Among the biggest factors affecting shippers as they craft logistics strategies are the annual general rate increases (GRIs) imposed by FedEx and UPS. Typically announced in the fall to take effect in late December or early January, GRIs ostensibly reflect rising costs for operational expenses like labor and insurance. But it’s also telling that the delivery giants consistently remain in lockstep on GRIs. Neither wants to miss out on incremental revenue nor risk market disruptions, especially when there is no substantial service advantage to warrant a significant difference in rates for either player.
The focal point of GRI announcements is the top-line figure, 6.9% in the case of 2023. As they say, however, the devil is in the details, and shippers must pay close attention to below-the-fold changes to have a complete picture when planning next year’s spend.
More change than you bargained for?
The announced GRI is an average number, and its actual impact depends on your shipment profile. Case in point: although the overall GRI was 6.9% for 2023, UPS 3 Day Select rates went up by 7.5% for short zones and 11.9% for zones 5 and above. If a shipper uses that service heavily, the impact to their costs would be much more than the “average” 6.9% increase. This is why simulating the cost increase based on your specific shipping patterns and package characteristics is critical. Plus, this is only the base cost, excluding fuel surcharges and other accessorial charges.
Carriers tend to be less forthcoming with the full scope of changes. For example, FedEx unveils rating logic updates in a section called "other changes." Despite the innocuous label, “other changes” can pack major consequences for accessorials like oversize shipments. This is where freight characteristics come into play. If you ship mostly small, dense packages, carriers can double the surcharge for oversize or large packages with minimal impact to your business. However, if you ship car bumpers, a simple change in dimensional factor or oversize surcharge criteria can double your costs. That’s how a 6.9% GRI can translate to a real-world increase of more than 10%. And if you forecasted according to the 6.9% figure, your budget is already busted.
Similar to surcharge increases, fuel surcharge is not included in the announced GRI figure. It is a mechanism through which carriers can gain revenue above and beyond the ebb and flow of actual fuel costs. For example, in the second quarter of 2022, jet fuel rates increased 125% year-over-year, but the express parcel fuel surcharge for both carriers more than tripled.
Shipper, know thyself.
To prepare for potential GRI consequences, start with knowing your own freight, specifically your shipping patterns, service utilization and package characteristics. Digging below the top-line rate can help you determine the full impact before you forecast for the following year. And if you still (understandably) find yourself flummoxed, you are not alone! Secure help from industry experts in developing short- and long-term mitigation strategies. Yes, the devil is in the details, but that doesn’t mean budgets have to be blown to hell. There are ways to find relief from GRIs.
Mingshu Bates is Chief Analytics Officer for AFS Logistics. Mingshu has over 20 years of experience, including 16 years at FedEx, where she led strategic initiatives in parcel pricing. Based in Atlanta, she leads a team that puts data to work for actionable intelligence to help clients solve supply chain problems, including through the quarterly Cowen/AFS Freight Index. To learn more about how AFS can help you mitigate the impact of GRIs, visit afs.net.