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July 24 2006 04:48 PM

It wasnt long after the ball dropped in Times Square on New Years Eve that United Parcel Service dropped the hammer on its customers with a January 7 rate increase. Whats that, you ask, didnt the annual rate increase always go into effect in February? Yes, but according to UPS, it is implementing it a month sooner because its research indicates customers prefer a schedule more in line with year-end budget planning. How thoughtful! For a moment, I thought UPS was simply increasing its revenue a month early to offset the negative impact of the economic downturn since September 11. What was I thinking? Whatever the reason, this latest rate increase will easily add another billion dollars to UPS bottom line in 2002.


If you use UPS to service your business, your rates have increased and significantly! Domestic ground and air rates went up. Inter-national rates increased, too. UPS management remains confident it can maintain market share despite reaching deeper into customers pockets. The company can be confident in this regard since FedEx Ground simply goes along with the annual rate changes. FedEx Ground chooses to make its play for business using negotiated incentives with desired customers while letting UPS take the lead on base rates. And its a strategy that has proven effective.


This commentary will provide a detailed analysis of this years UPS rate changes. Once again, there are healthy increases in the main service sectors. And the fuel surcharge remains intact as a separate charge. Accessorial charges continue to impact shipping costs. Customers are particularly upset with the residential charge being applied to residential air shipments in 2002. The groan you hear is all the non-store retailers and Internet merchants whove been hit by UPS hammer!


Ground Service

Ground service represents UPS largest volume and revenue source. The past two years, UPS used a flat, across-the-board rate increase for ground service only, but not this year. It has reverted back to the practice of varying percentage increases by weight and zone. The base rate increase for commercial service is 3.8% (based on a straight dollar average of all weight and zone cells), not 3.5% as stated in the company press release. Although UPS increases rates at different percentages throughout the various weights and zones, there is little appreciable difference between cells. There is an average increase of 3.7% for one to 15 pounds, 3.2% for 16 to 70 pounds and 3.9% for 71 to 150 pounds. Each zone increased an average of 3.8%.


As you may recall, UPS used to increase rates at a higher percentage in those zones and weights in which it had greatest market share, such as residential and short-haul/overnight ground markets. This pricing strategy maximized its revenue while minimizing the revenue increase of its national competitor since FedEx Ground always assumes UPS base rates. With FedEx Grounds recent movement into residential service along with hub capacity expansion, UPS may no longer see the advantage of significantly varying rate increases by zone and weight.

Lets take a look at Chart A to see the cumulative percentage rate increases among the different zones and weights that UPS has enjoyed over the last six years in its ground service. Because of the previous pricing strategy, there was an increase of 22% for one to 15 pounds, 17.5% for 16 to 70 pounds and 20.7% for 71 to 150 pounds. Zones 2 and 3 had the most dramatic increase 26.6% and 23.9%, respectively. Compare that to zones 4 through 8 where the increases were between 18.1% and 19.6%. If you ship parcels to low zones and they weigh less than 15 pounds, you have been taking the brunt of the annual UPS rate increase.

The residential surcharge has been increased from $1.05 to $1.10 over commercial rates. As previously mentioned, this surcharge now applies to air shipments, too. Make no mistake about it; this surcharge translates into big bucks for Big Brown. And dont forget about the infamous delivery area surcharge. There are now 24,496 ZIP Codes impacted by this charge. Thats over a third of all US ZIP Codes! Moral of the story: There is more than one way to skin a customer!


Ground commercial hundredweight base rates increased a whopping 8.4% for zone 2 and 7.9% overall. (And you thought ground service rates only increased 3.5%! So much for the accuracy of press releases!) Hundredweight rates for ground residential continue to be identical to ground commercial hundredweight. 


Time Definite/Express Services

Like ground service, time definite/express service rates increased this year. UPS has many service options to address a shippers time definite service requirements. In the process of doing so, it has become somewhat confusing for shippers to select the appropriate offering as it relates to cost versus service tradeoffs. Here is a summary of the service offerings and the respective rate increases.


