UPS Inc. (NYSE:UPS), bracing for what may be a historic peak holiday shipping season, will impose surcharges ranging from $1 to $3 per package on high-volume U.S. residential shippers, the shipping and logistics giant announced on Friday.
Surcharges of varying types will apply to all customers shipping more than 250,000 parcels per week during the eight-week peak cycle which begins November 15, UPS said. The surcharge amounts will depend on how much a qualifying customer shipped during February 2020, the last month before the coronavirus pandemic and the restrictions aimed at containing its spread altered consumer buying patterns in favor of e-commerce and skewed residential volumes sharply higher. The choice of February 2020 as the target month was by design because of the pandemic’s timing, a UPS spokesman said.
Under the UPS program, a customer whose peak volumes exceed more than 110% of its average weekly volume in February will pay a $1 per package surcharge on all ground residential deliveries during the peak period. That same customer will pay a $2 per package levy on all residential air deliveries, and a $1 per package levy for SurePost service, where UPS inducts parcels into the U.S. Postal Service (USPS) network for last-mile residential deliveries.
The surcharge levels will escalate for shippers tendering higher volumes. For example, shippers whose peak traffic exceeds their average weekly volumes in February by 200 to 300% will be hit with a $3 per-package surcharge on all residential air deliveries, and $2 per package levies on ground residential and SurePost. Shippers whose peak volumes surpass 300% of the weekly volumes in February will be slapped with $4 per package surcharges on residential air, and $3 charges on ground residential and SurePost.
The UPS spokesman said the escalating surcharges for higher-volume shippers is designed to balance the company’s capacity needs and costs with projections for holiday delivery demand. This year’s peak shipping season is likely to be unprecedented, as normal holiday activity collides with increased traffic from consumers who’ve turned more to e-commerce throughout 2020 due to pandemic-related concerns about buying from brick-and-mortar retailers. On its latest earnings call, executives of Amazon.com. Inc., (NASDAQ:AMZN) which competes with UPS but is also its largest customer, said they are expecting an historic peak season that will require at least a 50% increase in physical distribution capacity before it starts.
UPS will also impose new peak surcharges on shipments that typically require unusual and labor-intensive processing and force the company to incur higher costs to serve. A $5 per package charge will apply to shipments requiring “additional handling,” UPS said. Shippers tending a “large package,” defined as shipments whose length exceeds 96 inches or combined length and girth of more than 130 inches, will pay a $50 per package surcharge. Shipments that exceed UPS’ “maximum limits” for carriage will pay a $250 charge. The additional handling and large package surcharges have volume conditions attached to them. All three surcharges take effect October 4 and run until January 16, 2021.
The levies announced Friday will replace surcharges that UPS had imposed on May 31 to offset the higher costs of handling huge volumes of essential and non-essential goods during the pandemic. Two tiers of international surcharges, one on shipments originating in mainland China and Hong Kong and the other on shipments originating from other worldwide points, will remain in effect until further notice, the spokesman said.
The 2020 levies are a far cry from the 2019 holiday peak, when UPS didn’t apply any residential surcharges on parcels not requiring special handling. The additional handling and large-package surcharges will increase significantly on a percentage basis, according to Matt Bohn, a senior analyst for parcel consultancy Shipware, LLC.
Since the pandemic, UPS and rival FedEx Corp. (NYSE:FDX) have felt “empowered” to increase rates and introduce new surcharges, Bohn said in an e-mail. Shippers, meanwhile, “feel mostly powerless to fight back” even though they do have recourse, Bohn added. The new surcharges will hurt retailers already operating on slim margins, in some cases rendering the all-important holiday season “completely unprofitable,” Bohn said. The analyst expects pandemic-related surcharges to immediately resume in the U.S. once the holiday season ends unless the country gets the novel coronavirus under control by then, he added.
Shares of UPS and FedEx soared in Friday trading. UPS shares closed up $11.90 a share to $156.90. FedEx shares rose $11.29 a share to $183.53. UPS received an upgrade from investment firm Oppenheimer, while another investment firm, Stephens, called FedEx its “best idea” for the rest of the year.