Resource Center/Article10/13/2020

Carriers Navigate New Levels of Efficiencies, Optimization, and Expansion Preparing for Peak Season and Beyond

Positive carrier earnings drive capacity investments via rate increases, COVID-19 surcharges, peak season charges, and longer-term contracts.

Industry Outlook

Parcel and LTL carriers alike are seeking new levels of efficiencies, optimization, and expansion to overcome increasing E-Commerce demand and rising capacity constraints – both of which are highly anticipated to continue into 2021.
Carrier earnings remain positive, though it’s clear network and technology investments are needed to provide capacity support to shippers of all sizes. General rate increases, COVID-19-related and peak season surcharges, as well as longer term contracts seem to be viable strategies for carriers to manage capacity commitments and spikes. Shippers willing and able to work collaboratively/creatively with carriers to avoid overwhelming carrier networks throughout peak season may find themselves rewarded.
Though no specific shipper strategy has arisen this month, many of the previous strategies remain applicable, including:
carrier diversification as a means to fortify capacity throughout peak season (or beyond), as well as the reimagining of Last Mile Delivery via In-Store and/or Curb-Side Pick Up, and planning/communicating marketing-coordinated sales earlier during peak season (vs. the holiday week).

Parcel Carrier News

FedEx announces very positive Q1 2021 YOY earnings per share. While recognizing the growth from E-Commerce due to COVID-19, the carrier noted the importance of working collaboratively and creatively with large shippers to help overcome and smooth out capacity/demand constraints, while also protecting recovering small and medium shippers. Due to the unpredictability of COVID-19, FedEx is notably not sharing a 2021 earnings forecast.
  • FedEx discussed positive earnings per share during Q1 earnings call.
    • Leadership Quote: “The small and medium customer segment was our fastest growing segment with high double-digit revenue growth in the quarter, and FedEx continues to champion and support their recovery.”Overall, Q1 adjusted operating income increased 56% year-over-year primarily due to international priority volume growth of 31%, a surge in demand for U.S. residential delivery, yield improvement at FedEx Ground and FedEx Freight.FedEx discussed conversations with Top 25 customers, with similar conversations planned for Top 100, regarding rewards for customers able to pull volume forward and/or open to longer term contracts.Plans to integrate SmartPost completely into the Ground network by peak season were also discussed. And the carrier also referenced its ability to repurpose 28 of its former SmartPost facilities  to better sort and route the overwhelming increase in small and large residential packages, stating “We are running much higher yielding packages through than we have in the past.”The dramatic reduction of air cargo capacity was affirmed as a result of the significant loss of commercial airline capacity.The carrier revised its previous estimate that U.S. domestic volume would grow to 100+ million packages per day by 2026 to 2023 (with 95%+ of that growth to be E-Commerce related).Peak surcharges were noted as a way for the carrier to manage “increased demand while maintaining strong levels of service for our entire base of customers,” and UPS discussed plans to work collaboratively with the carrier’s largest E-Commerce customers to “leverage capacity and to develop creative solutions to smooth out demand spikes during the peak season”.
    • The carrier also noted a strong commitment to its small and medium customers, who represented the fastest growth opportunity for the quarter, specifically to protect them from “most peak surcharges” to ensure their continued recovery from the impact of COVID-19.
  • FedEx earnings per share 80% better than previously estimated. Early predictions estimated that the highest FedEx earnings per share would likely be about $2.70; however, the carrier recently reported $4.87 earnings per share from Q1 of the 2021 fiscal year. FedEx attributed the high earnings to the E-Commerce growth driven by COVID-19, and thanked its employees for their hard work during a period of such uncertainty.
  • New SenseAware ID predicted to be valuable COVID-19 vaccine partner. In September, FedEx proudly announced SenseAware ID, described as a “lightweight sensor-based logistics device that delivers… real-time updates on a package’s location within the FedEx Express network.” The increased visibility solution utilizes Bluetooth Low Energy (BLE) technology to transmit its location and is notable for “enabling [shippers] to optimize their supply chains and make any necessary adjustments during the journey of their shipments.” SenseAware ID is highly anticipated to be a powerful tool for health care customers wanting to better monitor, protect, and ensure the delivery of shipments sensitive to time and/or temperature, such as the highly anticipated COVID-19 vaccine.
UPS continues to pursue mantra, “better not bigger,” with laser-focus on reducing expenses and network optimization via new employee buyout and expansion plans. Carrier also welcomed new eBay partnership, as E-Commerce giant begins shifting volume away from USPS, and expanded outreach to small and medium shippers through a new solution from child company, Ware2Go.
