UPS Announces Significant Holiday Surcharges Amidst Industry Challenges

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UPS, the world’s leading package delivery courier, has unveiled its holiday surcharges for 2024, marking a significant increase that could potentially backfire, according to industry analysts. This move comes as UPS braces for an exceptionally compressed peak season from Thanksgiving to Christmas Eve, which will span just 17 operating days, compared to the usual 20 or more.

The shortened holiday period is expected to push daily peak season volumes to record highs, necessitating additional resources such as trucks, planes, and staff to ensure timely delivery of holiday gifts. To offset these increased operational costs, UPS is implementing substantial fee hikes.

The surge in fees is a response to a decline in revenue caused by the growing market share of online budget retailers like Temu and Shein. These companies have increased the proportion of low-margin, slower deliveries within UPS’s business model. The substantial fee hikes are intended to bolster UPS’s revenue, but Wall Street analysts and industry consultants express skepticism about whether seasonal demand will justify these increases.

Nate Skiver, a delivery pricing consultant and founder of LPF Spend Management, remarked, “UPS is attempting to create a more favorable pricing environment by force.” Scott Group of Wolfe Research added, “We were taken aback by the magnitude of these surcharges announced on July 23.”

In a novel approach, UPS is introducing a peak surcharge for commercial air shipments, including those of COVID vaccines, to optimize cargo space and generate additional revenue. Additionally, the company will reinstate a blanket per-package surcharge during the peak demand period. The overall surcharges are reportedly up by 10% or more compared to last year, with rates ranging from approximately $1.50 per package for the most economical SurePost service to $8.25 for overnight air service, according to consultant Satish Jindel.

UPS CEO Carol Tome noted that the company anticipates these surcharges will hold firm, citing that this year’s peak season is the most constrained since 2019. However, FedEx, a primary competitor, has yet to announce its holiday surcharge strategy, while the U.S. Postal Service is expected to impose minimal surcharges due to its excess capacity.

The influx of shipments from rapidly expanding e-commerce companies like Shein and Temu, which offer lower-cost, slower delivery options, has strained UPS’s network. This shift has impacted UPS’s earnings and led to a reduction in its 2024 margin forecast. The trend toward slower deliveries has also been observed with major clients like Amazon.com, which is exploring more cost-effective direct-to-consumer shipments from Chinese factories.

Market dynamics may undermine the effectiveness of UPS’s surcharge increases. Retailers are expected to offer earlier holiday deals this year, which could flatten peak season demand. Jindel estimates that U.S. delivery firms will handle around 90 million parcels per day during the holiday season, well below their capacity of 110 million parcels. “When capacity exceeds demand by such a margin, customers are less inclined to accept peak surcharges,” Jindel explained.

The post-pandemic era has shifted leverage to customers, who are now better positioned to negotiate shipping rates. Couriers, including UPS, FedEx, and others, have faced pushback and have often rolled back peak surcharges in response to reduced demand. Jey Yokeley, chief revenue officer at TransImpact, noted that shippers are likely to face increased resistance from clients.

High-margin commercial shippers, such as Pfizer and Moderna, which are crucial for UPS’s earnings growth, also hold significant leverage. Despite this, UPS is implementing these surcharges during a critical sales period for retailers, aiming to minimize potential backlash.

As the holiday season approaches, the effectiveness and impact of UPS’s surcharge strategy will become clearer, and industry observers will be watching closely to see how these changes influence both customer behavior and the company’s financial performance.