FedEx plays peak surcharge cards close to vest after UPS action

Manufacturers and retailers bracing for FedEx Corp. to follow rival UPS Inc. in imposing a peak shipping-season per-package surcharge will have to brace themselves a little while longer.

Memphis-based FedEx danced around analysts' questions about a possible surcharge during its conference call late yesterday to discuss its fiscal 2017 fourth-quarter results. Rajesh Subramaniam, the company's executive vice president, chief marketing and communications officer, said during the call that the company had not made a decision, but that it was working "with a small number of large customers" that have been responsible in years past for surges in holiday volumes to "make sure that we have the appropriate pricing in place, so we get compensated for the investments we make as well."

Subramaniam added that FedEx is focused on ensuring it has the "right forecast" in place for peak demand so it can allocate the appropriate resources to meet it

Shippers and industry watchers have been casting eyes on Memphis, FedEx's home, after Atlanta-based UPS said Monday that it would impose a peak season surcharge for the first time in its history. The UPS surcharges, which apply only to residential deliveries, will range from 27 cents per piece for its core ground parcel service, to 97-cent-per-piece surcharges on pricier second-day air and 3-Day Select delivery services. There will be no surcharges applied on any shipments during the middle two weeks of the holiday cycle, and surcharges on next-day air, second-day air, and 3-Day Select will be imposed only during the last week before the holiday, UPS said.

The two giants, which dominate the U.S. business-to-business parcel market and have combined annual revenue exceeding $120 billion, generally follow one another on moves of this magnitude; the only mystery has been which one leads and which follows. The business-to-consumer market, which has become the driver of parcel growth due to the explosion of e-commerce demand, is more competitive, containing behemoths like the U.S. Postal Service and Seattle-based Amazon.com Inc., which is building out a logistics network to support two-day deliveries of goods ordered through its "Prime" service. Prime promises two-day shipping on "eligible" purchases—which in reality is most of Amazon's product lines—for $109 a year.

David G. Ross, analyst for Stifel, an investment firm, said in a note today that although the conventional wisdom posits that FedEx will match the UPS surcharge, it's possible for FedEx to find a "different way" to collect more money from holiday shippers. Ross didn't elaborate in the note, and he did not respond to a request to comment on his opinion.

UPS moved a record 712 million packages during the 2016 peak period. A FedEx spokeswoman said the company set all-time records for holiday deliveries in 2016, but wouldn't disclose specific totals. Leading up to last year's peak, FedEx projected a 10-percent increase over the more than 325 million packages it delivered during the 2015 holiday season.

Rob Martinez, president and CEO of consultancy Shipware LLC, said the UPS announcement was timed to give the company the opportunity to negotiate concessions with big customers rather than face the prospect of losing volumes to FedEx that might not return once the holiday season passes.

Separately, FedEx reported record fiscal fourth-quarter and full-year 2017 results yesterday, with its three operating segments—FedEx Express, Ground and Freight—posting mid- to upper-single-digit fourth-quarter revenue increases year over year.