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Updated: January, 2007

2007 General Rate Increase – What's a Shipper to Do?
Written by Mitch Felts and Scott McGloughlin - DMG, Inc.

UPS recently implemented the highest rate increase since…well, EVER!  The increase consisted of an “average” boost of 4.9% in list Ground rates and a whopping surge in list Air and International rates by an “average” of 6.9%.  As if that wasn’t bad enough, numerous accessorial charges were increased or introduced in 2007 as well.  Considering “Average” rate increases, dimensional rating on ground shipments, fuel implications on list rates, increased accessorial charges, and the end of residential surcharge discounting, parcel carriers have become evermore clever in how to improve their margins while increasing our costs.  Learn the specific affect of the 2007 GRI to your bottom line, what you can do to combat it, and how these changes compare with your carriers’ financial performance.

Throughout this article we will be focusing on six specific aspects of the 2007 general rate increase. 

1. “Average” Rate Increases

Here’s that overused and misleading word we shippers love to hear, “Average”.  As a shipper you must always be cautious of the word “average”.  In our decades of small parcel management, we have yet to see a shipper receive an “average” increase.  As you well know, carriers apply larger increases in the highest volume cells (i.e. a weight and zone matrix).  The lighter the package and higher the zone, the larger the rate increase is going to be.  For instance, from 2005 to 2006 the published rate for Next Day Air, 17 lbs./Zone 7 package increased 10.38%; whereas, a 34 Lbs./Zone 2 package increased 4.24%.  Carriers can publish these “average” GRI’s by giving equal weighting for packages weighing from 1 – 150 lbs. shipped to Zones 2 – 8.  In our experience, no shipper has the perfect package distribution; much less one that actually realizes  “average” published increases.  Even shippers with GRI caps in their carrier agreements need to be careful of the cap language used in the contract.  Unless, your agreement states that increases will not exceed X% in a cell-by-cell matrix, you will most certainly realize an increase greater than the published “average” increase.  We recommend that shippers overlay the cell-by-cell increases with their actual package volume in order to truly understand the impact of the GRI.  Also worth noting, you cannot assume that the cap will not apply to new and increased accessorial charges.

2.  Dimensional Rating on Ground Shipments

By now most of you are aware of the change made to how small parcel carriers charge for larger packages shipped via Ground in 2007.  This single change will have a massive impact on many shippers depending on their typical package profile.  In a nutshell, the ‘Oversized’ terminology and rating logic goes away for ground shipments.  In 2007, packages equaling or exceeding 5,184 cubic inches will be dimensionalized and the shipper will be charged the greater of the dimensional weight or the actual weight.  For ground packages qualifying for dimensional rating, the same rating calculation used for domestic air shipments will apply (LxWxH /194).  The net affect of this change can be extremely difficult for shippers to quantify, but the carriers’ intentions are quite obvious.

Example:

Actual Weight = 28 Lbs
Length: 34 inches
Width: 18 inches
Height: 18 inches

Current Ground Rating Calculation:

34”L +72”G = 106” inches (L+G).  This package currently qualifies as an OSI and would be rated at 30 billable lbs.

2007 Ground Dimensional Rating:

34”Lx18”Wx18”H = 11,016 cu”/194 = 57 billable lbs.

Financial Impact on this package to a Zone 4:

2006 = $10.08 (not including accessorials)
2007 = $16.34 (not including accessorials or the 2007 GRI)
Net Difference = $6.26, or a 62.1% increase

