Both FedEx and UPS have announced major pricing changes for Ground products in 2015. Each will apply dimensional weight pricing to all Ground shipments with no dimensional exception. Currently, dimensional weight only applies to packages measuring three cubic feet (5184 cubic inches) or greater.
To help shippers gain perspective of this rate change as well as learn about regional parcel alternatives, Shipware recently interviewed many of the leading regional parcel carriers. Our participants included the following:
- Ted Kauffman, Chairman, Eastern Connection
- Josh Dinneen, Senior Vice President, LaserShip
- Rick Jones, President & CEO, LSO
- Craig Heurung, Corporate Sales Manager, Spee Dee Delivery Service
- Kent Szalla, Ground General Manager, PITT OHIO
- Jim Shook, Regional Sales Manager, Prestige Delivery
- Jimmy Baker, Director of Sales, Courier Express
- Mark Magill, Vice President of Business Development, OnTrac
In the following few pages, this distinguished panel will share their insight regarding the reasons behind the UPS and FedEx pricing changes, and each will clarify their own dimensional policies.
Martinez (Shipware): Let me open with this question for the entire panel. Why are FedEx and UPS changing the way each prices Ground packages based on dimension, and eliminating the three cubic foot exception?
Heurung (Spee Dee Delivery): This change has obviously been in the works for many years and both of the national carriers have slightly different reasons as to why they feel the need to make this change. It is true that e-commerce has exploded in the last five years and there are a lot smaller, lightweight packages in their networks.
Kauffman (Eastern Connection): I think FedEx and UPS are forced to changing the dimensional policies. It is probably upsetting their cost structure to take in packages of a certain size with very little weight. The growth of the e-commerce market is causing them to rethink their pricing strategy, and the announced dimensional pricing is the first – and frankly most impacting – reaction to this change in the marketplace.
Magill (OnTrac): Ted, I totally agree. With the huge influx of lightweight, over-packed e-commerce shipments, the national carriers have to increase the capacity of their delivery vehicles without getting the return on investment that the increased volume should provide for them.
Jones (LSO): I think I can color this very specifically. The DIM changes are very significant and in response to the mix shift between B2B and B2C. The growing B2C shift deteriorates revenue per stop. B2B stops are generally multiple-piece per delivery stop. B2C deliveries on the other hand are usually a single piece per delivery stop. The net result is revenue per stop declines, even though per package yields may remain steady. Since operating costs are primarily driven by stops, not packages, profitability Declines.
Martinez (Shipware): But don’t residential surcharges and lower incentives offered for B2C deliveries help the carriers address the revenue decline?
Jones (LSO): In some cases, yes. But in most situations, B2C surcharges don’t make up the revenue. Let me give you an example: Let’s say a B2B route averages 3 packages per stop with average revenue of $7 per package. That’s a total of $21 stop. At 13 stops an hour, this comes out to $271 per on road hour. In contrast, let’s add $3 for a residential surcharge, so instead of $7 per package, we’re making $10. And I’ll even increase the productivity to 18 stops per hour since we have to deal with fewer packages. But $10 per package over 18 stops per hour is only $180 per on road hour, which represents a revenue decline of nearly one third per on road hour.
Dinneen (LaserShip): Rick, you’re right on. And to Mark’s point earlier, let’s not forget the impact to network and vehicle capacities. You can’t maximize the load of a truck with lighter B2C packages.
Jones (LSO): True. Not only is the revenue per on road hour declining, but the assets must be upsized at additional expense as vehicles will now cube out before they weight out of capacity. Plus, B2C volume is highly seasonal and we all saw what happened last peak season.
Martinez: It sounds like many of you are justifying the changes which will allow FedEx and UPS to recover added expenses of handling e-commerce deliveries. Do any of you feel this is more of a money Grab?
Dinneen, (LaserShip): We have seen both standard practices and very aggressive tactics with various shippers and with a wide range of package characteristics. While dimensions and package weights do play into the cost factor, the national carriers clearly saw an opportunity to capture additional revenues with the vast majority of shippers. Removing the under 1lb and 3 cubic feet threshold UPS and FedEx have found a revenue source with existing customers, many of who have little recourse.
Szalla (PITT OHIO): Large shippers have been negotiating their dimensional pricing with FedEx and UPS for quite some time. It seems to me that UPS and FedEx are taking this opportunity to restart the conversation and eliminate some holes. For smaller shippers, this change is going to make them pay attention to the boxes they use. It is a significant opportunity for UPS and FedEx to increase revenue and their bottom line.
Shook (Prestige Delivery): Kent, I agree. The DIM weight calculations allow for all carriers to maximize their capacities and networks. With the growth of the e-commerce customers UPS and FedEx see an opportunity to raise their rates to many online companies that may not have another choice.
