The latest annual “State of Logistics Report,” which was issued by the Council of Supply Chain Management Professionals on June 20, confirmed what many shippers already knew: The cost of shipping parcels has been rising at a punishing rate. For the full year of 2021, parcel freight costs increased by 15%.
While several other freight sectors, such as rail and private fleet, increased more sharply in 2021, no other freight variety has seen a higher rate of increase over the past few years. Parcel freight has experienced an 11.4% compound annual growth rate over the past five years, far outstripping anything else in domestic transportation.
The bad news is that there is nothing on the horizon to stop this accelerated rate of increase in the near future. From this writer’s vantage point, all factors point to more of the same for the rest of 2022 and probably through 2023.
UPS, Fedex deliver
Both of the major parcel providers—UPS and FedEx—have seen their financial fortunes increase as a result of this growth. When Carole Tomé, the first woman to serve as CEO and first CEO who had not started as a dock worker, took over as leader of UPS in March 2020, many observers wondered how she would fare. With two-plus years under her belt, the unanimous conclusion would be that she has more than exceeded expectations. I say this from a shareholder’s perspective. Until the recent U.S. stock market swoon, UPS’ share price had reached $227 from a starting point of $94 when Tomé became CEO. Certainly a 140% increase in share price will bring smiles to most investors.
Tomé has delivered these admirable results via focusing on making the company better … not necessarily bigger. First, she divested UPS Freight, the less-than-truckload unit that always operated close to breakeven. She also made a big push toward smaller customers, which are often more profitable because they lack the buying power and negotiating leverage of larger shippers. This focus on more profitable customers also led UPS to review pricing and discounts for of all its parcel accounts. Because Tomé’s guiding philosophy is working so well for UPS, do not look for any change in direction or relaxation of pricing pressure on customers.
The story at FedEx is also changing rapidly, as for the first time in the company’s history Fred Smith is no longer the CEO, having stepped aside from day-to-day leadership into the role of executive chairman. However, Raj Subramaniam, a long time FedEx employee who now serves as CEO, **ital{is} a Fred Smith protégé, so a major shift in direction for the company probably isn’t in the cards. One aspect that will probably accelerate under Subramaniam is integration of the air and ground business units, which could be a big source of cost reduction. It should be noted that Fred Smith’s son Richard, who has been with FedEx since 2005, was recently appointed president of FedEx Express, which is still the heart of the company. Many experts familiar with the corporation expect Richard to eventually ascend to the CEO slot.
Since Subramaniam became CEO on June 1, FedEx shares have rocketed ahead about 15% for two primary reasons. First, the board of directors announced that the company will sharpen its focus on total shareholder value, and to support this directive, executive compensation packages will all include this metric. (The old adage that those things that get measured tend to improve certainly applies here.) Secondly, the board approved a very generous 50% increase to the quarterly dividend.
The emphasis on revenue quality and cost control is evident in the most recent FedEx quarterly report issued near the end of June. Revenue, income, and earnings per share were all up strongly. However, veteran parcel expert Jerry Hempstead, noted that FedEx results could be viewed as shocking, in that all of the FedEx domestic air products saw annual quarterly volume declines.
The key for shippers is that the two parcel giants—FedEx and UPS—have both put their focus on customer profitability. This measurement is now so high on their agendas that both companies have shown a willingness to cut ties with any account which cannot improve efficiency or will not accept a commensurate price increase.1 The days of shippers being able to shift their freight from one provider to the other for a better deal are pretty much gone. Shippers can use regional parcel carriers or the U.S. Postal Service (USPS), but many have found that these options just are not viable for a high-volume national program.
Other options
While some shippers have had success with USPS for parcel freight, the reality is that USPS continues to struggle, losing $92 billion since 2007. USPS has claimed these losses were caused by its being forced by law to pre-fund retiree healthcare costs. Actually, USPS hasn’t made a retiree health care payment since 2010, and now has $52 billion in unfunded liabilities. In a typical political charade, Congress is giving USPS permission to quit making payments it hasn’t actually made in over a decade. It is hard to see how this action helps anything other than giving both USPS and Congress some positive sound bites. Meanwhile real-world performance continues to sag for USPS with first quarter shipping and package revenue declining by more than 7%.
There is one recent improvement from USPS. Starting Aug. 1, parcels shipping as “Parcel Select Ground,” which is aimed at commercial accounts, or “Retail Ground,” which is aimed at consumers, will be delivered within the lower 48 states as many as three days faster for no incremental cost. This change is designed to divert parcels away from more costly air freight to the USPS ground system, which has underutilized capacity.
One potentially positive change for shippers is the arrival of the ocean–carrier giant Maersk into the e-commerce shipping sector in both Europe and North America. Via acquisition of Utah-based Visible Supply Chain Management and two similar firms in Europe, Maersk now boasts that it has a network of nine e-fulfilment centers that can reach 75% of the U.S. population within 24 hours, and 95% of the U.S. population within 48 hours. Because Maersk is recognized worldwide for its logistics prowess, the company has a running start to be a big player in e-commerce and provide additional competition to UPS and FedEx, but this will not happen quickly.
Fuel surcharges skyrocket
No matter which carrier they are using, all shippers should be keeping an eye on rising fuel surcharges. Certainly, veteran logistics managers know that fuel surcharges are a source of income for all transportation service providers. The higher diesel fuel costs go, the bigger the profit to carriers. And parcel giants UPS and FedEx are no exceptions. At press time, U.S. diesel fuel was selling for just under $5.00 per gallon. UPS fuel surcharge for ground is 17%, while air parcel pulls in 20%. In recent years, FedEx has been even more aggressive on fuel surcharges and that practice is expected to continue. FedEx Ground is currently charging 18%, while air shipments absorb a 20% fuel surcharge.
Carriers, of course, cannot control fuel costs any more than shippers can. But as long as the country has high fuel costs, fuel surcharges will continue to hurt shippers and help carriers. And while the Biden administration keeps trying various tactics to bring down oil costs, nothing they have done so far has had any significant effect on domestic prices. While my crystal ball is no clearer than anyone else’s on fuel surcharges, it seems to me that reduction in demand is the only lasting path to lower prices. The current high cost for gasoline and diesel fuel is already dampening demand, but this shift in demand will take months to work its way through the system and reduce fuel surcharges meaningfully. Historically, fuel surcharges always go up much faster than they come down.
The power of volume
So what does all of the above portend for parcel shippers? Pricing pressure will definitely not subside and will probably intensify as all parcel carriers try to improve profitability. Thus shippers must focus on the efficiency of their internal operations and cooperate with their carriers to control costs.
Bear in mind that neither FedEx nor UPS is willing to negotiate with shippers that have annual parcel expenditures of less than $10 million. Utilizing the services of a logistics company with significant parcel volume is one proven path to access better pricing. Far too many small shippers I encounter believe firmly in the prowess of their internal negotiating ability. In my opinion, negotiating know-how is much less important than buying power. If you don’t hit the volume thresholds of the big carriers, save your negotiating gunpowder for another battle.
Note:
1. Efficiency improvements that parcel carriers are expecting to see at shippers include actions such as having an open shipping door when the parcel carrier arrives versus waiting for one to open up; having parcels labeled and ready to load when the carrier arrives versus having the driver wait while freight is prepped; and packaging freight so parcels are easy to handle and less susceptible to damage.
Gartner, Inc.