UPS and FedEx Rate Hikes Are Coming: How Can Shippers Prepare?

Despite continued declines in shipping volumes, UPS and FedEx have both announced average rate increases of 6.9%. However, the actual cost increase may far exceed this figure, depending on factors such as the type of service used by shippers, package weight, shipping distance, and destination. In addition, increases in long-haul shipping, additional handling fees, and minimum package charges will further burden shippers.

"You can see that for many shippers, these fees will add up to a very significant increase," said Melissa Priest, founder and CEO of Alexandretta Transportation Consulting.

UPS said in an emailed statement that the rate increases will support network upgrades and maintain high service levels. Executives at both companies noted that inflationary pressures are one reason for this year's higher increases compared to last year. But shippers also face a challenging macroeconomic environment, prompting them to resist rate increases more aggressively. As shipping volumes decline from their 2021 peak, carriers may be more willing to offer negotiated discounts.

UPS and FedEx Rate Adjustments Differ Little

According to an analysis by Shipware, a parcel and LTL transportation consulting firm, UPS and FedEx rate increases are nearly identical across service categories and weight tiers.

Comparison of Carrier Base Price Increases

• Ground Commercial (1-5 lbs): UPS 7.34%, FedEx 7.34%
• Ground Commercial (6-10 lbs): UPS 7.16%, FedEx 7.16%
• Ground Commercial (11-20 lbs): UPS 6.89%, FedEx 6.86%
• Ground Commercial (21-30 lbs): UPS 6.85%, FedEx 6.84%
• Ground Commercial (31+ lbs): UPS 7.06%, FedEx 7.05%
• Next Day Air: UPS 7.68%, FedEx 7.55%
• 2nd Day Air: UPS 7.64%, FedEx 7.64%
• 3 Day Select (1-5 lbs): UPS 10.02%, FedEx 9.99%
• 3 Day Select (6-10 lbs): UPS 10.02%, FedEx 10%
• 3 Day Select (11-20 lbs): UPS 10.02%, FedEx 10.01%
• 3 Day Select (21-30 lbs): UPS 10.02%, FedEx 10.01%

Source: Shipware analysis. Note: UPS rate increases effective December 27, 2022; FedEx effective January 3, 2023.

The similarity between the two companies is no coincidence, noted Kevin Miller, vice president of data insights at logistics software provider Sifted. If one implemented lower increases, its network would be overwhelmed by a surge in demand, harming service levels. "They always stay similar because neither can currently absorb significantly more volume than the other," Miller said.

Surcharges Intensify Cost Pressures

The 6.9% average increase does not account for surcharges that may be stacked on top, including residential delivery fees, large package handling fees, and remote area delivery fees, which will be higher under the new rates.

Micheal McDonagh, president of parcel operations at AFS Logistics, reminded shippers to pay special attention to fuel surcharges because they apply to every package, regardless of size or destination. Both carriers adjust their fuel surcharge percentages weekly.

McDonagh's colleague, Mingshu Bates, chief analytics officer at AFS Logistics, illustrated the magnitude of surcharges: shipping a surfboard from New York to Malibu, California via FedEx 2Day service costs $153.77 this month, but will increase to $173.28 in January (according to AFS calculations).

Long-Haul Shipping Sees Larger Increases

FedEx and UPS rate increases have a particularly significant impact on shippers requiring long-haul transportation. Deliveries falling into higher shipping zones will face larger increases. Miller said rates for zone 5 and above increase by an average of 7.8%, while those for zone 4 and below average 6.6%.

One way to reduce exposure to high-zone deliveries is to fulfill orders from facilities closer to end customers. "Whether using a 3PL or fulfillment center, adding warehouses is increasingly important because people desperately want products faster, more on time, and cheaper. The only way to do that is to expand the network," Miller said.

Shippers able to shorten delivery distances will benefit from the trend of carrier diversification. Regional carriers focus on short-haul shipping, and their competition has led to smaller price increases in short-haul zones, Priest noted. "For UPS and FedEx, ignoring this impact would be unwise, and that's reflected in their pricing," Priest said.

Remote Area Delivery Costs Rise

FedEx will impose a new surcharge of $13.25 per package for domestic packages shipped to designated remote ZIP codes in the U.S. UPS announced a similar surcharge last year, and its U.S. remote area surcharge will increase to $13.05 per package, effective December 27. These fees particularly impact shippers that frequently ship to remote areas, such as hunting gear sellers, Priest added.

Independent parcel consultant Nicholas Fanelli (formerly global logistics head at Gelato) analyzed that more than 3 million people in the U.S. are in areas covered by FedEx's new remote surcharge. In a LinkedIn post, Fanelli suggested e-commerce retailers explore alternative carriers to cover ZIP codes where such surcharges are not imposed. Shippers can also negotiate published rates with carriers or pass surcharges on to affected orders.

Cooling Demand - A Turning Point for Shippers?

Experts point out that shipping rates are negotiable, but whether carriers are willing to concede remains to be seen. Ground shipping rates hit record highs during the pandemic as home delivery demand surged (according to the Cowen/AFS Ground Parcel Freight Index). Bates said discounts are easier to obtain when FedEx and UPS prioritize volume growth over higher margins.

But cooling demand in both companies' recent quarterly reports suggests the pricing pendulum may be swinging toward shippers. UPS CEO Carol Tomé said on Tuesday's earnings call that UPS is willing to pass savings from internal productivity improvements on to customers. Although under Tomé's leadership UPS has prioritized higher revenue per piece to expand margins, the company will balance that strategy with productivity initiatives to drive future growth.

"In fact, as we continue to improve internal productivity, we're willing to give some of those savings back to customers through revenue sharing, why not?" Tomé said. "If we can improve delivery density... we'll give some back because it's the right thing to do."

Editor's note: This article first appeared in our Logistics Weekly newsletter. Click here to subscribe.

Correction: This article has been updated to reflect Shipware's correction to its original analysis of UPS 3 Day Select rates, which was based on incorrect data. An earlier version also contained quotes based on that analysis that are no longer relevant.