Ever since last week when UPS announced the “Peak Surcharges” they will be applying to various shipment types during the November/December holiday shipping season, many shippers are wondering will FedEx follow suit and add their own peak surcharges. And, that my friends is a very good question. Without a crystal ball it’s anyone’s guess but we thought we’d explore this issue to see if we could find any signs that would point to the decision FedEx may or may not ultimately make.
For one thing, FedEx recently reported their fourth quarter earnings and they were spectacular, with a quarterly profit of over $1 Billion; very impressive. So what drove this huge increase in profits for FedEx; a couple of things. First and foremost was the reporting of revenues derived from FedEx’ TNT Express acquisition. This included restructuring charges, and $20 Million in TNT Express intangible asset amortization expenses, as well as $37 Million of integration expenses. From there FedEx reported increased revenues of 7% on increased package volumes, as well as growth in International Export activity which contributed an additional 5% growth. FedEx also reported that their higher profits were a direct result of higher base rates.
Higher base rates we believe were achievable through several measures FedEx has taken over the past year or so to shore up its profits, including the reduction in Dimensional Weight Divisors resulting in higher yields per package for dimensional rated parcels. Also, the elimination of refunds for late delivered packages which had been an integral part of FedEx’ contracts with their shipper customers. While many shippers still maintain the ability to file claims for refunds for late delivered packages, apparently, many of the new contracts Fedex is implementing contain waivers which prohibit shippers from filing refund claims for these late delivered packages. Obviously, other cost containment initiatives FedEx has been continually implementing and improving continue to pay off.
So, with these increases in profits, will FedEx opt in on surge pricing, AKA “Peak Surcharges” or will they let UPS be the “bad guys” and try to siphon business from UPS during the peak holiday shipping season? The reality of the matter in our opinion is that FedEx can ill afford to add significant volumes of packages during the peak holiday season as that would wreak havoc on their operations and potentially jeopardize service to their current large shippers. In fact we believe that much of the profit FedEx has derived from increased package volume has actually come from the peak holiday periods in late November and December.
So having said that, we believe that FedEx has absolutely nothing to lose by “me tooing” the Peak Surcharges UPS has scheduled to become effective for this coming holiday season. However, whether they do it or not remains to be seen. Still waiting for that crystal ball.