FedEx makes surgical strike in peak-shipping-season battle with UPS

By targeting peak holiday season surcharges at heavy, oversized shipments—often the main culprits in driving up peak shipping costs—FedEx Corp. appears to be betting it can protect its cost structure while retaining, if not gaining, small, low-cube parcel traffic that still accounts for most peak activity and isn't a drag on the company's operating network.

In diverging from rival UPS Inc., which will apply a 27-cent per-package surcharge on ground residential deliveries for three of the five weeks of the upcoming peak season, and 91-cent and 97-cent per-package surcharges on air and three-day deliveries, respectively, during the final week, Memphis-based FedEx will not impose any surcharges on the standard small-parcel deliveries its infrastructure is essentially built to handle. Instead, it will focus on the "large format" items that are not conveyable, may require extra or special handling, or both.

Delivery demand for those items is rising rapidly as retailers expand the stock-keeping units available for online purchase. This holiday season, 15 percent of all traffic will be comprised of the types of shipments to be affected by the new FedEx surcharges, according to SJ Consulting Group Inc. That translates into an exponential increase in the past few years, according to Satish Jindel, SJ's president. However, those shipments generally drive up line-haul costs because they are so unusually large and heavy.

In addition, while Atlanta-based UPS will not apply any surcharges during the middle two weeks of the five-week holiday cycle, the FedEx charges will be in effect from start to finish.

The biggest change occurs in a segment of the parcel delivery trade known as "unauthorized" packages, shipments with such outsized weight or dimensions that the company may refuse to handle them. That surcharge will soar by a whopping $300 per package, to $415 per package. The surcharge will apply to U.S. and international ground deliveries.

FedEx also boosted its surcharge on "oversize" packages—items not quite as outsized and somewhat easier for its system to handle—by $25 per package, to $97.50. The charge applies to all domestic air shipments and U.S. and international ground shipments. Finally, FedEx added a $3 per-package "additional handling" surcharge to U.S. express and U.S. and international ground deliveries, bringing that surcharge to $14 per package.

The announcement of the oversized and special handling charges was expected, though some observers were surprised by the magnitude of the jump in the "unauthorized" shipment surcharge. UPS also imposes surcharges on similar awkwardly shaped shipments.

For the past decade, the two companies have followed in virtual lockstep in implementing major pricing actions. There has been much speculation since UPS' June 19 announcement that FedEx would follow suit with similar surcharges. Even though FedEx went in another direction, Jindel doesn't expect UPS to lose peak business exclusively committed to it. However, shippers that are using both services and that aren't tendering the types of goods subject to the surcharge may tilt toward FedEx, he said.

Rob Martinez, CEO of consultancy Shipware LLC, said the FedEx moves will not result in a flood of UPS business to FedEx, but they will check UPS' ability to make all its surcharge increases stick. "Now that shippers have a choice and clear price difference, UPS customers will have more leverage to negotiate bigger residential discounts to offset the holiday rate hikes," Martinez said. UPS shippers will give the carrier a chance to adjust its increases before switching carriers, he added.

Several analysts said FedEx's pricing strategy is aimed at either discouraging the tender of very large items or forcing shippers to package them more prudently. Both carriers have adjusted their pricing based on package dimensions to make it more costly for customers shipping high-cube, low-weight items like pillows and lampshades.

This holiday, FedEx may end up sacrificing revenue should shippers of outsized items defect to UPS or to less-than-truckload (LTL) carriers whose forte is handling those types of goods. Yet the sacrifice may be worth it if FedEx drives down line-haul costs and frees up precious trailer space for 50 or so small parcels that could fit in the space equivalent of one or two outsized items.

Krishna Iyer, who spent nine years at FedEx and is today director, strategic partnerships and business development, at ShipStation, said merchants that fulfill on sites like Amazon.com, many of which are not sophisticated in the ways of shipping, need to be careful lest they get hit hard for surcharges on such items as a free-standing desk. Shippers also should be aware that the carrier determines which goods require special handling, and that the shipper may not become aware of the carrier's dictates until the shipment is delivered. "You will get the sticker shock after the fact, without much way to plan, in some cases," he said.

Most surcharges, which by definition are punitive in nature, are designed to force or influence changes in shipper behavior. In the case of residential deliveries, which for FedEx and UPS have poor delivery density, parcels tendered to them are often inducted deep into the system of the U.S. Postal Service, a low-cost operator that is required by law to serve every address, for final delivery. However, LTL and even truckload carriers are moving into the final-mile segment, drawn by the rapid growth triggered by the e-commerce phenomenon. "The carriers seem to be focusing on 'beautiful freight,' or packages that are profitable and fit within their network constraints, rather than pure volume," said Iyer. The surcharges, he said, are part of a strategy to retain that good freight—largely high-density business-to-business deliveries—while sending more shippers to their final-mile services for residential deliveries, he said.

As a byproduct of that, more shippers of super-outsized packages could begin taking a closer look at residential LTL services, Iyer added.