FedEx Express rolls out 2012 rate increases

FedEx said late last week it will increase non-contractual rates for certain services, effective January 2, 2012.

FedEx Ground and FedEx Home delivery rates will increase by a net average of 4.9 percent. Company officials said that the full average rate increase for both of these offerings is 5.9 percent, which is partially offset by reducing the full surcharge by one percentage point. And they also said that rates for FedEx SmartPost, its “last mile” delivery service partnership with the United States Postal Service, which is primarily spurred by e-commerce, will also change, but specific information was not made available.

Pricing details regarding surcharge changes and new rates for FedEx Ground will be made available on December 16, according to FedEx.

These pricing changes follow previous 2012 rate increase announced by FedEx in September during its Fiscal Year 2012 first quarter earnings call, when they said FedEx Express will increase shipping rates by a net average of 3.9 percent for U.S. domestic, U.S. export and U.S. import services, effective January 2, 2012.

Last month, FedEx’ biggest competitor, UPS, announced its own 2012 non-contractual rate increases.

Big Brown’s 2012 rates will be comprised of a net increase of 4.9 percent for UPS ground packages and a net increase of 4.9 percent on all UPS air services and U.S. origin international shipments. This increase is identical to the one the transportation bellwether rolled out a year ago for 2011 rate hikes.

The company also said that the rate increase for UPS Ground shipments is based on a 5.9 percent increase in the base rate, minus a 1 percent reduction to the index-based ground fuel surcharge. And the rate increase for air express and international shipments is based on a 6.9 percent base rate increase, minus a 2 percent reduction to the index-based air and international fuel surcharge, which also mirrors 2011 increases.

UPS Next Day Air Freight and UPS 2nd Day Air Freight rates for shipments within and between the U.S., Canada and Puerto Rico will increase 5.9 percent, and UPS 3 Day Freight rates will remain unchanged, according to company officials.

An industry expert told LM that these UPS rate hikes are “very reasonable,” adding that these increases are unlikely to result in a significant earnings improvement from 2011 to 2012.

Rob Martinez, CEO of parcel auditing and consulting firm Shipware LLC, said on a conference call hosted by investment firm Stifel Nicolaus last week that the 2012 rate increase announced by FedEx and UPS are “good news for investors and bad news for shippers,” as increases are likely to stick due to lack of shipper alternatives, complexity of the pricing structure, and carrier discipline.

And Jerry Hemnpstead, president of Hempstead Consulting, an Orlando, Fla.-based parcel consultancy, told LM that these increases are akin to what FedEx and UPS have traditionally done on an annual basis at this time of the year.

“Is there a story here? It’s what they have done every year,” said Hempstead. “UPS is by far the market leader on the ground, and FedEx is chasing their lead. With only two players in the marketplace there is no way FedEx is going to announce rates higher than UPS and there is no marketing benefit really of announcing a lesser increase. The differentiation, of course, is the speed of delivery (and FedEx has clearly distinguished itself in the last few years by pushing the envelope of ever improving guaranteed Delivery commitments) and in the discount levels offered.”

Hempstead said the waiting game now begins to actually look at and analyze what FedEx have done with the tariff and if it once again matches that which is published by their major competitor, UPS. Until then, he said, one can only guess and base assumptions on the fact that at least in the recent past what UPS does with Ground parcel rates the FedEx will mirror.

When FedEx and UPS announced rate changes for 2011 around this same time a year ago, they both announced they would be implementing a change to the dimensional weight volumetric divisor, which is used to tally the amount of space allocated to a specific shipment. It is derived by multiplying a shipments length, width, and height, and then dividing that figure by its weight.

Last year, FedEx implemented a change to the dimensional weight volumetric divisor from 194 to 166 for U.S. domestic services. And like FedEx UPS made changes to its dimensional weight volumetric divisor, with U.S. Domestic UPS Air Services and U.S. Domestic UPS Ground Services (for packages 3 cubic feet or larger) changing from 194 to 166, among others.

Parcel industry experts told LM that when these changes were made they would be a major hit to shippers, explaining it is strictly margin improvement as the carriers do not provide additional work or additional capacity investments while receiving more incremental revenue on the same shipments handled.

On the Stifel Nicolaus call, Martinez said that the 2011 dimensional change is not a one-time benefit, as carriers delayed the implementation of the DIM changes with some customers until it was time to renew contracts, with more of those contracts—ranging from 6 months to 3 years—set to expire in 2012, which will, in turn, boost carrier yields.