3.  Fuel Implications on List Rates

Parcel carriers outdid themselves this year when they communicated, “net average shipping rates will increase by 3.5 percent in 2007.”  The rate change will be made up of an average 5.5 percent increase in standard list rates and a 2 percentage point reduction in fuel surcharges.”  In Lehman’s terms, carriers are telling us the published GRI will be an “average” of 5.5% and they are being gracious enough to offer a 2% reduction in the fuel surcharge.  Any way you slice it, the rate base will increase by at least 5.5%.  We are all acutely aware of the dramatic affect fuel surcharges have had on our total parcel expenses in recent years.  We are also aware of the significant drop in fuel prices realized during the second half of 2006.  Fuel prices have receded to the point they were when parcel carriers initially implemented the fuel charges.  This 2% reduction in the fuel surcharge is no gift; rather it is a necessary leveling to bring the fuel surcharge back in line with fuel costs.  Carriers have always stated that the fuel surcharges will increase and decrease based on indices driven by the National U.S. Average On-highway Diesel Fuel Price and U. S. Gulf Coast (USGC) Jet Fuel Price.  Carriers even offer the following, “For the reported diesel fuel pricing information, please see the U.S. Department of Energy’s National U.S. Average On Highway Diesel Fuel Prices”.  We have included a snapshot of this pricing taken directly from the USDE’s web site.  In conclusion, the creative wording used to publish the 2007 GRI in combination with a reduction in the fuel surcharge was misleading at best.

4. Accessorial charges

Another distinguishing aspect of the 2007 GRI is the focus on accessorial charges.  We have all become accustomed to the carriers’ practice of publishing low “average” GRI’s (relatively speaking) in unison with not-so-low increases in accessorial charges.  Over the last three years, accessorial costs have increased at 10 times the rate of the list rates (and we all know the increases in list rates were nothing to sneeze at).  Carriers understand that most shippers are supremely aware of increases to base rates but they often lack the time and/or resources to accurately quantify the affect of new and increased accessorial charges.  This has allowed carriers to add new charges and increase their margins at a staggering rate.  Most do not realize that accessorial charges alone have come to account for over 30% of a parcel carrier’s revenue.  We’ve highlighted some of the specific changes we’re faced with in 2007 below:

• Fuel Surcharge Calculation - While carriers are patting themselves on the back for reductions in fuel surcharges, they have hidden certain fuel related changes in the fine print.  For instance, the fuel surcharge is now assessed on the net package rate plus applicable transportation-related surcharges, rather than on the net package rate alone.  “Applicable transportation-related surcharges include; courier pickup, delivery area surcharge, freight H3 pickup, freight residential delivery, freight residential pickup, freight delivery area surcharge, oversize, residential delivery, returns, Saturday pickup, Saturday delivery, call tags, unauthorized oversize, broker routing fee, and extended service area pickup and delivery.
• Delivery Area Surcharge – The Delivery Area Surcharge increased from $1.30 to $1.40, or 7.69% per package for commercial deliveries and from $2.10 to $2.20, or 4.76% per package for residential deliveries.
• Collect on Delivery (COD) – COD costs increased from $8.50 to $9.00, or 5.9% per every $100 of declared value.
• Delivery Signature Options – The surcharge for Direct Signature Required increased from $2.25 to $2.50, or 11.11% per package, and the surcharge for Adult Signature Required increased from $3.25 to $3.50, or 7.69% per package.
• Address Corrections – New air and ground hundredweight address correction charges have been introduced at a max. of $70 and $35, respectively.
• Hazardous Materials– the surcharge for shipments containing accessible dangerous goods increased from $60 to $65, or 8.33% per package.  For shipments containing inaccessible dangerous goods, the surcharge increased from $30 to $32.50, or 8.33% per package.  For U.S. export package and freight shipments containing accessible dangerous goods, the surcharge increased from the greater of $90 per shipment or $0.50 per lb. to the greater of $100 per shipment or $0.55 per pound, or 11.11%.  For shipments containing inaccessible dangerous goods, the surcharge increased from the greater of $45 per shipment or $0.25 per lb. to the greater of $50 per shipment or $0.28 per lb, or 11.11%.
• Residential Surcharges – The residential surcharge increased from $2.10 to $2.20 per package, or 4.76% on all air services and from $1.75 to $1.85, or 7.7% on ground services.  For freight shipments, both the residential pickup and residential delivery surcharges increased from $33.50 to $50 per shipment, or 49.25%.
• Oversize/Large Package Surcharges – The oversize charge increased from $30 to $40, or 33.33% per package.
• Metro Service Area Pickup and Delivery Surcharges – Freight shipments now realize a Metro Service Area Pickup and Delivery Surcharge of $100 per shipment to select ZIP codes in highly congested metro areas.

