DC Velocity - January 2012

newsworthy
The sum of “dim”: More cash for parcel carriers,
more pain for shippers

Parcel consultants have built an industry around saving their customers money in rate negotiations with FedEx and UPS. But they have been powerless to stop the Big Two from changing their formulas for calculating shipping charges on low-density packages. For many shippers, the de facto rate increases arising from this change will more than offset any concessions they’ve managed to extract from the carriers.

In the fall of 2010, FedEx and UPS announced adjust-
ments to their dimensional weight (commonly referred to
as “dim weight”) pricing, which determines the charge for a
shipment based on package density. By shrinking the
Shippers whose packages fell outside the new
parameters could either shrink their shipments’
cubic dimensions, increase their shipment density,
or swallow what parcel consultant Jerry Hempstead
of Orlando, Fla.-based Hempstead Consulting has
called the “mother of all rate increases.”

LIMITED OPTIONS

Many customers revolted, insisting on—and often receiving—concessions that grandfathered the old dim weight pricing into their contracts. However, most did not, and because they were unable to revamp their packaging processes, got socked with price increases in the 17- to 19-percent range, depending on the nature of the shipment.

For those who demanded and received an extension of the old pricing terms, the benefits could be short-lived, according to Rob Martinez, president and CEO of Shipware LLC, a San Diego-based parcel consultancy. Martinez said most of the extensions were short-term, with some expiring in as little as six months. As a result, FedEx and UPS will see a significant pickup in their revenue streams once those extensions lapse. “The revenue windfall to the carriers was not a one-time event for 2011,” Martinez said.

Martinez also said there’s little chance that shippers will be able to modify the dimensions of their packages to avoid being hit with the higher charges. “Some customers might have been able to monkey with box sizes, [but] the majority are still getting hosed. Their box sizes are their box sizes,” he said.

For affected shippers, one option would be to try to negoti-
ate away the higher charges when their contracts come up for
renewal. However, given the dominance of the FedEx-UPS
duopoly, shippers may have little recourse unless one carrier
decides to waive the new dim weight pricing scheme as a tool
to wrest business from the other. For those whose contracts
aren’t due for renewal anytime soon, there’s little prospect for
relief, as neither carrier has a strong incentive to return to the
old pricing formula.

COST PRESSURES MOUNT

The continued pressure on dim weight pricing is part of a broader trend that is seeing the carriers push through a variety of price increases. On Jan. 2, FedEx and UPS raised their tariff rates on ground parcel deliveries by 5. 9 percent, minus a one-percentage-point reduction in each carrier’s fuel surcharge. However, consultants believe the announced rate hikes obscure the reality that prices will actually be rising at a faster clip for many parcel shippers. Hempstead said an analysis by his company showed that rates for ground parcels between one and 20 pounds and shipped across virtually all of the country are likely to increase in excess of 7. 5 percent. In some instances, the increases will be pushing 9 percent, he said.

For example, UPS will raise rates by more than 8 percent on shipments weighing between two and 10 pounds and moving between 300 and 1,000 miles, according to the Hempstead study. The increases will be somewhat less on shipments of the same weight range moving beyond 1,000 miles, the analysis found.

Hempstead acknowledged that larger parcel shippers work under contracts and receive discounts that result in much lower package rates. He added, however, that virtually every customer of the Big Two is subject to what is known as a “ minimum charge” for each package, and that those charges are rising faster than the total average increase of 5. 9 percent.

For instance, UPS’s 2012 minimum charge of $5.49 is more than 6 percent higher than the 2011 charge of $5.17 per package, and represents a jump of nearly 31 percent over the 2008 minimum of $4.20 per package, according to Hempstead data. ;