October 1, 2010, 5:22 PM

Shipping rate hikes: Postal Service is out, FedEx is in

FedEx Express announced its own average hike of 5.9%.

Lead Photo

Retail shippers got a break this week with the federal Postal Regulatory Commission’s rejection of a proposed rate hike by the U.S. Postal Service. But other rate hikes are on the way. On the same day the postal rate hike got nixed, FedEx Corp. announced its own average hike of 5.9% slated to go into effect in January for its FedEx Express division, which handles packages of up 150 pounds.

FedEx has also announced some changes to rates in its FedEx Ground unit, which includes residential deliveries of smaller packages. UPS also typically announces in the fourth quarter its rate hike for the following year.

The Postal Service had sought a new rate schedule that, effective next January, would have raised most of its rates between 4% and 6%. But some rate increases would have been higher for particular mail categories, including 23% for standard mail parcels and 5.1% for catalogs, the Postal Service says.

The rate hike rejection cheered some business groups. “The knowledge that postage rates will not rise faster than inflation is important for the business community already operating in an extremely challenging business environment,” says Lawrence Kimmel, CEO of the Direct Marketing Association, a trade group of direct-to-consumer marketers and retailers.

Others were less convinced that the hikes would have seriously hurt shippers. “Insofar as it helps retailers maintain their own costs, especially when it comes to things like free shipping, yes, it helps,” says Nikki Baird, managing partner of retail industry research and advisory firm Retail Systems Research LLC. But she notes that the planned postal rate hikes would have added a maximum of about 30 cents to most standard delivery charges. “I’m not sure that this is enough to put off an online consumer,” she says.

The broader issue, Baird says, is whether the Postal Service will be able to remain a viable business at a time when it has lost much of its business to e-mail and faces huge operating costs. Without the Postal Service, e-retailers would in many cases have only two shipping choices, UPS and FedEx.

The Postal Service had sought the rate hike to generate $2.3 billion in additional revenue for the last three quarters of the fiscal year ending next September and another $3 billion for the full 12 months of the following fiscal year. Among other financial needs, the Postal Service faces a $5.5 billion payment to cover retiree health benefits.

However, the rate hike by FedEx, announced Wednesday, may be even more burdensome to shippers than what the Postal Service had proposed, says Tim Sailor, founding principal of Navigo Consulting, a firm that advises retailers and other shippers on shipping strategies.

FedEx Express intends to increase its rates by an average of 5.9% effective Jan. 3, though a drop in its current fuel surcharge will result in a net average increase of 3.9%, the company says.

But FedEx Express is also changing the formula under which it figures air and ground shipment rates by package dimensions, a step that can increase the rates for some packages by more than 15%. “For a lot of shippers, that will be a significant hit,” Sailor says.

FedEx Ground, which handles packages up to 70 pounds and includes FedEx’s Home Delivery residential delivery service, will also implement the same change to package dimension rates. A general rate increase for FedEx Ground will be announced later this fall, FedEx says.  

The FedEx Freight and FedEx National LTL units will implement a general rate increase of 6.9% effective Nov. 1, 2010, FedEx says. FedEx National LTL handles less-than-truckload shipments, which are larger than those handled by FedEx Ground and the company’s other residential delivery services.

 

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