Hike rates

FedEx to hike rates 6.9% ‘given inflationary backdrop’

Diving Brief:

  • FedEx will levy a general rate increase of 6.9% on average for its express, ground and home delivery services starting Jan. 2, 2023, the company announced Thursday. The move follows a tough quarter in which FedEx saw a decline in parcel volume.
  • The rate increase is bigger than previous iterations — FedEx raised rates an average of 4.9% in 2021 and 5.9% this year. The company also pointed out higher Express and Ground surcharges for residential deliveries, oversized packages and packages requiring additional handling.
  • FedEx believes the 2023 increase is appropriate “given the inflationary backdrop” and its cost pressures on the business this year, EVP and Chief Customer Officer Brie Career said in an earnings call Thursday.

Overview of the dive:

FedEx net income fell 21% year-on-year as a slowdown in manufacturing, global trade and consumer spending in the quarter resulted in lower-than-expected parcel volumes, according to Carere.

But the delivery giant’s struggles are unlikely to elicit much sympathy from shippers, who have faced high shipping costs, more expensive surcharges and capacity constraints throughout the COVID-19 pandemic. The increase in tariffs in 2023 will cause additional pressure for cost-weary customers.

“To soften the blow, shippers need to think like the carrier thinks and ship like they want them to ship,” Caleb Nelson, chief growth officer at logistics software provider Sifted, said in an email. “They really punish long distance shippers, for example…Whether it’s skipping an area or considering a new fulfillment center, shippers should do everything they can to maximize execution in the region .”

Adding to shippers’ woes, UPS is “extremely likely” to mirror FedEx’s 6.9% general rate increase, Nelson said. UPS has yet to announce a rate increase for 2023, but the two rivals have always tracked rate increases. UPS “probably doesn’t want” a flood of FedEx customers lured by lower rates because it would challenge the company’s network, Nelson added.

FedEx’s actions to bolster its results after a tough quarter go beyond rate hikes.

The company is rolling out a plan to save up to $2.7 billion in costs in fiscal year 2023, which kicked off in June. A key part of this initiative is the reduction in air cargo flight activity at FedEx Express, said Raj Subramaniam, FedEx president and chief executive officer. This includes cutting 11% of daily transpacific frequencies, 9% of daily transatlantic frequencies and 17% of daily frequencies between Asia and Europe.

FedEx is also consolidating some of its package sorting operations, postponing or canceling ground facility projects and reducing transportation expenses, executive vice president and chief financial officer Mike Lenz said.

“What that does for us is that when volumes have fallen below expectations, it leads to inefficient line hauling because the load factor is down,” Lenz said. “That way you’re running more lines than you need for the volume you have. So, by consolidating sorts and streamlining installations, this is just one example of how we can optimize by relative to the lower volume.”

The company is taking these cost-cutting measures on the assumption that the weak demand it experienced in late August will persist for the rest of the year, Lenz said.

“Rest assured, we will continue to focus on the things we can control, and if we need to make further adjustments and reduce the cost structure, we will act quickly and decisively,” he said.