Next Day Air: 10:30 AM money-back guarantee on delivery of letters, documents and parcels to all major US metropolitan areas. Letters increased between 50 and 75 (3.4% to 4.9%) depending on the zone. Non-letter rates increased an average of 4%, but an average doesn't tell the true story. For example, in the one to 15 pound range, the increase was a mere 2.1% in zone 102, while the increase in zone 107 was nearly 5%. By going with a very low increase in short zones, UPS has attempted to decrease the number of low zone Next Day Air packages being shifted to ground service. The prudent shipping manager recognizes that zone 2 ground packages are delivered next day with a guarantee and that the majority of UPS deliveries occur before noon. So there is no reason to spend the extra money on Next Day Air service. Table 1 on page 14 summarizes the impact of the increase.
Next Day Air hundredweight rates increased in all zones. The impact is as follows:
% Increase
Zone    100 to 499 pounds       500+ pounds
102      1.6                               1.6
103      3.8                               3.4
104      3.6                               3.7
105      3.8                               3.6
106      4.3                               4.5
107      4.5                               4.6
108      4.6                               4.5
Next Day Early AM: 8:00 AM delivery of US domestic letters, documents and parcels from most metropolitan areas. In addition, 8:30 AM delivery is available from virtually all overnight shipping locations coast to coast. Add $28.50 to the appropriate Next Day Air rate. This is a $1.00 (3.6%) increase from last year's rate.
Next Day Air Saver: 3 PM or 4:30 PM money-back guarantee to commercial destinations where UPS Next Day Air is committed by 10:30 AM or noon, respectively. Residential deliveries to UPS Next Day Air Saver destinations receive delivery by end-of-day. Letters increased between 25 and 75 (2.3% to 6.0%) depending on the zone. Non-letter rates increased an average of 4.6%. The rates for this service average a mere 11.9% off of the Next Day Air rate. The price difference between Next Day Air and Next Day Air Saver continues to tighten. UPS is clearly discouraging the use of Next Day Air Saver through its pricing strategy. Table 2  on page 15 summarizes the impact of the increase.
Next Day Air Saver hundredweight rates increased in all zones. The impact is as follows:
% Increase
 Zone   100 to 499 pounds       500+ pounds
 132     2.7                               2.8
 133     5.0                               4.7
 134     4.6                               4.8
 135     4.8                               4.6
 136     5.6                               5.4
 137     5.4                               5.6
 138     5.5                               5.4
2nd Day Air: A money-back guarantee second business day delivery of both letters and parcels. Letters increased between 10 and 50 (1.5% to 6.1%) depending on the zone. Non-letter rates increased an average of 3.3%, but as with Next Day Air service, there is a large disparity among the various weights and zones. For example, the increase in zone 202 is only 1.5%, while zones 206 through 208 exceeded 4%. The rates for this service average 41.3% off of the Next Day Air rate. Table 3 on page 15 summarizes the impact of the increase.
2nd Day Air hundredweight rates increased in all zones. The impact is as follows:
% Increase
 Zone   100 to 499 pounds       500+ pounds
 202     1.3                               1.4
 203     2.3                               2.5
 204     4.4                               4.7
 207     4.4                               4.7
 208     4.6                               4.8
2nd Day Air AM: Noon money-back guarantee second business day delivery of both letters and parcels to metropolitan commercial addresses where UPS Next Day Air delivery is committed by 10:30 AM. This service is not available to destinations where UPS Next Day Air delivery is committed by noon or end-of-day. Letters increased from 20 to 40 (2.6% to 4.8%) depending on the zone. Non-letter rates increased an average of 3.6%. The rates for this service average 12.5% more than 2nd Day Air. 2nd Day Air AM hundredweight rates increased in all zones. The impact is as follows:
% Increase
 Zone   100 to 499 pounds       500+ pounds 
 242     2.3                               1.2
 243     2.9                               2.1
 244     2.3                               2.3
 245     3.5                               3.7
 246     4.4                               4.6
 247     4.5                               4.6
