On February 7th, United Parcel Service�s (UPS) new rates went into effect. The December 29, 1999 news release announced that the rate increase is �modest.� Whether or not that is true depends on which side of the table you sit. But what is certain is that the rate increase will add another $1 billion to UPS� bottom line. That interesting fact was omitted from the news release due, I�m sure, to a little modesty on the part of UPS management.
No stone was left unturned. If you use UPS to service your business, its rates have increased. Clearly, UPS management is confident it can maintain market share despite reaching deeper into its customers� pockets. Domestic ground and air rates went up. International rates increased after remaining unchanged for two years. And there was a big surprise in Accessorial Charges. But what is the real impact of this year�s increase for your business?
This article will provide a detailed analysis of this year�s UPS rate changes and give you some insight into its pricing strategy. For ground service, UPS altered its strategy of increasing low zones and low weights at a greater percentage than the higher zones and weights. Yet for its Time Definite/Express and International services, UPS continued to use the old approach. Why? Let�s take a look.
Ground Service
Ground Service represents UPS� largest volume and revenue source. The rate increase for commercial service is a flat, across-the-board 3.1%. The strategy of increasing each zone and weight the same percentage is something UPS has not done as of late. And it decided to use this approach only with Ground service. In prior years, UPS choose to selectively increase rates at disproportionate percentages throughout the various zones and weights. This enabled the company 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. While this pricing strategy maximized UPS revenue, it also served to minimize the revenue increase of its national competitor since FedEx Ground has always assumed UPS base rates. With FedEx Ground�s recent movement into residential service along with hub capacity expansion, UPS may no longer see the advantage of varying rate increases by zone and weight.
Coupling this year�s rate increase with forecasted market growth, UPS ensures itself a healthy increase in revenue. In fact, steady rate increases and continued market growth in the small package sector has enabled UPS to grow annual revenues to $26 billion. This, in turn, has enabled UPS to spend a lot of money on internal investments such as technology. It was recently reported that UPS poured a whopping $11 billion into technology during the last decade. Now we know the motivation behind previous rate increases.
Let�s take a look at Figure 1 (on page 16) to see the cumulative percentage rate increases among the different zones and weights that UPS has enjoyed over the last four years in its Ground Service. Because of the previous pricing strategy, there was an increase of 14.2% for one pound to 15 pounds, 10.4% for 16 pounds to 70 pounds, and 12.7% for 71 pounds to 150 pounds. Zones 2 and 3 had the most dramatic increase: 18.3% and 15.8%, respectively. Compare that to Zones 4 through 8, where the increases range between 10.4% and 11.7%. 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. Figure 2 (on www.rbpub.com) depicts the rate increase by weight distribution. As you can see, the increases are certainly not uniform.
The residential surcharge continues to be $1.00 over commercial rates. Last year, a Delivery Area Surcharge was introduced for Residential Ground deliveries to select ZIP codes in less populated or less accessible areas. According to UPS, the $1.00 surcharge reflects the higher cost of providing service to these areas. This year there is good news and bad news. The bad news is the surcharge has been increased 50% to $1.50. It makes you wonder to what level UPS intends to raise this surcharge in the future given the significant increase after just one year. Just to show you that humor can be found in just about any situation, let�s now address the good news. In the aforementioned news release, UPS announced that the number of ZIP codes affected by the surcharge has been reduced. Fantastic! Now, only 22,275 ZIP codes are affected, instead of 22,308! Wow! Thirty-three less ZIPs! Our ship has finally come in!
Ground Commercial Hundredweight base rates increased 5.0% across the board. 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 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 25� to 75� (2.1% to 5.3%), depending on the zone. Non-letter rates increased an average of 3.5%; but an average doesn�t tell the true story. For example, in the one pound to 15 pound range, the increase was a mere 1.6% in Zone 102, while Zone 107 exceeded 5%. UPS is no doubt seeing some low-zone Next Day Air packages being shifted to Ground service and is trying to stem the tide with a very low increase. 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 18) summarizes the impact of the increase.
Next Day Air Hundredweight rates increased significantly in all zones. The impact is as follows:
Next Day Air Hundred Weight - % Increase
            Zone    100 � 499 lbs. 500 lbs. or more
            102      4.2       4.4
            103      6.9       3.6
            104      4.8       5.0
            105      8.5       8.9
            106      8.2       8.5
            107      9.8       10.2
            108      9.4       9.8
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 $25.00 to the appropriate Next Day Air rate. There is no change in this surcharge 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� to 50� (2.3% to 4.4%), depending on the zone. Non-letter rates increased an average of 3.5%. The rates for this service average 12.8% off of the Next Day Air rate.
Next Day Air Saver Hundredweight rates increased in all zones. The impact is as follows:
2nd Day Air - % Increase
            Zone    100 � 499 lbs. 500 lbs. or more
            132      4.8       5.0
            133      3.9       4.2
            134      2.7       2.9
            135      4.8       5.0
            136      4.5       4.7
            137      4.3       4.5
            138      4.1       4.3
2nd Day Air: A money-back guarantee second business day delivery of both letters and parcels.
