I was fortunate to be able to write an article for Total Retail this fall, which covered the state of the parcel market, especially as related to large shippers in the marketplace. Think of those retailers where you shop over the weekend, or surf online, for some of your basic necessities and home essentials.
It’s a trying and unprecedented time in shipping and this article underscores some of the levers creating the market conditions as well as factors to watch going forward into 2022.
On the heels of COVID-19, we sit in the most complex environment for parcel rates and service that we’ve seen in our lifetime. A confluence of factors have come together to bring sometimes fast-moving volatility to the market, which make parcel planning for large retailers incredibly challenging — both for peak and nonpeak. What follows is a look at where the market currently is as well as a summary of how the market may behave moving ahead based upon the factors currently in play.
Carrier, Capacity, COVID-19 and the Labor Market
In the early days of COVID-19, issues with carrier capacity were caused by a surge in e-commerce demand. Carriers were initially overwhelmed with the volume, and even Amazon.com needed to deliver just essential items for a period. As COVID-19 continued, capacity became more constrained around the rules and regulations based on social distancing. Reduced workers in spaces such as trailer unloads and sorting lines also hindered hub efficiencies.
Fast-forward to this year: While demand is still high for e-commerce deliveries, the primary constraint working against shippers is a lack of employees to fill open positions. Carriers are struggling to fill hub positions due to the stimulus money currently in the economy, and have said increases in wages and benefits have put upward pressure on shipping rates. The expectation is that as stimulus dollars taper, the employment void will dissipate and upward pressure will diminish. So far, the rise of the COVID-19 Delta variant isn’t impacting service by way of new social distancing protocols, and hopefully that will continue to be the case.
As volume surged last summer and continued into the fall and peak seasons, service levels were impacted. Some levels of lower service are still being seen in the market today. If the pace of hiring doesn’t improve, more service-level issues can be anticipated and carriers would be wise to communicate to customers to order early this year to avoid delays.
Another side effect of last year’s COVID-19 volume was the implementation by FedEx and UPS of new and complex peak surcharges. Some were per package by service and others — for enterprise shippers — were based upon complex comparisons of previous shipping volumes and new volumes, with an increase applied based upon the level of increase. Others were based on certain time frames and changed with the date. UPS and FedEx recently announced similar peak charges for this season, so the expectation is for more billing corrections this coming peak, with some shippers still working through billing issues from 2020.
Pricing and Fuel Surcharge Changes
There have also been changes to pricing and fuel, independent of the carrier’s annual general rate increases. In a 45-day period this summer, UPS raised its fuel surcharge table by 1 percent overall for all shippers through two separate increases. There have also been “peak season” surcharges for most of 2021 that have extended long beyond the traditional holiday shipping season. Additional handling and large or oversize packages continue to have “COVID-peak charges” applied.
Rules defining what’s considered an additional handling package changed in 2021 from a package measuring more than 130 inches in length and girth to any package measuring over 106 inches. Through this type of pricing change, one enterprise-sized shipper incurred $660,000 in increased costs even though its shipping characteristics and carrier agreement had not changed. Careful attention to package characteristics can help plan for mitigating these types of changes.
Peak Season Planning and Pricing for Enterprise Accounts
Many of the largest shippers were approached by the carriers in May, June and July for their peak season forecasts. For those shippers, penalties apply for both exceeding forecasted volume and for not meeting forecasted volume. The forecast now shows that parcel delivery demand may exceed capacity by over 1 million parcels per day this peak season.
Additionally, some large shippers were also approached for rate increases outside of agreed-upon contracted rates and outside of rate cap parameters. FedEx and UPS have both publicly announced they’re comfortable raising rates for large shippers, and their focus is on higher-yielding small and midsized shippers. The best strategy for some large shippers in 2021 is to avoid engaging with the carriers.
Regionals have finally gotten their due this year, with volume pouring into the regionals as shippers have looked for service improvements, capacity and cost avoidance. Right now, there’s very little capacity in the regional market, and strong West Coast provider Ontrac said it would not take on new business after Sept. 1. Additionally, pricing has tightened due to supply, causing the lesser-cost pricing aspect of regionals to temper considerably. The great news is that the regional carriers are using higher volumes and yields to increase and improve their infrastructure, service, technology and hiring. Looking to the end of this year, shippers will find it best to discuss long-term relationships and pricing for 2022.
Carrier General Rate Increases (GRIs)
FedEx and UPS haven’t announced their GRIs for 2022, though they’re expected to come in close to the typically announced 4.9 percent on ground services, which often equates to a 5.5 percent to 7 percent increase when applied to individual shippers’ data. Since FedEx and UPS have been able to increase pricing and profits in other areas, the general pricing increases don’t need to be particularly high to continue to add to higher pricing yields. FedEx and UPS have both been experiencing record earnings already based upon their pricing strategies over the past year. In addition to the GRIs, midyear increases have become the norm and are expected to continue in 2022 unless market conditions change dramatically. FedEx has already announced a new peak season surcharge set to begin on Jan. 17, which will apply until further notice.
In this complex market, pricing changes, pricing increases, service, billing issues and capacity continue to be hot-button issues. If hiring and better control of COVID-19 gain traction in the fourth quarter, the expectation is that we’ll move towards a better pricing and capacity environment in the 2022 parcel market.