Parcel carriers will lift COVID-19 delivery surcharges — maybe

In the past two weeks, UPS Inc. (NYSE:UPS) then FedEx Corp. (NYSE:FDX) imposed what both referred to as “temporary” surcharges on a portion of their U.S. residential deliveries to offset higher costs related to the coronavirus outbreak. When, and how, they lift the surcharges is another matter.

One expert who sees the surcharges becoming a permanent fixture is Glenn Gooding, president of consultancy iDrive Logistics and a 21-year veteran of the revenue management wars at UPS. Gooding said last week that both carriers will maintain the so-called COVID-19 surcharges into the holiday shipping season, leaving shippers with what amounts to dual surcharges during that period. The holiday surcharges will fall away after the new year as they normally do, Gooding said. Meanwhile, the pandemic surcharges will be integrated into the carriers’ 2021 rate tables to reflect higher costs and demand, Gooding predicted.

Other experts said the surcharges will eventually be lifted and not find their way permanently into the carriers’ rate tables. However, all differed in their forecasts for when the withdrawals would happen.

Effective May 31, UPS imposed a 30-cent-per-package surcharge on U.S. residential deliveries made through its core UPS Ground service and its SurePost delivery program in conjunction with the U.S. Postal Service (USPS). FedEx followed eight days later with a 30-cent-per-package charge on residential ground deliveries and a 40-cent-per-package levy on deliveries made through its program with USPS, known as SmartPost. The surcharges apply to bigger customers shipping significant volumes; few, if any, small to midsize businesses are expected to be affected.

The carriers also slapped hefty surcharges on customers shipping large volumes of oversize items that are difficult to convey and occupy a disproportionate amount of space on a trailer. 

The carrier actions were in response to soaring business-to-consumer (B2C) traffic as online volumes spiked in the wake of retail store closings and population shelter-in-place orders. UPS reported in the pandemic’s early stages that B2C volumes had hit a record 70% of its traffic mix, up from the historic 50% to 52% range.Todd Benge, vice president of parcel operations for consultancy Transportation Insight, said the carriers will withdraw the surcharges by the end of the summer as volume spikes abate.

However, Bunge predicted that FedEx and UPS will impose more holiday-season surcharges this year, as well as higher levies for handling non-conveyable packages. Next year’s rate increases will also be higher than normal and will focus on residential delivery services given the growing relevance of e-commerce, B2C fulfillment and the higher costs of servicing that business, Benge said. A number of experts believe B2C traffic, which accounted for about 12% of U.S. retail sales prior to the pandemic, will increase significantly in the years ahead as more consumers shift their buying activity from brick-and-mortar stores to online. 

Rob Martinez, co-founder and president of consultancy Shipware LLC, said the removal of the surcharges is not around the corner but that they will eventually be lifted. More reopened businesses, the possibility of a vaccine by early next year and carriers finally catching up to the “volume flood” will lead to first a partial then a full removal of the surcharges, Martinez said.

Mark S. Schoeman, president of consultancy The Colography Group Inc., thinks the carriers will keep the surcharges in place until a vaccine is released. Given that very few public health experts expect a vaccine to be produced and widely distributed until 2021, Schoeman’s comments suggest that a COVID-19 surcharge will be part of the holiday-season landscape. Schoeman reckoned that the carriers will be wrestling with higher B2C volumes and costs for months, and will not have as much business-to-business (B2B) traffic to fall back on because companies operating in that channel have not reopened.

B2B volumes, which have long been UPS’ and FedEx’s bread and butter, have more favorable density characteristics because multiple parcels are shipped to one destination. B2B services are a 9-to-5, five-day-a-week business for the carriers, unlike B2C deliveries, which have been seven-day-a-week affairs.

A UPS spokesman said a time frame for removing the surcharges has not been determined. The spokesman declined to comment on what factors would influence the carrier’s decision. FedEx did not respond to an email request for comment by time of publication.

The UPS surcharge applies to customers whose combined U.S. residential ground and SurePost volumes exceeded their weekly February volumes by more than 25,000 packages. Asked if Inc. (NASDAQ:AMZN), UPS’ largest customer, might move some of its business in-house as a result of the levies, Schoeman said it was largely irrelevant. Amazon, he said, wants to continue to expand its delivery network, and it would still be moving in that direction even if there were no surcharges.