Baker (Courier Express): It’s interesting that FedEx and UPS’s dimensional pricing policies are often referred to as “rules.” The dictionary defines a rule as a “regulation governing conduct.” Once again, the major parcel carriers are seeking increases through alterations in accessorial charges, causing all shippers to have to reevaluate their packaging and shipping processes.
Martinez (Shipware): FedEx made its announcement in May, and UPS quickly followed suit. Normally, the national private carriers announce rate changes later in the year. Why the early announcement?
Jones (LSO): I think it is very telling that this DIM change was telegraphed way in advance so that customers would have time to look for alternatives, preferably prior to peak season. By making this change at once in January along with the huge general rate increases especially for B2C shippers, I think it will create a sudden shift of volume out of UPS and FedEx to the USPS (either directly or through a SmartPost or SurePost solution). This of course will allow UPS and FedEx to adjust operationally all at once, versus gradually which would really be a death by a thousand cuts in terms of eliminating operational expense. The end result, I believe, is that they are looking to reverse the slide from B2B to B2C mix for their Air and Ground operations, and move that traffic to their postal services.
Martinez (Shipware): What are you hearing from your customers and prospects about the impact of the 2015 dimensional changes? Are they successfully negotiating around it?
Heurung (Spee Dee Delivery): Shippers will see an increase in shipping costs and it will differ based upon their individual characteristics. I have met with several of our larger volume customers who have multi-million dollar shipping spends and without sharing the actual percentage of increase, they have assured me that even with their large spends they will not be able to dodge this bullet.
Martinez (Shipware): So apart from trying to negotiate with FedEx and UPS, what recourse do shippers have?
Magill (OnTrac): This panel! Large shippers should explore what regional parcel carriers have to offer. OnTrac and many of my colleagues are very hungry for business and would be much more likely to negotiate a more liberal dimensional weight concession.
Shook (Prestige): Obviously, I agree! FedEx’s and UPS’s latest rate actions could cause many smaller companies like Prestige Delivery the ability to compete. Look DIM weight affects roughly 50% of ground packages. This new policy will have many customers reviewing their shipping and looking for Alternatives.
Martinez (Shipware): Well, let’s discuss those alternatives. How will each of your companies handle the dimensional policy moving forward?
Magill (OnTrac): Our customer contracts are custom, so OnTrac is open to negotiating concessions that make sense for our customers and of course us as well. While our standard service guide does not offer any dimensional exceptions, our dimensional divisor of 194 has been more favorable than the Big Two since they made the change in 2011.
Kauffman (Eastern Connection): Eastern Connection’s policies will remain the same as before. We will negotiate where necessary on the DIM’s and bring much more flexibility to our customer.
Shook (Prestige Delivery): Although we have not yet finalized our policy for 2015, at present Prestige Delivery offers the three foot exception before applying dimensional weight. Moreover, we offer the more favorable dimensional divisor of 194 (versus 166) for those packages that trigger dimensional Pricing.
Baker (Courier Express): Courier Express does not have a standard dimensional policy. We analyze our customers’ shipment characteristics and develop a simplified pricing solution that fits our mutual objectives. We don’t have rules that apply unilaterally to every shipper.
Szalla (PITT OHIO): Jimmy, same here. At PITT OHIO GROUND, we listen to our customers one by one and build solutions to meet their needs. As such, our pricing often times looks very different from UPS and FedEx. For instance, we will take the dimensions of the freight into account and bake that into the overall price. For customers that want to directly compare apples to apples, we often use DIM factors from a few years back, which were a lot more reasonable than 166.
Dinneen (LaserShip): LaserShip’s current policy is to charge the greater of the DIM weight or the actual weight. Our standard DIM factor is 194, and we also maintain the three cubic feet threshold before DIM weight calculations kick in. Like Jim, at this time we have not finalized our strategy for 2015, but DIM weights will likely continue to be an advantage of working with regional carriers.
Heurung (Spee Dee Delivery): Shippers, you’re going to love this! Any package under 130” (length and girth combined) is charged on a weight basis. That’s right; we currently do not impose a DIM charge on those packages! For larger packages, we do charge a dimensional fee, but it is a lot easier to determine. Packages measuring 130″ to 170″ (length and girth combined) and weighing 100 lbs. or less are charged a flat dimensional fee. Finally, oversize packages weighing 101-150 lbs. are charged the weight plus the flat dimensional fee.
Martinez (Shipware): Gentlemen, I truly appreciate your time and insights today. It’s clear that the 2015 dimensional pricing announced by FedEx and UPS promises to be a significant revenue challenge for shippers, but a tremendous opportunity for regional delivery companies like yours to help shippers mitigate cost increases. Best of luck to each of you in the coming months!