 248     4.5                               4.6
3 Day Select: A money-back guarantee third business day delivery of both letters and parcels. There is not a letter rate with this service. The rates average 32% less than 2nd Day Air rates but double the cost of ground service. Since the majority of UPS ground parcels are delivered within three days, careful study of this service should be conducted prior to its use. If you are using this service for zones 2 through 5, you are spending a lot of extra money for this service when ground service will satisfy your service day requirement. Rates increased an average of 4.3%, but again, averages are misleading. For example, there is only a 1.9% increase in zone 302, while zones 306 through 308 increased nearly 5%. Table 4 on page 15 summarizes the impact of the increase. 3 Day Select hundredweight rates increased in all zones. The impact is as follows:
% Increase
 Zone   100 to 499 pounds       500+ pounds 
 302     1.8                               1.8
 303     3.2                               3.2
 304     3.2                               3.2
 305     4.0                               4.0
 306     4.0                               4.0
 307     4.0                               4.0
 308     4.0                               4.0
International export rates from the US increased for the third consecutive year. In the late 90s, UPS held prices constant in an attempt to increase international volume from the US to offset the lack of growth and heightening price wars they were experiencing in foreign domestic markets. However, with recent gains in international revenue and profit, UPS believes the time is right for another rate increase.
Worldwide Express: Letters increased between 50 to $1.50 (1.7% to 2.3%) depending on the zone. Non-letter rates increased an average of 3.9%. Table 5 on page 15 summaries the impact of the increase.
Worldwide Expedited: Package rates increased an average of 6.2% with limited disparity among the various zones. However, the higher the weight, the greater the increase.
Worldwide Service To Canada: Package rates have increased. Standard, expedited and express service had an average increase of 4%, 4.9% and 3.8%, respectively.
Accessorial Charges
Nine accessorial charges have increased. Some of the increases were hefty. And some new ones appeared on the scene. These include UPS returns: Print Return Label and Electronic Return Label. Lastly, the thresholds for the weekly pickup charges have been changed in UPS favor. The following summarizes the changes:
            2002    2001    % Increase
   billing shipments         $10      $5                    100
Early AM surcharge      $28.50             $27.50       3.6
Hazardous material
   surcharge, air             $30      $27                  11.1
Hazardous material
   surcharge, ground      $20      $17                  17.7
   account # charge       $10     $5                    100
Proof of delivery
   (fax or mail)   $3        $2                    50
UPS returns:
   Print Return Label      25                  -           -         
UPS returns: Electronic
   Return Label 75      -           -         
UPS returns plus: One
   UPS pickup attempt $4       $3.75   6.7
UPS returns plus: Call tag         $5       $4.75   5.3
UPS returns: Print &
    Mail Return Label     $2                    $1.75   14.3
            2002    2001    % Increase
Weekly service
  charge  $16            $0 to $14.99     $0              -
Weekly service
   charge  $11           $15 to $59.99   1 to $49.99
Weekly Service
   charge  $7                 $60+               $50+
There were no changes to international accessorial charges.
What does the rate increase mean to your company? You can find out by analyzing your monthly parcel expenditure using the old and new rates and computing the incremental cost. (To help you accomplish that task, don't forget that you can download UPS 2001 and 2002 rates directly from its Web site at A detailed cost analysis will provide the necessary information to help you decide which service offerings best serve your company's needs. Regardless of which services you select, understanding how your carriers' rate increases impact your budget and bottom line is a top priority!
Joe Loughran is president of SmartTran, Inc. and an expert in parcel carrier rate analysis. SmartTran is a transportation consulting company offering services in carrier rate negotiation, guarantee refund service and logistics planning. SmartTran's management team has over 50 years of experience in parcel transportation management. Joe can be reached by phone at 724-934-0626 or e-mail at