Letters increased between 20� to 35� (1.7% to 4.8%) 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 1.1%, while Zones 206 through 225 exceeded 4%. The rates for this service average 37.7% off of the Next Day Air rate. Table 2 (on page 18) summarizes the impact of the increase.
2nd Day Air Hundredweight rates did not change in Zones 202 and 203, while Zones 204 through 208 increased between 3.0% and 5.7%. The impact is as follows:
2nd Day Air AM - % Increase
            Zone    100 � 499 lbs. 500 lbs.  or more
            202      0.0       0.0
            203      0.0       0.0
            204      4.6       4.8
            205      3.5       3.7
            206      3.0       3.1
            207      5.4       5.7
            208      5.0       5.3
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 15� to 40� (2.2% to 5.0%), depending on the zone. Non-letter rates increased an average of 3.4%. The rates for this service average 12.1% more than 2nd Day Air.
2nd Day Air AM Hundredweight rates did not change in Zone 242, while Zones 243 through 248 increased between 2.6% and 5.6%. The impact is as follows:
3 Day Select - % Increase
            Zone    100 � 499 lbs. 500 lbs. or more
            242      0.0       0.0
            243      5.3       5.6
            244      4.0       4.2
            245      3.1       3.3
            246      2.6       2.8
            247      4.9       5.1
            248      4.5       4.7
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. You may be spending a lot of extra money for this service when ground service will satisfy your service day requirement.
Rates increased an average of 2.7%; but, again, averages are misleading. For example, there is no increase in Zones 302 through 305, while Zones 306 through 308 increased between 4.7% to 4.9%. Table 3 (on page 18) summarizes the impact of the increase.
3 Day Select Hundredweight rates did not change in Zones 302 through 304, while Zones 305 through 308 increased between 2.9% and 5.7%. The impact is as follows:
International - % Increase
            Zone    100 � 499 lbs. 500 lbs or more
            302      0.0       0.0
            303      0.0       0.0
            304      0.0       0.0
            305      3.4       3.7
            306      2.9       3.2
            307      5.4       5.7
            308      5.0       5.3
International export rates from the US increased for the first time in three years. Prior to this increase, UPS held prices constant in an attempt to increase international volume from the US to offset the lack of growth and heightening price wars which they is experiencing in foreign domestic markets. However, with recent gains in international revenue and profit, UPS believes the time is right for a rate increase.
Worldwide Express: Letters increased between 50� and $2.50 (2.3% to 12.5%), depending on the zone. Non-letter rates increased an average of 3.4%, but there is a large disparity among the various weights and zones. Table 4 (on page 18) summarizes the impact of the increase.
Worldwide Expedited: Rates increased an average of 3.1% with limited disparity among the various weights and zones.
Worldwide Service To Canada: Rates increased for Standard, Expedited and Express service, which had an average increase of 2.6%, 3.4% and 4.4%, respectively.
Accessorial Charges
Eleven Accessorial Charges were increased. Some of the increases were hefty. The most significant item is the addition of a second Oversize charge. The new �Oversize 2� minimum charge applies to any package with a combined length and girth measuring 108 inches or more (up to 130 inches). The minimum charge is equal to the charge for a package weighing 70 pounds. This will have a tremendous negative cost impact for all companies that currently exceed 108 inches and pay the 30 pound oversize charge. For example, the Ground Commercial charge for a 30 pound, Zone 5 package is $9.96. At the Oversize 2 charge, it shoots up to $18.58! Wow!
The following summarizes the changes:
                        2000    1999    % Increase
Additional Handling      $5.00   $4.00   25.0
Address Corrections � Air        $10.00 $7.50   33.3
Chargeback For Consignee
  Billing Shipments         $5.00   $4.00   25.0
C.O.D.s           $5.50   $5.00   10.0
Delivery Area Surcharge           $1.50   $1.00   50.0
Delivery Confirmation
  With Signature
  Required        $1.00Addl        $0.25Addl        300.0
Hazardous Materials
  Surcharge: Air            $25.00 20.00   25.0
Hazardous Materials
  Surcharge: Ground      $15.00 $13.00 15.4
Oversize 2        70 Pounds        New     �
Weekly Service Charge
  ($0 � Billed)   $15.00 $14.00 7.1
Weekly Service Charge
  ($.01 � $49.99 Billed)            $10.50 $10.00 5.0
Weekly Service Charge
  ($50+ Billed)  $7.00   $6.00   16.7
There were no changes to International Accessorial Charges.
Final Thoughts
There you have it! What does the rate increase mean to your company? You can find that 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 1999 and 2000 UPS rates directly from its Web site: www.ups.com). A detailed cost analysis will provide you with useful information to help you decide which service offerings best serve your company�s needs. The expansion of time-definite service now places greater requirements on today�s transportation managers to use the most cost effective means to ship their products. No matter what services you select, understanding how your carriers� rate increases impact your budget and bottom line is a top priority! Have a great 2000!