5.  The End of Residential Surcharge Discounting

A fatal blow was delivered to many shippers this year with high residential volumes.  One variable that had always differentiated UPS from the rest was the fact that they included the ground residential surcharge in the list rates and applied a shipper’s base and revenue threshold incentives to the full gross cost.  This practice is now ancient history.  UPS is now identifying the residential differential, $1.85 per parcel, as a separate line item in shippers’ invoices.  Just as DAS charges are non-discounted, separate line items (unless previously negotiated) in shippers’ invoices, so too are the Ground Residential Surcharges in 2007.  To highlight the impact, a shipper with a cumulative Ground Residential discount of 30% will now pay an additional $.55 for the same package shipped in 2006 exclusive of the increase in list rates.  In this example, the shipper would have paid $5.30 for a Zone 4/10 lb. parcel in 2006.  When all is said and done, the same package will cost this shipper $6.15, or 16% more than 2007 (excluding fuel).

6.  Small Parcel Carriers’ Financial Performance

Carriers continue to defend their substantial GRI’s by claiming the increases are simply covering their increased operating costs due to higher fuel costs, labor costs, geographic expansion, etc.  While this is perfectly logical in theory, it becomes evident that the GRI’s are more than covering these costs when you analyze the carriers’ financial performance.  While we recognize carriers do their fair share to control operating expenses, it is obvious that their unparalleled financial success stems more from increased prices than cost control.  In addition, these numbers are a little misleading, because the parcel segments within these carriers provide for the bulk of the profits, while the additional supply chain management services drag the numbers downward.  The data below supports our theory that the annual increases to published rates and accessorial charges are doing nothing more than contributing to the carriers’ profits and earnings growth.  You be the judge.

	UPS	FedEx
Profit Margin	8.80%	5.86%
Operating Margin	13.99%	9.70%
Return on Assets	11.69%	9.04%
Return on Equity	24.40%	17.70%
Revenue	$46.87B	$33.13B
Quarterly Rev. Growth (yoy)	10.50%	10.90%
Gross Profit	$36.45B	$9.05B
EBITA	$8.41B	$4.79B
Quarterly Earnings Growth (yoy)	8.90%	40.10%
	United Parcel Service
	31-Dec-05	31-Dec-04	31-Dec-03
Total Revenue	$42.581B	$36.582B	$33.485B
Cost of Revenue	$6.135B	$4.480B	$3.987B
Gross Profit	$36.466B	$32.120B	$29.498B
Operating Income	$6.143B	$4.989B	$4.445B
Net Income	$3.870B	$3.333B	$2.898B
	Federal Express
	31-May-06	31-May-05	31-May-04
Total Revenue	$32.294B	$29.336B	$24.710B
Cost of Revenue	$23.245B	$19.529B	$16.139B
Gross Profit	$9.049B	$9.834B	$8.571B
Operating Income	$3.014B	$2.471B	$1.440B
Net Income	$1.806B	$1.449B	$0.838B

We hope you have found this information useful, and we would welcome the chance to analyze your company’s small parcel landscape to identify sizable savings opportunities and help buffer you against the increases mentioned above.  DMG’s clients realize an annual savings in excess of 22% annually.  To request DMG’s complimentary parcel analysis, please go to the ‘Contact Us’ page of this web site, fill in the required fields, and type “Contact” in the ‘Comments’ field.  One of our representatives will contact you within one business day.  This contact does not obligate you to utilize DMG’s services; it simply puts you on the path to success.

To request DMG’s complimentary Dimensional Weight Rate Calculation Guide as well as the 2007 DIM Calculator, please follow the instructions above, type “DIM Weight” in the ‘Comments’ field and click ‘Submit Request’.

To be added to the wait list for DMG’s 2007 GRI Assessment and 2007 Accessorial Comparison, please follow the instructions above, type “GRI” in the ‘Comments’ field and click ‘Submit Request’

*Your contact information will be kept highly confidential!

Archived Articles

• Tackle the 2006 General Rate Increase; February, 2006
• Avoid the Nickel and Dime Treatment; March, 2005
• Postal Consolidators - Here today, acquired tomorrow!; October, 2004

Contact The Distribution Management Group today!