The Case for Rate Increases

The Case for Rate Increases

Copyright 2008, Traffic World, Inc.

Consistent with its position as a price leader, UPS last month said it will increase base rates for its ground parcel service. This difference from most previous years is that its ground rate increase of 5.9 percent net is higher than its 4.9 percent net for express (actually 6.9 percent, but with a 2 percent decrease in fuel surcharge), matching the increase unveiled by FedEx Express in September.

This has only occurred only twice in the last 10 years, in 1998 and in 2003.

Having made the case in January 1997 for guaranteed ground service and applauded parcel carriers for periodically speeding up transit times, I''ll set out reasons for this higher increase and for the similar increase FedEx Ground followed with this month.

UPS and FedEx have made numerous changes in ground parcel services in recent years. Compared with 10 years ago, ground service has many new capabilities and a pricing approach that matches that of air express service. Enhancements include: guaranteed delivery commitment; faster transit times; shipment visibility for tracking, tracing and managing shipping operations and invoice payments via online tools. What''s more, on-time delivery performance for ground is as good if not better than for air express service, and it has the same pricing structure as express for dimensional weight.

The first landmark change in ground service came in May 1998, when UPS responded to FedEx''s acquisition of RPS by guaranteeing on-time delivery for ground service. RPS, now FedEx Ground, followed this UPS move in July 1998. However, by doing this in the middle of the year, the companies missed the opportunity to seek higher rates for this valuable feature.

Since then, UPS and FedEx have improved transit times in many lanes. As a result, about 55 percent of all ground parcels are delivered in two days or less and about 80 percent within three days. While distances of 250 miles had a two-day transit times for ground service in 1998, the parcel carriers now offer overnight delivery in lanes up to 400 miles.

In January 2007, in recognition of this shift from express to ground service, the carriers changed the dimensional weight price structure for ground service from three levels of oversize packages to the liner approach used for air express services. However, the carriers left the large package surcharge of $45 unchanged for ground and air.

It also used to be that many shipment visibility features were only available for air express services but now are available for ground service. With greater visibility applications, shippers should be able to avoid use of express services where ground would do the same.

Yet, despite these noticeable improvements, ground service base rates have increased at a lower rate than express rates. Using 1998 rates as a base of 100, the compound increase of express and deferred base rates at 150.7 percent through 2008 is higher than the 140.5 percent increase for the ground service.

The savings to shippers from improvements in ground service are more dramatic. In 1998, a package that had to be shipped by two-day air express service for $19.50 can now be shipped by ground service with same two-day transit time and at much lower current ground rate of $7.08 (excluding fuel surcharge). That amounts to a 63.7 percent savings with 1998 deferred air express rates and 73.7 percent using 2008 rates for the deferred express service.

In the future, shippers should expect an even higher increase in ground for shorter zones. An increase at twice the rate of express in shorter lanes covered by zones 2 and 3 still leaves ground pricing at a huge discount to the alternative of express and deferred services.

Although there is justification for the higher increase in ground service, it should have been accompanied with reduction in surcharges for several accessorial services that do not result in any difference in cost based on air express or ground service.

Examples include: the UPS address correction fee of $10 for express should be reduced to the new $8 fee for ground; a new residential delivery surcharge fee of $2.40 per package for express should be reduced to the new $2.05 fee for ground; and a new hazardous material surcharge for express of $32.50 should be reduced to new $22.50 fee for ground.

These surcharge reductions would help carriers create more accurate invoices and for shippers to verify billing accuracy for proper and timely payments.

In light of the current global economic collapse and focus on cost control, shippers are bound to express displeasure about this higher ground rate increase.

However, understanding the basis for it and preparing for more of this in future until the gap between overlapping express, deferred and ground services is eliminated will allow the carriers to offer a true mode-neutral parcel service and pricing for savings in the long term for all.

-- Jindel is the president of SJ Consulting Group, Sewickley, Pa.