Choppy Waters

By Tom Morrison posted 12 days ago


Summer has been one for the history books as the market wrestled with UPS’ labor negotiations, FedEx’s restructuring, downshifting consumer spending, and slackening parcel demand.

As the parcel express market moves from summer into fall, a perfect storm of carrier challenges, market shifts, an unsettled economy, and weakening demand is threatening to upend the best-laid plans of shippers—just as supply chains are beginning to normalize after two years of pandemic-induced turmoil. 

Among the challenges: 

  • A massive restructuring at FedEx designed to cut costs, consolidate ground and express parcel network operations into a new “One FedEx” organization, and ultimately shutter some 100 locations. 
  • Slowing e-commerce volumes as consumers become more cautious, shift spending from goods to services, and return to shopping in stores. 
  • Shippers dealing with stubbornly high rates, as well as a rising tide of parcel and package surcharges and fees.
  • Understanding how United Parcel Service (UPS) will operate going forward and what will happen with parcel rates, now that it has secured a new five-year labor agreement for its 340,000 Teamster employees who pick up and deliver some 20 million packages a day.

Looking Forward

The new Teamsters contract covering UPS workers, which Teamsters officials termed “historic” and “overwhelmingly lucrative,” raises wages for all workers, creates more full-time jobs, and includes workplace protections and improvements, according to the union.

UPS Chief Executive Officer Carol Tomé, in the company’s second-quarter earnings call, described the contract as a “win-win-win.” “Together, we reached agreements on the issues that were important to Teamster leadership, to our employees, and to UPS,” she said. 

Tomé noted that the company, which moves 6% of the U.S. gross domestic product (GDP) every day, did expect the negotiations to be “late and loud,” and as the noise increased through the second quarter, “we experienced more volume diversion than we anticipated.” She thanked UPS customers for their support through the negotiations, adding “for those customers who [diverted their business], we look forward to bringing you back to our network. We are now laser-focused on executing our win-back initiatives and pulling through the more than $7 billion of opportunity in our sales pipeline.” 

According to the company, by the end of the new five-year contract, the average full-time UPS driver, in terms of total compensation, will make about $170,000 annually in pay and benefits. Part-time union employees who are already working at UPS will be making at least $25.75 per hour, by the end of the contract, while receiving full health care and pension benefits.

Between the labor situation, a tepid economy, and softer overall demand for package delivery services, UPS saw its second quarter 2023 revenues decline by 10.9%, to $22.1 billion. Strong cost controls, however, helped the company report $2.9 billion in operating profit. 

Going forward, Tomé said UPS is focused on winning back diverted freight over time and participating in the industry’s peak shipping season, which she expects to be 21 days, “the same as last year.” “So [shipping’s] still going to pick up. It's just from a different volume level,” she notes. “And we're well prepared. ... It’s just another day with more volume.”

Meanwhile, at FedEx 

In April, FedEx announced its plans to consolidate operations, which it expects to be fully implemented in June 2024. The move will bring together FedEx Express, FedEx Ground, FedEx Services, and other operating units into a single operating company under the FedEx brand, explained President and CEO Raj Subramaniam. 

“Our new structure will provide a distinct focus on air and international volume, while facilitating a more holistic approach to how we move packages on the ground, utilizing both FedEx employees and contracted service providers,” he said.

Jenny Robertson, FedEx’s senior vice president of integrated marketing and communications, emphasized that the company is being deliberate and methodical, creating a more streamlined organization that will “help our customers compete through a fully integrated ground and air network.”

The plan calls for facility consolidations as well as reducing some redundant routes, including closing at least 100 facilities by 2027, although that number could change. 

Robertson noted that FedEx had begun implementing some strategic consolidation initiatives before the pandemic, such as optimizing last-mile residential deliveries where FedEx Express contracted with FedEx Ground for the transport and delivery of certain shipments, but then the pandemic hit, and e-commerce-driven package volumes went through the roof.

Robertson emphasized that for FedEx as it emerges into its new, leaner form, “e-commerce and residential delivery are still the No. 1 area for growth. We see a lot of opportunity to realign our network to address and capture that growth.”

Surcharges Creep Up 

Package volumes have clearly slowed and demand remains soft, but that hasn’t prevented parcel carriers from implementing tactics to protect yield and expand revenue per shipment, noted Micheal McDonagh, president of parcel for AFS Logistics, an audit and cost management specialist that manages over $4 billion in parcel spend annually for about 900 customers. He noted that in FedEx’s March earnings call, the company reported per-package revenue increased 11%, even with decreased volume.

“It’s interesting what is happening to yield” as well as stubbornly resilient parcel rates, he notes. Among the factors (or culprits if you are a shipper): fuel surcharges that go up quickly but don’t drop as fast when fuel prices decline; surcharges that were once instituted for weeks, but now extend for months or a full year; and late fees charged by carriers.

“[Carrier] payment terms used to be 30 days; now they want payment in seven to 15 days,” he explains. Then there are what used to be “peak” surcharges. In 2018, McDonagh recalls, peak surcharges started around Black Friday and ended around December 23. 

“Now, post COVID, peak charges start in October and extend to January. And in some cases, they never go away,” he says. Large and oversized shipments are particularly vulnerable.

Another area is “remote” delivery surcharges, where the carrier charges an extra fee for rural or extended-delivery areas. “Delivery area surcharges extended during peak were $7.15. Now they are $13.25 for specific ZIP codes, and they don’t go away. No added service but an extra charge. It’s a great way [for the carrier] to increase revenue without adding cost,” he says.

As for how shippers can best protect themselves, McDonagh counsels customers to be strategic yet careful about spreading out their volumes among multiple carriers.

“Our recommendation is to have at least two carriers, but be careful,” he emphasizes. “A lot of discounts are based on revenue spend. The more you spend [with the carrier], the higher the discount. When dividing your volume among carriers, be sensitive with spend levels. If you fall down a tier, you lose the discount, and that could negate the savings you expected.”

Written by:  Gary Frantz, contributing editor for CSCMP's Supply Chain Quarterly and a veteran communications executive, for CSCMP’s Supply Chain Quarterly.

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