According to Benjamin Franklin, only two things are certain in life: death and taxes. We may want to add transportation rate increases to the list, as well. Despite overall declining volumes, airfreight carriers, including express providers, continue to raise rates.
Express operators have been among the positive standouts in an otherwise dismal airfreight market, with FedEx and UPS, the two largest U.S. express providers, announcing average 2020 rate increases of 4.9% and 4.2% respectively for the U.S. market. FedEx rates went into effect Jan. 6, while the UPS rates were effective Dec. 29, 2019.
Before we look at the rates, perhaps we need a bit of context.
In terms of volumes, FedEx Express ended its fiscal year in May 2019 on a positive note with total average daily volume up 3.6%. U.S. volume growth led the way, up 6.3% while international volumes increased 1.3%.
Meanwhile, UPS Air average daily volume increases are trending into double digits through the end of the third quarter in Sept. 2019, with Next Day Air up 21.1% and Deferred up 12.1%.
However, revenue per piece has declined for both providers. For its fiscal year 2019, FedEx Express reported average revenue per piece declined for U.S. packages by 2.3%, International Export declined by 2.6% and International Domestic declined 4.0%. In total, FedEx Express revenue per piece declined 2.7% as average pounds per package declined 2.1% from 14.3 in fiscal year 2018 to 14.0 in fiscal year 2019.
Through the end of September 2019, UPS’ Next Day Air revenue per piece declined 7.7%, Deferred was down 3.1% and total International Package fell by 0.8%.
Although UPS does not report average pound per package, it is assumed that it is also experiencing a decline in line with that reported by FedEx Express. This would not be surprising given the general rise in e-commerce packages, which are typically lighter in weight, and UPS’ relationship with Amazon.
To balance rates and volumes is tricky when the goal is profitability. While speed is important to shippers, it can also be costly for both providers and shippers.
The rates FedEx and UPS publish on an annual basis are standard; few shippers pay these rates, thanks to established contracts, some shippers also utilize spot rates.
Extra fees add up
Surcharges are another matter. Additional handling, dangerous goods and oversize or nonconforming freight are among the cargo types subject to numerous surcharges and, yes, these extra fees increase yearly.
For 2020, the UPS surcharge for nonconforming freight — shipments that are non-stackable, odd-shaped and/or require special handling in transit — is 30% of airfreight charges, with a $230 minimum. Special handling requirements at origin or destination, such as labeling, auditing or customized reports, result in a $94.50 per-shipment fee.
FedEx Express has similar surcharges, including additional handling for Express package services at $24 per package and $185 for freight services per freight handling unit. A missing or invalid account number results in a charge of $17 per shipment, and the electronic export information filing fee is $10 per shipment.
But it’s the fuel surcharge that can potentially wreak havoc on an invoice. According to FedEx, the fuel surcharge percentage for FedEx Express services is subject to weekly adjustment based on the weekly published U.S. Gulf Coast spot price for a gallon of kerosene-type jet fuel. The price per gallon of jet fuel range and its corresponding surcharge, available on the FedEx Express website, show a minimum price range of $1.61 to $1.66 with a surcharge of 6.25%. Surcharges increase 0.25% to 9.25% for jet fuel between $2.21 to $2.26.
Likewise, UPS also uses the weekly published U.S. Gulf Coast spot price for a gallon of kerosene-type jet fuel. UPS’ chart of surcharges based on jet fuel shows a minimum $1.43 to $1.48 with a 5.25% surcharge. Like FedEx, the UPS surcharge increases 0.25% to a maximum of 8.75% for jet fuel price range $2.13 to $2.18.
Adding capacity management to the mix
Managing capacity is also important to FedEx and UPS, for cost and profitability.
“We expect the current softness in air cargo demand to continue into calendar year 2020,” said FedEx Chief Operating Officer Raj Subramaniam. “As such, we will take action to reduce our intercontinental flights after our peak season to better match supply to demand. We have already decreased U.S. domestic flight hours and we will be aggressively looking for additional opportunities.”
Meanwhile, FedEx CEO Fred Smith said the company will retire at least 20 MD 10-10 aircraft during the current and next fiscal year, and is “highly likely” to retire 10 more A310 aircraft later this year, and the equivalent of seven MD-11 planes this fiscal year.
UPS, on the other hand, is adding to its fleet. Citing growth in Next Day Air volume, UPS plans to add 50 new, converted and leased 747-8Fs and 767s to its fleet by 2022.
As FedEx and UPS work to balance rates, volumes and capacity to improve profitability, surcharges are also on the rise to offset their additional costs. Shippers will need to be mindful of these charges and question those that are unclear.