UPS Rate Changes: Watch for Accessorial Charges
American Shipper, March 2001
by Satish Jindel

Every February, you can usually count on two things:   Punxatawney Phil will see his shadow, forecasting six more weeks of winter; and UPS will enact a rate increase.

Sure enough, Phil did arise on Feb. 2 and saw its shadow and UPS raised its rates effective Feb. 5. UPS said that on average, its ground rates increased 3.1 percent and express rates rose 3.7 percent.

A closer look at the rate increase shows that some customers will pay significantly higher increases. However, before looking at the details, let's explore why a company with $4.5 billion in operating income and a 15-percent operating margin would take a large increase in a slowing economy where its customers are barely breaking even There are three good reasons.

First, UPS has spent more than $10 billion on technology projects in the last few years. Examples include electronic clipboard that has enhanced the speed and accuracy of delivery information, and its Web site, which can handle tracking hits for more than 6.5 million packages per day.

Second, UPS continues to provide a compelling value proposition. With the popularity of the just-in-time shipping concept, companies are reducing inventory costs even at the expense of higher charges. However, for JIT to be successful, the delivery carrier needs to be dependable and consistent. UPS continues to demonstrate such capability.

Third and the biggest reason may be UPS's market dominance. In spite of the 1997 Teamsters strike, UPS still delivers about 80 percent of the U.S. ground parcels and is gaining share of the express parcel market. This level of control leaves shippers with few choices since their only alternative is FedEx Ground (formerly RPS).

This year's rate increase has many charges not disclosed in the UPS press release. In addition to the increases targeted at mostly small and medium shippers, UPS has introduced new rates aimed at further cherry-picking the most attractive packages, shipments and customers.

While UPS announced a 3.7-percent increase for express services, the actual increase varies from 2 percent in the low zones to 6.5 percent in the higher zones.

UPS's one-time pickup fee has increased to $4.00 per package, which is a 33-pereent increase over last year.

The UPS Hundredweight program takes a different approach than the industry practice. Most carriers give a rate break as the shipment weight increases. In the past, even UPS offered a per pound reduction in shipping charges for heavier shipments. However, in this rate increase UPS has indicated that it is mostly interested in less-than-palletized shipments by creating a higher rate for shipments exceeding 1,000 pounds.

UPS has increased many "Additional Charges." Ground residential deliveries will now cost 5 percent more and hazardous material charges have increased by $2.00 per package for a 12 percent increase.

Since UPS rarely discounts these charges even in contracts with large shippers, it collects these charges from both large and small shippers. Hence, UPS will continue to raise these charges at a higher rate to achieve double digit profits. In addition to higher increases, these services impose penalty for nonconformance with UPS shipping guidelines. Its additional charges can be organized under three types of services:

• Surcharges intended to put discipline in shippers operations. Examples include address correction, special handling for non standard packages, packages exceeding UPS's maximum weight and cube limits, and missing account number. Some of these charges have increased more than 150 percent in last five years.
• Additional charges for value-added services desired by shippers on selected packages. These are Call Tag, Proof of Delivery, C.O.D., declared value, etc. Some of these charges have increased by more than 100 percent since 1997.
• Surcharge for packages that result in additional cost. Examples include hazardous material, oversize packages, and residential and rural deliveries. With this latest rate change, UPS has categorized 24,000 ZIP codes for delivery area surcharge, including many that qualify for 10:30 a.m. delivery for express services. Some of these charges were either nonexistent or have increased by double the amount in place just five years ago.

The lack of alternatives for ground parcel service leave the shippers with no choice but to pay these higher rates, even when they lack profitability in their own operation. However, for shippers who care to minimize the impact of these developments, here are two simple suggestions.

Are you shipping zone 2 and 3 packages via Next Day Air Saver or 2nd Day Air services? If so, you should be utilizing software that helps you to utilize ground service that will provide the same or faster transit time at a much lower cost. For example, a package shipped from Pittsburgh, Pa. to Cleveland, Ohio, via 2nd Day Air would get delivered in one day, carry the same service guarantee and cost a lot less with ground service.

Are you requesting refunds on the packages that don't make service based on the guarantee service commitments? As a customer, you are paying for the guarantee and the technology as part of the shipping charges. Hence, you should also deploy that technology to ensure UPS meets its delivery commitment by filing for refunds on service failures.

The annual rate increase, the huge increases in certain accessorial charges and lack of accountability for its own failures are feasible in the Parcel industry due to lack of alternatives. Airborne's entry in the ground parcel market and DHL's intentions to expand its operation in the United States may bring further changes in this industry that were first started by RPS in 1985.