Peak parcel surcharges likely to persist despite slowing demand and carrier overcapacity

The past two peak seasons for parcel delivery services have been rough. Parcel carriers introduced a delivery surcharge almost at will. Shippers, knowing their service options were limited during a period of unprecedented pandemic-related demand, have largely absorbed the fees.

This year’s peak season, which begins in earnest at the end of October, will be completely different. Shipper activity slowed as inflation, higher interest rates and recession worries held back consumer spending. Many shippers are already holding too much inventory or have moved holiday traffic into their networks due to ongoing concerns about supply chain disruptions.

Quotas, or limits, that carriers imposed on large shippers during the past two peak seasons to cushion the effect of huge spikes in demand are not a factor this year, except perhaps for the largest shippers.

Carriers that have built up workforce and infrastructure capacity in anticipation of increased demand may find it difficult to attract the business to justify their investment. FedEx Ground, the ground delivery division of FedEx Corp. (NYSE: FDX) and the unit that ships most of FedEx’s holiday volume has already warned of lower peak traffic than originally forecast.

But the change in the macro landscape will not affect the many peak season surcharges currently in place, most analysts say. Barring the unlikely scenario that one carrier takes the initiative to undercut another, FedEx and rival UPS Inc. (NYSE: UPS) appropriate surcharges are unlikely to budge, especially at this late date.

Both carriers are under pressure to gain margins in the face of rising costs. As a result, they will resist downshifting at the surcharge level even in the face of punk demand, excess capacity and shipper resistance, they said.

“We would be very surprised if national parcel carriers didn’t see a spike in surcharges this year,” said Bascom Majors, a transportation analyst at Susquehanna Investment Group. “Inflation is still rampant, even if the peak turns out to be weak.”

The 2023 holiday season could be a different story, Majors said. However, those problems will be there for several months, Majors said.

Nate Skiver, founder and president of consulting firm LPF Spend Management, said any breaks in peak surcharges, if any at all, have already happened. Any reduction in surcharges would be reserved only for those shippers whose year-round revenue and margins are critical to carriers, Skiver said.

“Discovering that there are small volumes does not trigger a flurry of negotiations with a shipper that is so close to the peak,” Skiver said. A shipper will have leverage for now only if it has a sufficiently diverse carrier base and can easily move volumes on short notice where it could threaten to walk away, he said.

That’s an unlikely prospect, said Jason Murray, co-founder of Shipium, a provider of multi-carrier shipping options for e-commerce companies. Package shippers, he said, “don’t have a lot of options to go elsewhere because the vast majority of customers don’t have the necessary software installed to quickly add new carriers to their network.”

A reduction in surcharges will only happen if one carrier blinks and the other is forced to respond, Murray said.

Branden Burt, TransImpact LLC’s director of package operations, said UPS and FedEx are overestimating forecast demand for the holidays. Because of this, carriers must retain their surcharges to increase profitability.

Burt advised shippers to forget about the surcharges and instead focus on their 2023 pricing programs. Next year will begin with the largest general rate increase (GRI) in FedEx history, and UPS, which as of this writing has yet to announce its GRI, is expected to raise a similar amount.

With capacity expected to exceed demand for some time, shippers have the best chance in years to take the lead in next year’s negotiations, Burt added.

“Both carriers are hungry for business,” he said. “Shippers who want to submit RFPs to take advantage of this opportunity should do so quickly to get ahead of GRI in January.”

Paul Yausi, senior consultant at consulting firm Shipware LLC, takes a different view of peak surcharges. FedEx has become very aggressive in bidding for new business and is set to enter the market with stronger discount incentives than UPS, according to Yaussy’s channel review. That’s a possible sign that FedEx is struggling to fill its network, Yaussi explained. It also suggests that with effective negotiation practices, shippers will be able to push carriers away from their tough stance on surcharges, he said.

“Both carriers are open about the fact that surcharges are levers that can be used at any time to control margins,” he said. “Because there’s some uncertainty in the peak season, it naturally opens up the idea that they’re really up for discussion.”

The ability to negotiate additional fees during the peak season does not depend on how much business a shipper has with a carrier, he added.

If there’s one saving grace for shippers, it’s that they won’t have to worry too much about getting their holiday items delivered on time. With lower demand than the past two years and volume restrictions largely a thing of the past, UPS and FedEx will be more flexible in responding to shippers’ concerns during this peak than the previous two, Skiver said.

“Operators need volume and profit so they limit volume only when there’s a high service risk on the network,” Skiver said. Given what is expected to be a relatively subdued peak, such scenarios “should be much less common,” he said.

The TOP 500 FREIGHTWAVES The list of hired carriers includes FedEx (No. 1) and KBS (No. 2).