensional weight charge, thus adding to the shipper's costs.

This is the first time in more than six years that FedEx has changed the divisor for domestic parcels, which for years prior had been set at 194. Last night's announcement brings the domestic divisor in line with the measure used for FedEx's international shipments.

In 2014, Memphis-based FedEx and Atlanta-based UPS said they would apply dimensional pricing to U.S. ground parcels measuring less than 3 cubic feet. UPS and FedEx are delivering significantly more e-commerce shipments, many of which fall under the 3-cubic-foot threshold.

UPS, whose daily package volumes are much larger than FedEx's, did not announce a change to its dimensional pricing formula when it disclosed its 2017 rate adjustments on Sept. 1. Susan L. Rosenberg, a UPS spokeswoman, said today that the company plans no new rate changes.

However, Rob Martinez, president and CEO of parcel consultancy Shipware LLC, forecast that UPS could make a similar move either in November 2017 or January 2018. By waiting until the peak holiday-shipping season, UPS may not encounter much resistance from customers already burdened with moving holiday packages, Martinez said in an e-mail. UPS also can capture more revenue by applying dimensional pricing on much larger holiday volumes, he added.

Martinez said in an e-mail that it would be unwise for UPS to act now because its 2017 published rate increases have, in some cases, come in higher than FedEx's, and UPS would risk significant shipper backlash if it adjusted its dimensional pricing formula so soon.

As part of last night's announcement, FedEx announced a 3.9-percent rate increase, effective Jan. 2, on its air and international services, compared with UPS' 4.9-percent increases announced earlier this month and set to take effect Dec. 26. Rates for FedEx's ground parcel, less-than-truckload, and home delivery services will rise by 4.9 percent, also effective Jan. 2. UPS' ground parcel rates will rise by the same amount, effective Dec. 26. UPS' LTL rates rose 4.9 percent, effective yesterday.

The companies say the changes in their dimensional pricing formulas are needed to properly compensate them for handling lightweight, often bulky packages that occupy disproportionate amounts of space aboard a plane or ground vehicle, but that have traditionally been priced at their actual weight. As e-commerce volumes continue to grow, the companies say they are handling a larger proportion of packages with those characteristics. "Package weight keeps going down, but the cube keeps going up," UPS Chairman and CEO David P. Abney said at a company event in June.

The companies, and many industry experts, had hoped the various changes to dimensional-weight pricing, especially the 2014 adjustments, would convince e-commerce shippers to streamline their packaging. However, many parcels continue to be packaged with too much padding--which often isn't even necessary at all—or just empty space. "There are a lot of packages with a lot of hot air," said Satish Jindel, head of SJ Consulting Group Inc., in an e-mail.

Jerry Hempstead, head of a consultancy that bears his name, said the FedEx announcement will have more widespread impact than its 2010 adjustment because e-commerce's penetration is exponentially greater, and so many e-commerce shipments are comprised of lightweight items. The lower divisor threshold will catch many parcels that previously had escaped the dimensional pricing net, Hempstead said in an e-mail.

High-volume shippers that account for the bulk of FedEx's traffic may not experience any change in the near term, according to Jim Haller, program director, transportation services, for consultancy NPI LLC. For example, customers in the midst of multiyear contracts may be granted a waiver for the duration of their contract, Haller said. However, adjustments would likely be required as a prerequisite for contract renewals, he added.

Another notable aspect of the FedEx pricing changes is that the company has broken from UPS on a variety of fronts, ending the near lockstep moves that shippers have grown accustomed to. Besides the divergence in some of the rate increases, FedEx will assess a lower minimum charge on each ground package than will UPS, according to Martinez of Shipware. FedEx and UPS have also proposed different increases on a variety of so-called accessorial charges, fees assessed for specialized services that go beyond the basic delivery service.

Martinez said FedEx is "sending the signal that they are the market leader, no longer following the lead of UPS." FedEx, Martinez said, has "picked up its marbles and is now playing entirely in its own sandbox."

The divergence is no small matter to shippers, especially in the business-to-business parcel-delivery segment where the two firms, with combined annual revenue of about $110 billion, hold a near duopoly. Martinez said the changes will make it difficult for most shippers to accurately compare the service offerings and prices of the two giants.

Editor's note: An earlier version of this story reported that UPS might change its dim weight formula in November 2016 or January 2017. DC Velocity regrets the error.