  • UPS offers voluntary buyout to managers – the last buyout in 2018 resulted in $200 million annual savings. While navigating the fine line between hiring 100,000+ seasonal employees and seeking to reduce costs across the giant’s overall network, UPS announced plans to offer voluntary buyouts to management employees. Employees that accept the severance offer will leave in one of two phases, either at the end of this year or mid-2021. The carrier’s last buyout occurred in 2018 and resulted in a $200 million annual expense reduction, an effort UPS is likely hoping to repeat with this move.
  • UPS child company announced FulfillmentVu, new solution for small and medium – or Omnichannel-less – E-Commerce shippers. Ware2Go, a UPS company, known for its tech-enabled fulfillment solution primarily for E-Commerce merchants, announced FulfillmentVu – a “combined warehouse management system, order management system, and transportation management system that empowers merchants of all sizes to easily meet customer expectations across all sales channels to drive revenue growth.” Both the solution and company are notable for allowing E-Commerce sellers easy access to larger transportation networks, as well as One-Day and Two-Day Delivery.
  • USPS’s second largest E-Commerce customer, eBay, turns to UPS. The carrier’s marketshare grows alongside its relationship with eBay, as the online auction site announced plans to shift some of its volume away from USPS. eBay sellers will have the option to ship via UPS at a discounted rate (up to 62% from standard UPS rates). eBay cited USPS capacity and consistency concerns as the driver for change, equally notable for USPS as eBay was the postal carrier’s second largest e-commerce customer in spring 2020.
  • After completion of 425,000 sq. ft Visalia, CA, hub, UPS announced $252 million construction plan for Mebane, NC, hub. The carrier shows a clear commitment to network expansion efforts by announcing $262 million construction plans for a massive hub in Mebane, NC, shortly after the opening of new massive Visalia, CA, hub. Not only would the Mebane, NC, hub help UPS face growing future capacity projections, it would also further the carrier’s network span throughout the south and welcome an estimated 451 new full-time employees. And after two years of construction, the carrier is also celebrating the opening of its new 425,00 square-foot hub in Visalia, CA. The new hub is notable for its green technology and automation emphasis to increase sorting and delivery times while decreasing its carbon footprint. UPS is currently seeking to hire 625 new employees (full and part) for the hub.
General Rate Increases
  • FedEx
    • FedEx announced its General Rate Increase for 2021. | FedEx Express package and freight standard list rates will increase an average of 4.9% for U.S., U.S. export and U.S. import services. FedEx Ground and FedEx Home Delivery standard list rates will increase an average of 4.9%. FedEx SmartPost, FedEx Ground Multiweight, and FedEx International Premium rates will increase. Minimum rates for FedEx Express services will also increase. Many surcharges and fees are changing. Notable highlights:
      • Beginning January 2021, FedEx will charge a 6% late fee to U.S. FedEx Express and FedEx Ground customers who don’t pay their invoice within their agreed upon payment terms.Additional Handling – Effective Jan. 18, 2021, a surcharge will apply to any Express and Ground package that measures greater than 105 inches in length and girth (the length and girth is length plus (two times the height) plus (two times the width). This change will be added to the existing criteria under the Dimension heading.Effective Feb. 1, 2021, the fuel surcharge for U.S. Domestic Express Freight services will be a charge per pound assessed on the rated weight of the shipment.There will be changes to the Delivery Area Surcharge zip code lists for FedEx Express and FedEx Ground. Regular DAS will have a net increase of 1,236 zip codes, while the number of extended DAS zip codes is decreasing by 957.
      • FedEx has revised the delivery commitments for certain US Express services.  For Priority Overnight and 2Day AM, the commit time for Residential shipments to 10:30 a.m. service areas has changed to Noon.  For Standard Overnight shipments to Commercial destinations, the commit time is now 4:30 p.m. to all service areas.
  • UPS
    • Effective October 4, 2020 the amount of the Peak Surcharges applied to certain international shipments decreased.
    • Effective October 5, 2020, the UPS Tariff/Terms and Conditions of Service and the UPS Rate and Service Guides were updated. The notable change was to the Delivery Change Request. Where there was a $6.00 fee, there are now subcategories of Delivery Change Requests that have charges ranging from $8.00 to $17. See page 115 of the updated service guide.
  • UPS Canada
    • Effective October 4, 2020 the amount of the Peak Surcharge applied to shipments from China Mainland and Hong Kong SAR to Canada decreased.
  • DHL
    • DHL Express announced a 4.9% general average shipment price increase for U.S. account holders that will take effect on January 1, 2021. Some optional services and surcharges will increase as well.  New rates are not available yet.

