Resource Center/Article01/20/2021

COVID-19 Carrier Surcharges are Back, and E-Commerce is a Priority for Parcel & LTL

Post Peak Season, COVID-19 driven surcharges return, and E-Commerce continues to be a growing priority for LTL and Parcel industries.

GMT Update

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What is the GMT Parcel Benchmark Report? The GMT Benchmark Report is a performance indicator report designed to help Parcel shippers identify the industry best practices and trends that will move the needle for their Parcel networks. Learn more about the report.

Industry Outlook

The 2020 Peak Season is behind us, and two things remain certain for shippers already operating in 2021: 1) E-Commerce is a priority focus for Parcel and LTL carriers; and 2) peak surcharges aren’t just for peak season anymore. Check out our review of returning 2021 surcharges and their YOY differences.

Parcel Carrier News

FedEx announces continued positive quarterly earnings for 2Q 2021, refers to surcharge “new normal”, and highlights cross operational efforts and technology investments – specifically with E-Commerce in mind. Still, investors unsure of meaning behind lower FedEx Ground margin.
  • FedEx announces positive 2Q 2021 earnings.
    • Leadership Quote: “I’m very pleased with our second quarter performance. Second quarter adjusted operating income increased 121% year-over-year, primarily due to international priority volume growth of 32%, continued strong demand for U.S. residential delivery, pricing initiatives, operating margin improvements across all our transportation segments, and a $70 million benefit from a reduction in aviation excise taxes provided by the CARES Act.”Notable Highlights
      • Consolidated Revenue: $20.6B (+19% YOY)Operating Margin: 7.1% (390 bp YOY)Net Income: $1.23B (+119% YOY)Earning Per Share: $4.55 (+114% YOY)FedEx Express
        • Revenue: $1.3BOperating Margin: 9.1% (+500 BPS YOY)Operating Profit: $943M
        FedEx Ground
        • Operating Margin: 7.5% (+110 BPS YOY)
        FedEx Freight
        • Operating Margin: 13% (high growth attributed to revenue quality and aligning cost to volumes).
      While addressing a 10% YOY (from 57% to 67%) jump in U.S. domestic residential packages, FedEx referred to peak surcharges as “the new normal for our industry,” and indicated this would be a particular pricing strategy for E-Commerce. FedEx’s post-peak surcharges have also been announced and go into effect Jan. 18, 2021. See the surcharges.Speaking to FedEx Ground capacity and lead time, the carrier was careful to note that 25-30% of FedEx Ground packages arrive a day early, with Ground packages spending an average of 2.4 transit days in their network. FedEx also noted its continued cross operational efforts, moving more than 10 million packages from FedEx Express into the FedEx Ground system because of FedEx Ground’s lower cost day-definite system. President and COO, Rajesh Subramaniam noted that FedEx Freight also played a role in FedEx Ground, “they’ve driven 40 million miles, up 80% year-over-year. There were 1.5 million packages that Freight has delivered, these hard to handle packages up more than 435%.”
    • Future Predictions
      • FedEx anticipates E-Commerce package volume will grow to 111 million packages per day by 2026. The carrier further addressed it’s E-Commerce focus while noting its acquisition of ShopRunner would allow them to have data visibility into their brands, seeing upstream earlier, and increasing logistics optimization in their effort to “transform the end-to-end e-commerce experience”.
  • FedEx continues to seek facility expansion and technology solutions to speed up FedEx Ground network. While speaking on continued efforts to wield technology as a capacity solution during the Q2 earnings call, FedEx highlighted its 2021 strategy for automated satellite sorting facilities. “Our focus is going to be on much smaller automated satellites and stations, our regional sortation facilities, which, if you’re not aware, sort about 12,000 to 15,000 packages an hour,” said FedEx Ground President and CEO, Henry J. Maier, “They tend to be inbound only so that we can process direct loaded volume from large retailers… you should think about overnight mainly… [they] serve as a relief valve for spillover sortation at peak.”
  • Despite positive earnings and record breaking numbers across the company, FedEx Ground margin results disappoint Wall Street analysts. With 2021’s dependence on (and growth of) E-Commerce, as well as significant investments made by the carrier to its network to improve B2C and residential deliveries, investors and analysts alike had hoped to see FedEx Ground’s operating margin be doubled its actual 7.5%. Investors notably expressed concerns that FedEx appears to lack “clarity and confidence around Ground’s margin trajectory”. While addressing investor concerns, FedEx Ground’s President and CEO, Henry J. Maier, noted unusual and “higher-than-normal operating expenses” driven by COVID-19, such as pulling peak payments forward for independent contractors and delayed facility expansion and construction investments. Maier reiterated the carrier’s focus on working with customers to more accurately predict and forecast volume needs.
UPS ranked #1 On-Time Deliver amongst the Big Three, while preparing for wave of predicted 8.75M returns and continues hiring healthcare logistics employees beyond 100,000+ seasonal employees.
  • UPS sells UPS Freight to TFI International Inc. In a Monday morning press release, UPS announced plans to sell UPS Freight to TFI International Inc. as part of an effort to “to be even more laser-focused on the core parts of our business that drive the greatest value for our customers.” The move is cited as part of the carrier’s “better not bigger” strategy. Throughout 2020, freight notably played a growing role with E-Commerce, so many curious eyes watch to see how the carrier will navigate this new freight strategy.
  • UPS deemed #1 in delivering 2020 Peak Season holiday packages on time, with an estimated 85%+ on-time delivery rate. USPS notably trailed behind, with many speculating on the carrier’s bogged down network as FedEx and UPS turned shippers away once assigned maximum allocations were met. Together, the Big 2 almost reached an 80% on-time delivery rate, while collectively the three carriers had a 71.5% on-time delivery rate.
  • Following an unprecedented 2020 Peak Season, UPS announced anticipation of 8.75M returns during the first week of January. The carrier estimated that it would see a 23% YOY growth in returns traffic during the first week alone. Interestingly, UPS also anticipated that this high volume would be somewhat evenly distributed throughout the week (vs. clustered into specific days), possibly even as return volumes remained high through the middle of the month.
  • A strong returns strategy is paramount to maintaining your network’s health – don’t miss our rundown of the five return policies we love – and why we love them!
  • With 100,000+ seasonal employees already hired, UPS continues to add new employees as it begins globally distributing COVID-19 vaccines. GlobalData reports that the carrier’s new hiring focus is strategically dedicated to healthcare logistics, seeking employees in North America, Europe, and APAC regions while notably “expanding and building new facilities in Hungary, the UK, and China.” GlobalData predicts that the carrier’s healthcare-focused hiring trend will continue further into 2021 as new COVID-19 vaccine candidates receive approval, as well as possible new virus strain mutations and variations.