LTL Carrier News

  • FedEx Freight expands to estimated 90% of the U.S. market and prepares to work collaboratively with Ground during peak season. In September, FedEx expanded FedEx Freight Direct standard and premium services to “90% of the country”. The expansion came as FedEx began preparing to ship more heavy, bulky, and “large-format” items as shoppers continue to curtail in-store for online shopping, especially during the holiday season. FedEx Freight has also notably been a collaborative partner to FedEx Ground, delivering an estimated “750,000 non-conveyable shipments for FedEx Ground” starting in June. Raj Subramaniam, FedEx Corp. president and chief operating officer, has notably referred to such collaborative and expansion efforts as the carrier’s effort to create a network for “what’s next.”
  • The LTL carrier market continues to grow. Forward Air continues to grow into the LTL space with new service options in select parts of Missouri and Virginia, and they have also indicated more LTL growth is on the way. Those familiar with the market may notably draw comparisons and excitement around other similar offerings and expansion efforts by Old Dominion (which has already opened 9 new terminals this year), YRC (which announced an expansion of its regional next-day service), and Roadrunner Transportation (which has announced plans for 3 new facilities this year).
  • Roadrunner Transportation Systems completes multiyear restructuring effort to makes LTL its primary service offering and bring profits back to the company. In addition to cementing Roadrunner’s commitment to the LTL industry, the carrier has recently celebrated opening new facilities in both Riverside, CA, and Chicago, IL. “The real key takeaway for us is that Roadrunner’s best days was when we were focused on LTL,” said President Frank Hurst, “We’re getting back to our roots of being a strong LTL company focused on quality and service throughout the U.S.”

Shipping Industry Trends

DHL Logistics Trend Radar Report
  • DHL highlights 29 logistics industry trends and innovations in fifth Logistics Trend Radar report. Each trend is categorized for its high, medium, and low impact on the industry. High impact trends were: Big Data analytics, the Internet of Things (IoT), cloud and APIs, robotics and automation, artificial intelligence (AI), and self-driving delivery vehicles. Medium impact: next generation wireless, blockchain, 3D printing, unmanned aerial vehicles (UAV), quantum computing, digital twinning. And low impact: augmented/virtual reality, and bionic enhancements.
The Amazon Effect
  • Amazon Air fleet grows by 40% as E-Commerce Giant Positions Its Air Network to be Faster and Decentralized. This past May, Amazon welcomed nine new planes to its Amazon Air fleet – growing its Amazon Air fleet from 50 to 70 since last February. The move is notable for the parcel industry and the Amazon Effect, as the Amazon Air fleet is an integral component to Amazon’s ability to serve customers One-Day and Two-Day Delivery. A DePaul University research study noting the rapid growth discussed how Amazon’s air strategy is a decentralized approach – one in which shipments are not moving between giant hubs for mass sorting, but instead “creating a network designed to link warehouses and distribution centers to help position goods for rapid shipment to customers once an order is placed.”
  • Amazon officially unveiled a working prototype of one of three upcoming electric Rivian delivery vans. Expect to begin to seeing these all electric vans with 150 mile capabilities on the road starting in 2021. Amazon estimates it will have a fleet of 100,000 Rivian vans by 2030. The van’s design is notable for having “Alexa integration, delivery optimization software, and safety features including a bulkhead door and multiple cameras for a 360-degree view around the van.”
Fuel Trends: Though supply remains, a decrease in global demand lowers the price of fuel amidst continuing COVID-19 uncertainty.
  • Current Price (⬇): September Oil Prices declined due to the ongoing COVID-19 Pandemic, as the decrease in oil prices correlated with slowing global oil demand.
  • Supply (⬆): EIA estimates that production rose to 11.2M b/d in September. US crude oil production is expected to decline to an average of 11.0M b/d in the second quarter of 2021; as new drilling will not offset declines in existing wells.
  • Demand (⬇): Demand down 8.6M b/d from 2019. EIA’s growth projection for 2021 is 0.3M b/d less than the September 2020 forecast. The reduced forecast is driven by lower than normal demand due to COVID-19.
  • Price Forecast (⬇): Brent Crude Price Forecast to $42/b in 4th Quarter of 2020. EIA anticipates $47/b in 2021 as oil markets become more balanced. EIA expects high inventory levels and surplus crude oil production capacity will limit upward pressure on oil prices. The October Short Term Energy Outlook remains subject to heightened levels of uncertainty due to mitigation and reopening efforts related to COVID-19.
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