GRI & Surcharges

LTL Carrier News

  • Transportation Insight looks at the year ahead for the LTL industry and finds a trajectory familiar to the Parcel industry. The LTL industry continues to follow a similar path to the Parcel industry, with LTL carriers relying on new surcharges to combat growing capacity constraints, as well as turning some customers or volume away in efforts to maintain capacity and solve rising delivery delays. As in the Parcel industry, contract bargaining has swung largely in favor of the carriers, while LTL shippers are required to seek creative solutions to an increasingly complex and costly landscape.
  • Also like the Parcel industry, both the LTL industry and LTL carriers are expected to see record revenue numbers, likely driven by new carrier pricing strategies. As previously mentioned by FedEx in their 2Q 2021 earnings call, LTL is playing a significant role in retail and E-Commerce, and LTL carriers – who have been grappling with capacity concerns since the start of the pandemic – are taking note and raising rates. Satish Jindel, Principal of SJ Consulting, notes “retail is going to be a bigger sector of LTL. Those who don’t pay attention will fight over smaller pieces of the LTL market. You can’t operate in the retail sector with the same attitude as industrial freight.” This is an important distinction when you consider how different retail shipments are from traditional freight shipments. These lighter shipments often “cube out before weighing out”, with preferences for in-store delivery methods over traditional docks
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